Accounting 1: Program #2 – “Basic Accounting Concepts”

Hello, I hope everybody's semester is starting
out well. This is the first official lecture of Accounting 01. Now, everybody should have
had a previous session where we talked about class policies. For you face to facers we
did that last time we didn't film that, and for you people at home I did a separate filming
and taping of going through the class policies for you, so please make sure those folks at
home are taking this as an online class that you watch that don't just skip it thinking
it's not going to be important. It's very important to succeed in this class I want
you to know how we're going to do things so, for the people watching at home on You-Tube
or on DVDs, or on that cable TV channel never skip the lectures ok, watch them in sequence
watch the whole thing.

If you try to shortcut it you'll do yourself harm so, at this point
everybody knows the class policies and procedures and everything we're going to go ahead, and
start the subject of accounting now, I always like to say at the very beginning some people
have to take this class, and it's like "oh I wish I didn't have to take this, but I have
to it's required" some people want to take it. Truth be told out of the fifteen of you
here there's maybe only one or two who want to be a full-time accountant someday so sometimes
the question comes up "why do we have to take accounting", and I'll tell you.

Several reasons,
but one of them is statistically speaking about half of you are going to own, or co-own
a business sometime in your life. Now it may not be your sole source of making money, but
it may be just an ancillary income, but you will own or co-own a business. Now I've talked
to some of you, and a lot of my students they want to be entrepreneurs, they want to own
a business someday.

Well if you do that you need to know accounting at least at some level,
and you might say "well I'll just hire somebody to do my accounting", but what's the problem
with that? Anybody know? It costs money, and what's the other one? you might get ripped
off. You can look at the business section, and see what happens when a business owner
gives all of their accounting responsibilities to somebody else. It's like "will we trust
that person?" I could tell you horror story after horror story from my days as a Financial
statement Auditor of small businesses that somebody ripped them off, because that person
didn't know accounting at all. So, maybe you won't do all the book keeping, but you at
least at some level need to know accounting. Accounting is the language of business, plus,
wherever you all end up working there's going to be a bottom line.

There's going to be a
net income that you need to meet, right, I mean JCCC isn't out for profit, but we concentrate
on that bottom line too. We have to stay afloat don't we? In your own homes you have financial
situations right? So, the language of business is accounting, it's very important to know,
so I know there are a lot of reasons for being in this class, but I want you to remember
that there's basic concepts of business, and how important it is to apply to accounting.
The first thing I want to do is go over and you should have the PowerPoint slides for
you folks here in the face to face.

I handed these out to you, and for you folks at home,
I have these on ANGEL under the lessons tab. I thinks it's very beneficial to have these
so, you don't have to copy everything down that's on the screen, and you can just take
notes to the side, or however you'd like to do it. Let's go ahead and go through the very
first slide for chapter one, and that is going to be kind of the definition of accounting.
I spend a lot of time on this slide so don't think that every slide we do we'll spend this
much time on, but I think this is a real nice definition, and I'm not the type of teacher
who's going to give you a test question that says "write out the definition of accounting",
because truth be told you can find another text-book, and it probably would be slightly
different, but this one has a lot of good aspects, and I want to concentrate on that
a little bit. It says accounting is a system that identifies, records, and communicates
information that is relevant, reliable, and comparable to help users make better decisions.
Let's go off the PowerPoint, and come back and I want to step away from that for a second,
and take you to a different example I think will help flesh out that definition.

Let me
write something down here that has absolutely nothing to do with accounting, and tell me
if anybody knows what I'm doing? I'll give you a clue it has to do with sports. I'm sure
you're all like what is he doing? Right, any idea what that is? Anybody want to make a
guess? It has to do with basketball. Anybody here play basketball? You've watched basketball
right? You know what a free throw is right? It's when a player gets fouled they go to
the line, and they shoot free throws, right? Well, one of the things I did in high school
(I love basketball still do), but I couldn't make the basketball team at my high school.
So, what I did and this sounds like a geeky future accounting professor thing to do – I
kept stats for the basketball team.

