Hi, welcome to the first lesson in this course today, we will learn about the finance from one side
accounting and bookkeeping.
So by the end of today's lesson, you should be able to distinguish between these three related topics.
Let's start with an example from a small business.
So here we have a barbershop and a.
In a one day, we noticed all these activities, so if you look at these these all activities, these
are events and these in the business are called transactions.
So a transaction is an activity or an event where the business interact with an external party.
So in the first example, the business is interacting with the customers.
Second one will be with the supplier and so on and so forth.
Now, some of these transactions will have a financial impact.
So they will have monetary impact.
They will impact the business financially.
These transactions are called financial transactions.
So in any business, what I need you to start to think now is what of the types of financial transactions
this business will be involved in?
And once you know that, it's easy to understand that accounting is just the process of identifying,
measuring and communicating these financial transactions.
So what accounting does is just identify.
So accountants will say, OK, this is financial transaction.
This is not a financial transaction.
If it is a financial transaction, then the account, the need to measure it.
So what its value?
It needs to be given a monetary value.
It has to be assigned with a value ten pound, two hundred pound, fifty pound, two hundred dollars,
whatever.
It has to be given a value.
It has to be recorded in a system and it needs to be communicated.
So accounting is just the process of doing that.
Accounting is the process of identifying the financial transaction, measure it recorded and communicate
these transactions to the users of these transactions.
And that's why it's commonly known that accounting is the language of businesses.
So accounting is the language of business because it communicates
record.
Please post the financial statements for each business.
Now, what is the purpose of accounting?
As we said, accounting is there to identify and record the financial transactions of any business and
actually accounting try to answer too many questions.
How much profit did the business make?
And what is the value of the business?
So the first question will be answered through what we call the income statement.
This is will be our next topic, next lecture.
And the second question, which addresses the what is the value of the business?
This is also the through the balance sheet, which something we will study and lecture three.
So these are the purposes of accounting in terms of types of accounting, we have two main types.
The first one is what we call financial accounting.
The second one is the management accounting.
Now, financial accounting has two stages.
The first stage is about the recording.
So in this stage, all financial transactions on day to day basis will be recorded, it will be measured
and identified and recorded.
This process under the financial accounting is what we call book keeping.
So the bookkeeping is only that part of financial accounting related to recording financial transactions.
Once these transactions are recorded at the end of the period, at the end of the month, at the end
of the quarter, at the end of the year, the business may decide to prepare the financial statements.
So this is the second stage within financial accounting.
Now, remember, financial statements are basically reports.
So these are reports prepared by the business in order to show maybe the cash movement.
So this is a through the cash flow statement, the financial position of the company.
This is a through the balance sheet financial performance of the company.
And this is a through the income statement.
And we will have one designated lecture for each of these three statements.
Now, management accounting, as the name may suggest, is the accounting and using the accounting skills
for the management of the business.
So it's how we utilize accounting skills to manage the business.
And it has three objectives.
It does help with planning, decision making and control.
If we look at one exercise of that, which is the budget at the beginning of each year, most of the
large companies, they will prepare a budget and the budget is simply just a list of all the expenditures
of the business and the income of the business.
OK, so one way is to utilize that budgeting for planning.
So once we do the budget, that means we include what we plan to purchase, what we plan to sell, how
much we plan to produce, and then we make the decisions on all of these planning that we addressed.
And finally, we do the control and the control usually done through, for example, with the budget
by looking at the actual number versus the projected number.
So beginning of the year, you projected you will sell two hundred thousand point end of the year.
You sit down and you look at your actual sales if it's below the two hundred thousand.
But then you start to ask the question, why was that?
And this is what we mean by control now.
So if bookkeeping is just about recording the day to day business transaction, if accounting is the
bookkeeping and the preparation of a financial statement, what is the finance now?
Finance is the management of the accounts of the business.
So in the income statement you have the first account is revenue, which is the sales, the turnover.
Now finance will be how to manage this revenue, how to increase it, how to improve it, how to improve
the quality of the revenue.
So this is all will be under the finance.
Let's apply that to our example of Mark Bulba.
Let's throw in some numbers and let's see what we mean by bookkeeping.
So at the end of the day.
Mark or his accountant should have registered.
All these transactions where there is a financial impact.
So one account will be impacted is the cash and if you look at the cash, you will notice that cash
increased by hundreds hundred how we when we have 24 customers who paid cash.
So that's two hundred and forty.
And he paid twenty five pound for, let's say, supplies.
That's the second on the job.
And he paid a hundred and fifteen pound in salaries.
So the total hundred and forty, so two hundred and forty minus one hundred and forty that will leave
a cash increase of hundred pound.
Obviously you look at the revenue, the main point to notice here, we included the revenue from Iran,
although we did not receive the cash for it.
And this is what we call matching principles.
So we recognize revenue when we deliver the service of the product.
So since Mark already delivered the service of cutting the hair for RAM, we need to include that and
recognize that in the revenue.
So that will be the bookkeeping side.
Accounting side is obviously where we keep registering all these transactions on day to day basis.
And at the end of the month we prepared the financial statements to see how much profit we made, what
is the value of the business and how was the cash position of the business.
And finally, the finance side will be what to do with these accounts.
So if we notice that revenue is not doing well, what can we do to improve that?
Shall we run a marketing campaign, for example, if we notice that the cash is too high, how to manage
the cash?
Shall we open a new branch?
Shall we redecorate the current branch?
Shall we invest this cash in any other business to bring more diversification?
So all these questions about managing the accounts, making them more effective, comes on the finance.
So this is the end of today's lecture.
I hope you enjoy it.
And I look forward to see you in the next lecture, which will be about the income statement.
So I'll see you then.
Thank you very much.