- Exactly how old is accounting?
- I'll tell you, it's old.
Clay tokens have been found in Mesopotamia
dating back to 7,000 years ago
that are a primitive form of accounting.
- Now this early accounting was quite basic.
A farmer would say, "Alright,"
"these clay tokens represent how many sheep I have."
- And once you have a record of
your number of sheep last year,
you can compare that to what you have this year
and can start to make some simple decisions,
some comparisons.
- Then somebody came up with the idea,
rather than have these little clay tokens
let's start making notations on clay tablets
or chalk on a wall.
Is bookkeeping the earliest form of writing?
I think so.
- [Man, Left] This simple idea of numerical recording
proved to be so useful that it persists to this day.
- [Man, Right] So what exactly is accounting?
Well first, it's quantitative, it's numbers.
Accounting is all about numbers.
- [Man, Left] Second, accounting is financial in nature.
That means money.
Numbers about money.
- [Man, Right] Third, accounting is meant to be useful.
The fundamental purpose of accounting is to be useful.
Accounting, it turns out,
is a very practical field of study.
- [Man, Left] Useful for what?
Well that's the fourth aspect of accounting.
Useful in making decisions.
Accounting helps you use information from the past
to make decisions in the present
to change the future.
- Accounting is quantitative,
numbers about money to help people,
you and me, make better decisions.
That's accounting.
- There are four kinds of accounting.
We'll call them the four flavors of accounting.
- First the most fundamental type of accounting
is bookkeeping.
Just the routine gathering of the information,
making sure that everything gets recorded.
So bookkeeping is gathering the information systematically.
- The second flavor of accounting is
financial accounting.
This is reporting to people outside your organization.
Summary reports, not the details.
Just summary reports to people outside
who might be thinking of loaning you money,
or might be thinking of investing in your company.
That's called financial accounting.
Reporting to outsiders.
- Now the third flavor of accounting is
managerial accounting.
These are the detailed, secret data that individuals
use inside their organizations to make decisions,
detailed decisions.
Should I raise my prices?
Should I stop selling shirts
and start selling shoes instead?
Should I build my new factory in Wyoming
or should I build it in Alabama?
The detailed information used in making decisions
such as these is called managerial accounting.
- [Man, Left] And finally the fourth kind of accounting
is income tax accounting.
This is the accounting we use to make sure
that we are compliance with the law.
- Bookkeeping, financial accounting,
managerial accounting, income taxes
these are the four flavors of accounting.