Traveled around with them, and kept stats. So, let's
go back to this do you see how this applies to free-throws. What this meant is player
twelve got fouled, and he went to the line for two free-throws he missed the first one,
so I didn't color in that bubble, and he made the second so I colored that in, you with
me? Okay then player seventeen got fouled for two shots he made both of them so I colored
in the bubbles. Number nine player got fouled, and that looks a little different doesn't
it? Anybody want to venture a guess what that is? Not a technical – do you know what a one
and one is? Certain types if you get fouled you don't get two free-throws, but if you
make the first one you get a second attempt.

Does that make sense? So I would draw that
kind-of like a little cherry. So, this guy got fouled and he made the first one, so he
got a second attempt, right? If he wouldn't have made the first one it would have just
looked like that. This one has just one bubble, what does that mean? Anybody want to guess?
He made the shot, but he got a free-throw so, if you get fouled while making a shot
you make the basket, you get one free-throw. Now, why do I show you this, because this
has nothing to do with accounting? Well this is one of the things as a basketball statistician
that I kept track of for the coaches. Now, the next day when I would come to school do
you think the coach wanted me to hand him this report, with the bubbles? Go back to
the screen do you think that this is what they wanted? What did they want? They wanted
a condensed report, and I made out just a sample report ok, this is kind-of what they
wanted. This is a free-throw report for Northwest vs.

Southeast on October 20, 2011. This is
the player Jones. This is the free-throws attempted eight, and he made 4 free-throws,
so he shot fifty percent. Smith went to the line, and attempted ten free-throws only made
eight, and shot eighty percent, do you see what I'm saying? This was the report I gave
the coach. Now, why would the coach care about having this information? To know who the best
free-throw shooters are may be there's a technical during the game, and who would you want to
put to the line, probably your best free-throw shooter, right.

You'd want to know who needs
to work on free-throws, who's getting better, who's getting worse, right. Do you agree if
you were a basketball coach a report like this would help you make better decisions,
is that correct? Let's go back to the PowerPoint definition, and let's apply this to the basketball
example I just gave. That was a system that identified, recorded, and communicated, wasn't
it? For instance I would hear the whistle blow, and it would identify that I need to
record something, correct? It identified that somebody was going to go to the line, and
I needed to record it with that little bubble method, and there's nothing magical about
that little bubble method. I didn't make it up as a common way to keep track of free-throws.
Eventually I would need to communicate that to my coach, right.

Now, I would communicate
it so it would help him make better decisions. However, for it to be able to help him to
make a better decision, it had to be relevant, reliable, and comparable, what does that mean?
Let's talk about that, what does it mean to be relevant? To be relevant means it needs
to be in regards, to the game that he's concerned about, right? What if I were to give him the
free-throw statistics for the 1972 Olympic Games between Russia and U.S.A., is that relevant?
Is that going to help him make a better decision? No.

So, it has to be relevant, it has to be
related to what he's concerned about. It has to be reliable. What if I don't know what
I'm doing as a statistician – is it going to help him make better decisions? No. What
if I told him "hey coach, here's your report for last night, but I'm going to be honest
with you I was pretty drunk when I did it, there's a lot of mistakes, I fell asleep during
the third quarter… don't know how reliable it is.

Is it going to help him at all? No,
and I did not drink as a high school student. Note that if my mom is watching. The third
one – it has to be comparable, what does that mean? What that means is there has to be a
consistent method that we are using to keep track of this stuff, there has to be rules.
For instance we always count a free-throw made if it goes through the hoop, right? What
if I said "I changed the rules I started to count the free-throws even if it just hit
the rim and even if it didn't go through, well I changed the rules." Is that the way
we've been doing it? No. Ok so it's no longer comparable to previous games. Is it going
to help him make a better decision? No. Go back to that one more time this was a system
that identified, recorded, and communicated, and if it was relevant, reliable, and comparable
it would help him make better decisions.

