hello and welcome to our video series on financial accounting and welcome to module 1 in this module we will learn all about the financial statements but before we can prepare and understand the financial statement which we will do in this video series we need to understand some terminology some jargon when I was a beginning accounting student I thought accounting was all about numbers all about math it really isn't accounting is all about language they call accounting the language of business and if you want to have a prayer to survive your accounting class you're gonna need
to understand these six words that we're gonna introduce in this video so let's do that this video I bet it'll be over ten minutes and all we're gonna do is talk about these six words but you need to have them super internalized you need to be an expert on understanding what these words mean and how they make sense in the world of accounting so let's get to them here are the six words assets liabilities shareholders equity I guess that's two words I've counted as one shareholders equity revenues expenses and dividends and the three that are
in color there are really going to be key to your life as an accountant well they'll all be key but those three particularly will be so let's begin by talking about assets and when I begin a course I begin talking about assets and I ask my students hey make a list of all the assets you think a typical undergrad student at this university will have make a list of typical assets of an undergrad and so here's the things that they list out they'll list out things like cell phone they might say you know textbook they're
looking around the classroom they see textbooks that's a typical asset of an undergrad maybe a car you know and that's the the list generated by students but I also get some more interesting or creative answers some might say they have beauty or youth or even something like a high school diploma because of course you're not grad student at a university you probably have a high school diploma so these are all I think good examples of assets of an undergrad now the first three on my list are much simpler to discuss than the second three but
we'll discuss both here the thing that all of these things on the list have in common though and this is how I want you to think about assets they're anything of value the word I want you to think of is they are things of value so that word should just be really tied to assets the technical definition gets a little bit more complicated I don't ask my students to give a technical definition but your prof might if they asked for a technical definition it's anything that a company owns or controls created from a past transaction
that gives us a future economic benefit that's a pretty technical definition but anyway it's anything you own or you can typically think of it as owned an intro financial accounting but the leased assets also can count under this category but most of the time it's just own stuff you own that's good to own 99% of the time that's a sufficient understanding of what an asset it is now let's think about this list so cell phones text books cars those are all things of value and absolutely these types of assets find their way onto company financial
statements when a company is listing its assets it would list any cell phones the company has any textbooks or any cars the company has those would all fit very easily under the definition of asset the last three however absolutely would not find their way onto a company's balance sheet even though I think their assets I think they are things of value right your high school diploma is certainly something valuable to you it's useful for the rest of your life it makes you more employable than not having a high school diploma your youth your health these
types of things absolutely are very valuable and should not be taken for granted but why don't they find their way onto fine no statements and there's a simple reason and the reason is it's hard to put a number on it it's hard to say how much they're worth right I have a CPA designation that allows me to teach at this university well my CPA designation is definitely my most valuable sort of academic achievement but how many dollars is it worth is it where the thousand dollars is worth ten thousand dollars a hundred thousand dollars a
million dollars it's really hard for me to put my finger on how much that's worth now my car I can put a number on it and be pretty close my cell phone I have an iPhone eight I can look up online what's an iPhone 8 cell for right that I can put a number on my my beauty what's my worth not much I would guess but who knows right what's the number you would put on somebody's beauty very difficult to measure and so company say look that stuff yes we agree there may be a value
there we're not gonna try to put a number on it stuff like cell phones text books and cars absolutely yes we will so anything a company can own or control that has value that's good to own or control that can be reliably measured that's sort of another piece of what makes an asset an asset so what are typical assets we find on a company's financial statements on their balance sheet well we would find something like cash of course that's something you should want to own and own more of there's something called accounts receivable and what
accounts receivable are when somebody owes you money so you're gonna collect money in the future of future economic benefit I use that word well we're collecting money in the future that's a future economic benefit so that is absolutely something that would be categorized as it excuse me as an asset easy for me to say inventory if you walk into a Walmart or a retail store near you look around right all the stuff you see that they've bought from their suppliers that they're planning to sell to you the customer that is inventory and his assets right
that stuff they owned that's good for them to own we have the broad category which I'll call property plant and equipment and you know is it almost seems overly technical here property is land like literally the land real estate property plant is buildings plant I wished it's such an outdated term but you do see it used all the time it's buildings so you can own a building right that's something of value and equipment all the stuff in their computer equipment or you might have machines these types of things a car would categorize as equipment it's
a broad category of asset now the list here I could make a lot longer we have things like investments right like Facebook bought Instagram well they spent a billion dollars buying Instagram that is an investment Instagram is an asset that belongs to Facebook and our list could go on and on but these are typical assets you find on company financial statements moving over and actually before I move over just to reiterate when using asset I want you to think something of value something of value that a company can own or control okay something of value
that a company owns or controls and the value can be reasonably reliably measured looking at liabilities if my key word for asset was value my key word for liability is even simpler it's Oh liabilities are anything that has to be repaid in the future so you know from a student perspective you might have student loans those are liabilities they're things you're gonna have to pay back if you have a phone bill sitting on your table and paid it yet great example of a liability I have a mortgage on my house there's a liability and companies
can have very similar types of obligations right they have similar things they have to pay back and these are the liabilities of a company so anything a company owes and I think to give a technical definition we would say any future economic obligation in anything they have to pay back in the future so examples on a balance sheet well we said for assets there's accounts receivable for liabilities there's something called accounts payable is a very common liability that you'll see on a baljeet and it just means within typically within 30 days you've got to pay
