why do we need accounting some might think that accounting is only a boring and unnecessary redundancy and that it exists only due to regulations and legal requirements but the opposite is true accounting exists because it plays an extremely important role in running a business let's illustrate this with a simple example meet adam he lives in a small village where there's no convenience stores and its residents have to travel to a nearby town to go shopping for most basic goods which is a few miles away adam came up with the idea that he could open his
own small store where he would sell the most necessary products he rented and renovated a garage in his neighbor's house and built several shelves and a counter with the materials he had on hand then he went to the wholesaler and bought goods for a total amount of one thousand dollars he knew the prices of items from the store in town and he set his prices at the same level he expected that his potential customers will be more willing to buy from him than drive a few miles since the prices are the same of course these
prices were higher than the prices at which he bought his merchandise adam bought the same goods every week and sold him at the same prices however after a month when he checked his account it turned out that he had 500 less than a month earlier it's impossible i must have been robbed adam thought however all account activity was in order and nobody attacked him in the store either so what went wrong in the evening adam sat down and took his bills and notes he had kept during work he wrote down all the expenses on one
side adding up four bills from the warehouse for one thousand dollars each then he took bills from the gas stations there were five of them for the amount of 100 at the end he added the amount for the monthly rental of the premises i.e 500 the total was 5 000 on the other side he wrote down his total sales by week adam realized that even though he was getting more money for the goods than he paid for them the store had brought him a loss he began to wonder what to do not only do i
have to break even but i also have to make a living from this business he thought we can see that if someone wants to run a business without even the simplest of calculations he will be at the mercy of fate it might as well turn out that adam gained a lot from his company but without any calculations he would not be able to analyze and optimize his business also when in a crisis he would have a problem finding the reason why he suddenly stopped earning money so adam started counting as we saw he learned that
his business took losses but he didn't yet know why so he started to look for a reason at the very beginning he checked how individual products were selling it turned out that every three days he was selling all the bread he bought every four days all the vegetables and every five days all the fruit he also realized that some of the cleaning products didn't sell because they are longer lasting products so people don't buy them every week at the same time some products such as juices went bad rather quickly which caused adam to throw away
half of them every week after counting everything up adam made a shopping list but this time he decided he would buy more prepackaged bread vegetables and fruit so he wouldn't run out so quickly he also bought half as many juices and did not buy cleaning products at all because he still had a supply from previous purchases he decided that he would only buy it when he would have a week's supply of cleaning products left this time he paid only 750 to the wholesaler after a week when people saw that atom's store was better stocked and
had more products actually needed on a daily basis they started to buy there more willingly after all adam's well-stocked store saved them time and fuel money sales became higher and more stable adam's clients spent in his store 1 500 every week and every week adam would go to the wholesaler and buy best-selling products and once every four weeks he would also buy cleaning products this meant that he bought products for seven hundred fifty dollars three times a month and once a month he bought for one thousand dollars at the end of the month adam calculated
his sales and expenses again so this time thanks to adam's analysis he earned 1750 which covered last month's losses and generated profit however it would not be possible if it were not for the calculations he made ten years have passed during this time adam expanded his business and his profits grew after a while he opened a second store in the town nearby and after that finally expanded his business to a whole network of small shops simple calculations made on a piece of paper are no longer sufficient for adam's needs now his accountant prepares a complete
report for him every month to give him an overall view of the operation of the entire company on the basis of this report and comparing it with the reports from previous periods adam is able to initially assess whether the business is going well or badly whether the company is profitable whether it has adequate financial liquidity etc if the company would underperform the reports would help adam to determine why or at least where to look for a problem if for example the company would be no longer profitable or its profitability would decline adam could request reports
for individual stores look at their performance and see which one is profitable and which one is losing money then he will look for reasons why this store is not profitable analyze its income and costs there can be various reasons for a store to underperform for example adam can find out that the sales have dropped significantly to find out why it dropped he will need to talk to the store manager however thanks to his analysis he knows what the problem is and what to ask about to sum up adam from 10 years ago who did everything
by himself in his small convenience store needed only the simplest calculations he certainly didn't need complicated reports because he personally knew about everything that was happening in his store however with the growth of business when adam stopped personally participating in most of the processes in his company efficient management of the company is possible thanks to accounting which provides him with the crucial knowledge this video is only a general description of what accounting is for if you are interested in the topic and you want us to do more videos on the topic of accounting in the
next videos please let us know in the comments the author of this script is marek vostuk please visit econclips.com where you can find more videos and subscribe to our youtube channel you can find the links in the video description