Accounting is the same way; now let's stay on this for
a second. We identified things that needed to be recorded these will be transactions
that need to be recorded such as, buying office supplies, or selling services to a customer,
or paying our employees, or getting a loan from the bank. We record that information,
and eventually we're going to communicate it through a report, through a summation like
you were saying. And if that information is relevant, and if it is reliable, and if it
is comparable we're following the rules, it will help our users make better decisions.
What sort of decisions would you see in the business world that would be aided by financial
information presented to them in a report? Do I want to invest in this company? Maybe,
Do I want to extend credit, or make a loan to this company? How's the business doing?
Are we going to have enough cash to pay salaries next month? Right, if you have a business
you want to have accurate financial information, financial reports – that's what accounting
is about.

Does that flesh that out a little bit for you? Let's move on a little bit, I
like to have our lectures be a mixture of me talking, and then maybe taking a break
and doing some exercises and then going over those. I don't like it just to be me talking,
but like I always have to say this first lecture is a lot of me talking, because we really
haven't done anything yet. So please don't be concerned if you're going "gosh… are
we just going to have to listen to this guy every fifty minutes every time?" No, we'll
be doing stuff that's why I want you to bring your textbooks and your calculator to class.
There will be a lot of times where we take breaks, and you'll work on it for a while,
but this lecture is kind of me jumping around and giving a lot of basic business concepts,
so we can start to build our foundation.

Alright let's go on, there are two sets of users of
accounting information. There are external users, and there are internal users. External
users are those that do not work at the company. They work outside of the company such as,
lenders, or banks, or credit unions, or share holders, or stock holders, or potential share
holders and stock holders, the government, consumer groups, customers, external auditors.
Do you know what an audit is? An audit is when you go in and you look at the records
of a company, and you verify it. Sometimes people think of an IRS audit. All of those
individuals are external to the company, correct? They don't work there, they're just they're
outside the company.

Now, external user's financial accounting is the accounting that
serves external users primarily, and that's this class. Now, there are also internal users,
these are the people that work at the company such as, managers, or the sales staff, or
the internal auditors. Some companies are so big for instance; Sprint, they have their
own internal audit department they're internal within the company. There's also the controller,
do you know what a controller is? The controller is the chief accounting individual. He or
she is in charge of all the accounting – they're called the accounting controller, but all
of those individuals are internal to the company. Now, the type of accounting that is mainly
concerned with internal users is managerial accounting. Have you heard of managerial accounting?
Does anybody already know they're going to have to take managerial accounting? A lot
of people will take financial accounting which is mainly concerned of the external users,
and then they eventually take managerial accounting which is the internal users.

Alright, let's
go to the next slide just like there are rules of basketball that must be followed there
are rules of accounting that must be followed, and this will help insure that the information
remains relevant, reliable, and comparable, and we know it has to be those three things
for it to be useful. So, there are what's called generally accepted accounting principles
sometimes we abbreviate that GAAP (G double A P) these are the rules that have been put
into place that we have to follow for accounting. We'll start learning some of those.

Now, who
sets those rules? Those are set by what is called the Financial Accounting Standard Board,
and we abbreviate that sometimes the FASB. This is the private group that sets the rules
of accounting. Now, they take input from a lot of different groups such as the SEC the
Security and Exchange Commission, have you heard of that group? They're the government
body that has the reporting rules for companies that trade stock, and issue stock to the public
they certainly have input to the FASB on what GAAP is. There's also something called the
International Accounting Standards Board, and they deal with international standards
ok, so they certainly have input to the FASB as well.

