- The most fundamental type of accounting is bookkeeping.
Just the routine, systematic gathering of data,
making sure that everything gets recorded.
- Financial accounting is the organization
and summarization of these bookkeeping data
into reports to be given to people
outside your company
who might be thinking of loaning you money.
- Or who might be thinking of investing in your company.
- Bookkeeping is the system in place to
capture the raw data.
Financial accounting is the organization
of these raw data into summary reports.
- And at its heart,
bookkeeping is about collecting data,
getting things recorded.
- This capturing and recording process
is crucial, because once events are
recorded, then we can organize the data
about those events
and start making better decisions.
- For example, Walmart has ten billion
customer visits per year.
In order to operate, Walmart must have an
organized bookkeeping system in place
to keep track of what those customers bought,
how much they paid,
what items need to be ordered,
and so forth.
With ten billion customer visits per year,
Walmart needs a good bookkeeping system.
- Bookkeeping seems mundane.
But without it, Walmart could not
continue to function.
- Simply stated, bookkeeping is the preservation
of a systematic, quantitative record
of an activity.
And until you have a record of an activity,
you really can't make any sophisticated
decisions with respect to that activity.
- All right.
Walmart has carefully captured and recorded
bookkeeping data from its ten billion
customer visits,
and its millions of purchases from its suppliers,
and its millions of paychecks for its employees.
So what next?
- Well, this is where financial accounting
comes in.
The accountants for Walmart will take up
the information from these
millions and billions of events,
and summarize the meaning
in just three reports,
called the financial statements.
- These financial reports can be thought of
as three pieces of paper.
The balance sheet, the income statement,
and the statement of cash flows.
It is amazing how much information
can be summarized about a company on just
three pieces of paper.
- A balance sheet is a very fundamental report.
It is a list of an organization's resources,
accountant's call those assets,
and an organization's obligations.
Accountants call those liabilities.
- Assets are cash, land, trucks, and equipment.
Liabilities are bank loans,
taxes you owe to the government,
and wages you owe to your employees.
A balance sheet is a fundamental report
for any business.
It reports what you have and what you owe.
- And the next fundamental financial statement
is the income statement, which reports
how much money the company is making.
For example, in 2018 the selling price of
all of Apple's goods and services was
$266 billion.
Accountants call this number revenue,
and that number is reported
in the company's income statement.
- Apple's total business expenses during 2018
were $206 billion.
The difference between $266 billion in revenue
and $206 billion in expenses,
means that Apple's net income for 2018
was $60 billion.
Not bad.
- Not bad.
All of this information can be found in
Apple's income statement.
- The third primary financial statement is
the statement of cash flows,
also known as the cash flow statement,
which is a report of a company's cash receipts
and cash payments.
- In 2018, Apple's operations generated
surplus cash of $77 billion.
This is cash that could be used
to buy new equipment,
to repay loans,
and to pay dividends to shareholders.
The details can be found in Apple's
statement of cash flows.
- The balance sheet,
the income statement,
and the statement of cash flows
are summary reports that are provided
by businesses to people outside the company.
So those people outside can decide,
"Should we loan that company money?"
"Should we invest in that company?"
- Bookkeeping involves the capture
and recording of the raw data.
Financial accounting involves
organizing those data into
three fundamental financial statements.