it back and so I always think of a phone bill when you think account payable just think of phone bills and bills like that and you're not far off other types of liabilities well all sorts of we'll call them there's a broad category here called notes payable and you know within that category is things like bank loans student loans mortgages the category is called note payable and know payable is just a piece of paper you know contract you sign saying I promise to pay you back on this date with this much interest right that's a
note payable and so that a bank loan fits that a mortgage fits that an informal they call it a promissory note fits that all sorts of things fit that category but those are typical liability and we could have all sorts of other ones we can have wages payable to our employees and bonuses payable things like this there there is no shortage of items I could put on my list but we'll cut it off there so when I talk to my students about these categories people generally have a pretty good idea about assets and about liabilities
where things get a little bit shaky IRR is when I asked about shareholders equity not very many people have a good definition of shareholders equity and largely because it's defined by what it's not and I'm gonna explain shareholders equity actually by explaining my house I own a little house and it is a house that cost $300,000 so there's this asset right and it's this house and it's a $300,000 house now as I already suggested to you when I bought the house I did not have $300,000 so I took out a mortgage and if I look
at that mortgage statement today it's around a $200,000 more and a mortgage of course we said is a liability so I have a liability of $200,000 I have a $300,000 house against which there is a $200,000 debt or $200,000 liability if and this is where equity comes in if I were to sell my house today and I were to liquidated and I got 300 grand cash I pay off all the debts against it so I pay off the mortgage how much money goes in my pocket well the answer is a hundred grand right I have
a three hundred thousand dollar house I liquidate against Randor grand cash the mortgage company isn't gonna allow me to keep the mortgage if they don't have the security if the house so they take their two hundred thousand dollars back three hundred thousand dollars proceeds on the sale two hundred goes to the mortgage company one hundred goes to me my piece of the pie my piece of the house the shareholders piece of the company is called their equity equity is the concept of what's left over if I sold off all the assets I paid off all
the debts what goes in the shareholders pockets that is their equity so from my home we would call it home equity for a company ivory v8 adhere as SE and se stands for shareholders equity and so my shareholders equity is a hundred thousand dollars this relationship creates something and you'll you'll learn about it in Chapter one of any accounting book in the world this thing called the accounting equation assets equals liabilities plus shareholders equity a equals L plus SE so three hundred thousand equals two hundred plus one hundred thousand okay so when I think about
equity I actually think of this formula I just think a equals L plus s ii or alternatively shareholders equity is what's left over when I take my assets and I subtract my liabilities right that's what I think of when I think of equity so there's not a sort of fancy one Werder I guess if I were trying to put it into words I would say what's the owners piece of the pie right they pay off all their debts how much money is going into the owner is pocket that's what I think of when I think
of equity what are the accounts well one is called common shares so if you buy into a company you buy shares you're buying equity of the company right you're putting in thousands of dollars they are giving you shares you're buying a piece of the pie so it's called common shares there's also preferred shares if you're taking an intro class you might see this referred to as share capital that's that's a common thing you'll see and a big important account is called retained earnings and we'll get into this more as our videos go on here's the
gist of retained earnings though you investor buy into a company or you run a company to make profits right you want to make money right you want to earn money if your company is profitable and making money you have two choices with what you can do with the money you can keep it in the company retain those profits in which case the amount goes into retained earnings and the shareholders piece of the pie gets bigger or you can take it out in the company and you can pay yourself a dividend in which case the retained
earnings gets smaller the shareholders equity gets smaller so it might seem a little complicated right now just know that there's retained earnings is an account that keeps track of how much profit is being kept in the company versus and again the alternative is pay it out as a dividend so that is what retained earnings is so we've got these three key accounts assets this stuff we own and control that's good to own or control the things of value liabilities that's what's owed shareholders equity that's the shareholders or the owners piece of the pie though what's
left over if I take all my assets sell them off pay off all my debts what goes into my pocket that is my equity in the company very quickly revenues expenses and dividends I'll be much quicker here revenues the word I want you to think with revenues is earn whoops not earn earn revenues are what happens when the company does what it does to earn money Walmart sells me stuff they have sales revenue my university charges tuition they have tuition revenue you know a bike my landlord or well I own my own house but if
you were a landlord and you charge friend you would have rent revenue right it's the the business doing what it does to earn money think of revenues as being earned how is the money coming in its the revenue generating part of the business expenses think of costs so again thinking of a university I love my job at the university but I don't do it as a volunteer I don't do it for free they got to pay my salary they have a salary cost a salary expense they also have to pay to keep the lights on
well that's a utilities expense they also have to pay to keep the carpets clean in the place maintained that's a maintenance expense there's all sorts of costs of running a university and those are the expenses those are the costs dividends as discussed earlier are at the end of the year if the company's revenues exceed the expenses in other words if we earned more than we spent we are profitable and if we're profitable we have a choice to make we can keep the money keep those profits in the company or the shareholders can say I'd like
some of that money I'm going to take a dividend and they'll pull their money out of the company so dividends are shareholders pulling profits from the company taking it from the company's retained earnings I used to think that was a problem I used to think that there's something wrong with that I no longer think that I think look if your company is profitable and you would like to use the money for something else you should be able to and that's called a dividend okay so these six terms should be ingrained in your brain right now
and going forward through the course you need to understand these six terms asset things of value things the company can owner control that are good to owner control liabilities that is owed that is a company's obligation they've got to pay something back in the future Cheryl there's equity if I take all the assets I sell Eliab I sell out them all off for cash and I pay off all my debts how much money goes into the shareholders pocket what's the shareholders piece of the pie that is their equity revenues are the company doing what it
does to earn money expenses are the costs of earning that money and dividends are when the shareholder wants to pull money from the company they want to withdraw money from the company they take a dividend all right with those six words in mind you are ready to take on the rest of chapter one module 1 good luck I'm thrilled that you're with me on this journey to better understand accounting all right bye for now everybody