Now, one thing about international
standards is that we're becoming a much smaller world in some ways, aren't we? Have any of
you going to these classes, have any of you ever Skyped, do you know what Skyping is?
Have you ever Skyped to somebody overseas? Have you ever purchased something over the
internet overseas? If I were to ask this in an accounting class twenty years ago I probably
would get responses like this – first of all you would say: what is Skype, second thing
you wouldn't think about buying something from somebody in Germany for example, because
it's just not possible. But with technology, with communications we're becoming a smaller
world aren't we? It's always interesting with these accounting lectures being on YouTube
I'll get emails from people in Poland, Saudi Arabia, London, all over the world that somehow
they stumble upon these lectures, and for some reason they watch them.

Maybe they're
taking an accounting class and it kind of helps them, but it's kind of fun to hear from
those if somebody out there is watching it shoot me an email I'd love to hear from those
people, but it's a small world isn't it? Well, because of that we have to start having some
international standards, because companies are becoming global with operations not in
just the United States, but other countries as well. So, you might hear of something called
IFRS that stands for International Financial Reporting Standards, and they identify the
preferred accounting for companies ok. We won't get too much in this, but I want you
to be aware of it that IFRS is more and more concerned each year with how are we going
to make the accounting operations in London comparable with the ones in Georgia ok. How
are we going to do that, we want to try to find a common set of rules, and that's what
IFRS is. Ok, I want you to read about next now were into a different subject, and I want
you to read about this in your books.

The Business Entity Forms and this is on page
eleven and twelve in your textbook. Now, I'm not going to go through every aspect of this,
but I want to hit some high points, it's on page eleven and twelve in your textbook. And
what I want to do is, and I going to double-check that make sure I gave you the right pages.
Yes I did ok eleven and twelve in your textbook. Now, if you start a business one of the first
things that you have to decide is, how do I want to set up my business? And there's
three main ways you can set up that business. You can set it up as a sole proprietorship,
as a partnership, or as a corporation ok those are the three main ways. Now there is kind-of
different sub-ways under each one of those, but for the purposes of this class we're going
to kind-of concentrate just on those three ways.

Now, there is a nice chart in your book
I'm not going to talk about every little row and column on here, but I want you to read
about this and to know this. Let's highlight a few of those ok proprietorship versus a
partnership versus a corporation ok. Now let's come off the slides for a second, and it's
Jake right? Let's say you started a landscaping business Jake you can set it up as a sole
proprietorship where you are the only owner, and you don't incorporate anything you're
just a sole proprietorship, right? Or what you can do is let's say there are two owners,
and it's Jake and Matt let's say there were going to be two owners, and you're not going
to incorporate but you're going to be a partnership you can set it up that way, or the other thing
you can do is incorporate now going back to the previous slide looking back at it real

You might think sole proprietorship means one owner, partnership just a few, and
corporation means a lot of owners that slide kind-of indicates that, but that's not totally
true, because going back to you Jake even if you were the only owner you could incorporate
what it means to incorporate is you set your business up as a separate legal entity, a
separate legal entity if you're a corporation. Not so much a contractor, but like Sprint
is a separate legal entity but even your landscaping business you can be a separate legal entity
and set that up completely separate from you as a human you as a person.

As a matter of
fact if you die the corporation is still alive, right? Or if you're a partnership you can
incorporate so I don't want you to think corporation always mean hundreds of hundreds of owners,
because there's actually a lot of corporations with just one or two owners. A corporation
means you have gone through the paperwork, and fees, and procedures to set it up as a
separate legal entity, does that make sense? Ok going back to this slide no matter how
you set up your business you're going to be a separate business entity which means you're
going to keep your business books separate from your personal books. You don't want to
comingle those records ok.

Jake you don't want to keep track of your landscaping business
in the same check book and records as you do in your personal life, or if you have more
than one business you want to keep those separate as far as record keeping. But only a corporation
is a separate legal entity ok. Now the nice thing about a corporation is that a corporation
has what is called limited liability. A proprietorship and a partnership have unlimited liability.
Unlimited liability is a bummer it's a bad thing for example, let's say Jake that you
have a landscaping business, and you are set up as a sole proprietorship and let's say
that you have a lawn mowing incident and you run over somebody and they die, tragic, lawn
mowing incident well since you have unlimited liability proprietorship they can come and
sue you, and take your personal assets your home, your savings that grandma left you all
that sort of stuff.

If you're a partnership, and you're not incorporated and let's say
Jake has a tragic lawn mowing incident right? Well let's say Jake didn't have any money,
but Matts loaded they could actually come and take your assets you have unlimited liability
that's a bummer isn't it? He did it and they're taking my assets, right? Unlimited Liability
is a bummer. You want to have limited liability that's why you might incorporate what that
would mean is this is if you incorporate, and that situation happens they can come try
to take the assets of the business, but they can't take your personal assets. It's kind
of a shield sometimes we call it a corporate shield, does that make sense? That's why one
person might incorporate or two people might incorporate ok, so, unlimited liability bad
thing, limited liability good thing.

The process of getting to be a corporation? Well to be
in this framework to be if you want limited liability you have to incorporate in some
way which means that there's certain policies that you have to follow, paperwork that you
have to fill out, fees you have to pay to the government, maybe records you have to
provide to the government. Sole proprietorship is easy you really don't have to do much you
know you'll just be a sole proprietorship ok. Ok unlimited life a proprietorship a partnership
they have a limited life that means if you die the business is over, but a corporation
has a unlimited life.

If you are an owner, or a shareholder of Sprint for example think
about that if you die is Sprint going to be going on they probably won't send you a card
or flowers or anything, will they? They keep going a corporation has a unlimited life,
is the business taxed? Well that's a bummer about being a corporation a great about a
corporation is that it has limited liability the bummer is that a corporation is taxed.
Now, let's explain this real quick let's say you are a sole proprietorship does that mean
you get to enjoy a tax free life, No.

That just means that you get to fill out an informational
tax return and you pay your taxes at the personal level. Same thing with a partnership the partnership
is not taxed, but a corporation is taxed. Let me explain that in real elementary terms,
Sprint has a pile of money, then they have to pay taxes, and that pile of money is now
less right? Then they pay dividends to their owners, or their shareholders do the individual
shareholders and owners have to pay taxes again on those dividends. Yes they do. That's
called double taxation that's a bummer isn't it? It doesn't seem fair does it? Corporation
pays taxes, and then they distribute money to their owners, and the owners have to pay
taxes again that's the big bummer about being a corporation. Do they have to pay like payroll
taxes? Yes that's a great comment I'm not talking about payroll tax or sales tax I'm
talking about income tax ok? Good question. Is one owner allowed like I said yes you can
have a one owner corporation, proprietorship is just one owner, if you are a partnership
you can't have one owner you have to have two or more.

Now, there is something called
a Limited Liability Corporation an LLC, have you ever heard of that? That's a great way
to start a business, because let's say the two of you start as a LLC you would have the
advantages of limited liability that's good, and you also would not pay taxes at the business
level only at the personal level. The question might be "why doesn't everybody be an LLC,
why doesn't Sprint be an LLC?" Sprint would love to be an LLC, but there are rules that
you can only be such a certain size or less to be an LLC once you have a certain amount
of owners you have to incorporate basically.

But if you were going to start a business
I would bet you that your lawyer would advise it to be an LLC, but you'd have to talk to
him or her. I had a business I was an LLC, because I wanted the limited liability, and
I did not want to pay taxes at the business level cool. Alright, we're going to talk about
a few more things that's really important. This is your new buddy the accounting equation,
What is the accounting equation? The accounting equation is assets equal liabilities plus
owners' equity ok. Now I want you to remember something here come off the slides real quick.
When you first learn something you're going to have somebody like me who's going to teach
you something, and you're going to have to trust me a little bit right, like when I taught
my son to play baseball when he was just a real little kid I told him how to hold a baseball
bat right.

Now he doesn't know he's just got to trust me that that's the way you hold a
baseball bat if I want to be mean I could show him so weird way now, he wouldn't know
would he? Now I'm not going to do that to you ok there are some things I'm going to
teach you in chapter one, and throughout this whole course that you're not going to understand
the full implications of it, but I want you to memorize it. Are you with me? Trust me.
And the implications will come into play as the semester progresses, but going back to
the accounting equation for now I want you to memorize that the accounting equation is
assets equals liabilities plus equity.

Are you with me? Now, let's flesh that out a little
bit what are assets we've heard the term assets these are the resources you own or control,
aren't they? Such as, cash that's an asset that's a resource if you have vehicles, or
supplies, land, or equipment, or buildings, supplies those are assets right? Those are
assets that you own. A couple of these require a little more explanation such as accounts
receivable. Jake let's go back to your business let's say you mow my lawn and you charge fifty
dollars for a lawn mowing, and I just I'm going to pay you later I'll pay you next week
ok and you say that's fine I trust you, you would have a accountant receivable from me
the customer, because you're going to receive cash in the future. Does that make sense?
That is an account receivable on your books ok.

Anybody here work at a bank by chance?
No ok. Well I have a car loan at Bank of America they have a note receivable from Dave Krug
a note is similar to a account receivable, but a note is little bit more formal. It's
usually written down "hint notes receivable", and there usually interest involved, but an
account receivable or a notes receivable is an asset. You're going to receive cash in
the future, does that make sense? It's usually dated have you ever had a loan, student loan,
car loan, good for you keep living that way ok. When I did my car loan though for those
of you who have car loans, or student loans did you have to sign, and date a bunch of
stuff did they say an interest rate it was more formal Than me just saying "hey you can
just pay me next week" you see what I'm saying we're not signing there's no interest that's
an account receivable with a bank it's a note receivable, good question.

Alright what about
liabilities, well unfortunately most of us know about liabilities, this debt this is
things we're going to have to pay in the future ok. Going back to Jake you have an account
receivable for fifty dollars in your books from me well on my books I have an account
payable to you right? That's a liability on my books. Bank of America has a notes receivable
from Dave Krug for the car loan, I have a note payable to Bank of America ok. There's
also things like taxes payable going back to the slide. Taxes payable are taxes that
I owe I'm going to have to payout cash for. Wages payable or salaries payable anything
ending in payable is I owe this person, company, or whatever I'm going to have to pay them
in the future that's debt right.

Some of you have student loans payable. Anybody here own
a house, ok you have a mortgage payable right? So, those are liabilities ok. Now, let's talk
about equity, what is equity? Now most people understand what assets are, and most people
understand what liabilities are generally speaking, but then they get to this equity
thing and they go "oh what's equity" we've heard about it before, but it's not quite,
it's hard to get your arms around what equity is. I think the best way to learn about what
equity is, is to talk about equity increases, and equity decreases but this is the owner's
investment in the company. So I want you to know this so as a matter of fact for you face
to facers we are going to have a quiz at the very beginning of the next period, and it's
going to be right at nine-o-clock so if you're late you'll miss it, but the quiz is going
to be number one what is the accounting equation, and that is assets equals liabilities plus
owner's equity. The next question I'm going to ask you is how does owner's equity increase,
and how does owner's equity decrease? So you folks at home even though you cannot take
this quiz I want you to act like it's a quiz, because I have found through teaching this
class many times that this is a fundamental principle that I want to get into everyone's
head and I want to make everything easier ok.

So, know the accounting equation don't
just abbreviate either assets equals liabilities plus owner's equity, and now let's talk about
how owners' equity Changes. How does owner's equity increase will there's two ways. The
first way is investments of assets by the owner into the business, investments of assets
by the owner into the business. Going back to Jake and your business let's say that grandma
died and left you ten-thousand dollars in her will she gave it to you personally. And
you decide to take that ten-thousand dollars and you start your business with it well you
are investing personal assets into the business that increase your owner's equity. Let's say
you own a truck and you decide to put into the business that's putting a different type
of asset into the business, and that increases owner's equity.

You with me so, putting assets
into the business increases owner's equity. The second thing that increases owner's equity
is revenue, what is revenue? You kind of know what revenue is right? When you said you were
going to mow my lawn, and I'm going to give you fifty dollars later. That fifty dollars
is revenue, and you really don't have to wait until I pay you that's revenue as soon as
you're done mowing the lawn and will talk here in another lecture. If you go buy a twenty
dollar DVD at best buy after class today that's twenty dollars of revenue for best buy.

you pay fifteen dollars to get a haircut that's fifteen dollars of revenue to the barber correct,
right? We'll talk about that we're going to kind-of ignore taxes for now, because the
taxes that really aren't that something you have to give the government, but ignoring
taxes if you pay fifteen dollars for a haircut that's fifteen dollars of revenue for the
barber right? Makes sense if you go buy a five dollar meal at McDonalds that's five
dollars of revenue for McDonalds. So, these are the two things that cause owner's equity
to increase: investments of assets by the owner into the business, and revenue.

I'm telling you right now face to facers this is the quiz this is the question these are
the answers. Sometimes people will give me the answers that sound right, but there not
such as they'll say "cash", well no cash doesn't always cause owner's equity to increase. If
I go get a fifty-thousand dollar loan in cash, but does that cause owner's equity increase?
No. The questions and the answers to the quiz are on this slide here the two things that
cause owner's equity increase investments of assets by the owner into the business,
and revenue. It's just that simple I know you don't understand the full implications
of this, but trust me and just memorize this for now. Now, let's talk about two things
about how owners' equity decrease, and this is going to be the flip side of what we just
discussed. If putting assets increasing taking assets out of the business decreases equity
that makes sense doesn't it? Why might you take assets out of the business Jake? Well
let's say you need some money to pay your apartment rent or to buy groceries that's
why you have a business right? So you can take money every now and support yourself.
Well that's fine that's expected when you take those assets out of the business that
decreases your owner's equity.

Make sense? That's expected that's normal assets increases,
assets out decreases. Marlin? How would that work for like a corporation like somebody
taking assets out. What that would be is how do assets leave a corporation and go to the
owners through dividends primarily ok. So it's a little different when you think Jakes
landscaping business versus Sprint. but the principals still apply good question. Alright
now if revenues cause owners' equity to increase what do you think causes owner's equity to
decrease? Expenses you're exactly right you have salary expense you have advertising expense
you have gasoline expense expenses cause owner's equity to decrease. So I told what's on the
quiz didn't I? If you like find a chair for your salon would that be an expense but once
it's in your salon it would be a revenue. No great question, and the there's a lot of
different concepts wrapped in that question and it's a great question and I'm not going
to be able to fully answer it today, because it's going to involve some principles I'll
talk about the next couple lectures.

First of all if you buy a huge asset we don't expense
it's an asset and that's not an expense now we'll depreciate over time we'll expense it
slowly and that's when it causes owner's equity to decrease. And then there was second part
of that question if forgot already oh does it become revenue? No. No revenue is when
you provide product or services to customers and you can book that as revenue and you will
eventually receive payment ok. The chair's never going to pay you for anything it's not
a customer does that make sense? Great questions. So there's the whole quiz what's' the accounting
equation assets equals liabilities plus owner's equity what causes owners' equity to increase
going back to that slide investment of assets by the owner into the business and revenue.
What causes owner's equity to decrease withdraws of assets by the owner out of the business,
and expenses. Would it still be a positive thing for equity if it was a non profit company?
Yes now I want you and it's a great question you're asking about not for profits and you
asked about a corporation Marlin.

These are excellent questions; however, I'm not going
to fully be able to answer them it's kind of like baseball its like if I was teaching
my son how to play baseball and I would teach him when you're on first base and they hit
the ball you run. If he's four or five years old I'm just trying to get the concepts that
run this way around the bases run from first base to second base not first to third not
to mom in the stands, but from first to second now for those of us who know baseball you
know that there's a lot of other implications right on a fly ball you go half way right
there's a lot of different things but I'm not going try to teach my four or five year
old all those implications just yet. Corporations not for profits they use these same principles,
but in a slightly different way I don't want to go down that road just yet it will kind
of confuse us.

As a matter of fact the majority of our class financial accounting that you
take this semester is going to be in regards to a sole proprietorship we'll talk a little
bit about corporations we'll talk a little bit about not for profit trust me these concepts
apply but it's a little different. So I think it will be easier to try think about Jake
and his landscaping business as you learn these fundamental principle make sense? Walk
before you run. What I want to do right now is we have a few minutes and I want to do
in your book and I'll do this often. Is we'll work on something in class for a few minutes.
For you folks at home there going to play this snazzy jazzy JCCC music and I want you
to do these problems as well and I want you to come back and go over the answers, and
if it takes you more time folks at home just pause it, and play when we go over the answers
when you're ready, but what I want to do is go over quick study one-three in your book
that's on page thirty one and exercise one-three ok let's just do those right now quick study
one-three on page thirty-one and exercise one-three on the bottom of page thirty two.
I'll give you some time to do that for you folks here you can work together if you want
you can share your answers, but I'll give you about four minutes and then will go through
the answers.

So let's do that right now. (music 44:20-48:15) ok I wanted to give you a little
bit more time face to facers, but were running out of time here so if you at home are not
done just pause it start it when you are done. But let's go through the answers real quick
now first of all notice in your text book there are quick studies, there are exercises,
and further on there's problems. So when I give you homework if I say to do quick study
one point two don't do exercise one point two don't do problem one point two do quick
study so you can't just concentrate on the numbers you have to know if it's a quick study
an exercise or a problem.

Quick study one-three on the top of page thirty one external or
internal a lender is what external, what about the controller internal, shareholders are
external, the sales staff is internal, the FBI and the IRS are external, and so are consumer
groups consumer groups are external, consumer groups are external, brokers like stock brokers
external, suppliers are external, customers are external, the managers of a business internal,
business press like the Kansas city star or the Kansas city business journal are external,
and the district attorney is external, any questions there? Alright. Let's jump over
real quick and go over exercise one-three what type of accounting is most involved?
Review of reports for SEC compliance is mainly financial accounting, because it's for external
users who might be considering in investing in the company or something like that. So
number one is B financial accounting on exercise one-three on the bottom of page thirty-two.
Planning transactions to minimize taxes would be tax accounting ok we didn't talk about
that but there's tax accounting as well so number two is tax accounting.

Number three
investigating violations of tax laws is also tax accounting C. Preparing external financial
statements what's that? B, financial accounting. What about budgeting? That's more of an internal
thing right? So that would be managerial accounting number five is A. Number six cost accounting
that's more of an internal situation as well that's also internal that's also managerial
accounting so six is A. Number seven external auditing is financial accounting like we discussed
earlier so number seven is B. Number eight is internal auditing that is managerial accounting
so number eight is A, any questions on that? ok I know we went through that a little quick
sorry about that.

Last thing I'm going to do is give you your homework please do this
for next period you who've taken accounting know is the way you learn this stuff is by
doing it. So the only homework I'm giving you and once again keep track if this is a
quick study or an exercise, and eventually well have problems, but I want you to do quick
study one point eight, quick study one point seven, and exercise one point seven. I know
this was a little bit of a longer lecture, but I wanted to get some stuff in thanks a
lot and we'll see you next time bye-bye..

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