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  • Hi, Else here.

  • And today, we'll be talking about the elements

  • of financial reporting.

  • Let's first have a quick review, so we

  • understand why the elements are a part of Generally Accepted

  • Accounting Principles, also called GAAP.

  • We know that stakeholders are individuals or groups who

  • either affect the business or are affected

  • by the actions of the business.

  • Every stakeholder has an objective-- something

  • they want from their relationship with the business.

  • Stakeholders can be either internal or external.

  • Internal stakeholders work for the business.

  • Their objectives generally relate to their ability

  • to do their jobs, keep their jobs,

  • get promoted, and get paid.

  • External stakeholders are outside of the business.

  • And their objectives relate to the decisions

  • they'll make about providing resources to the business--

  • generally, money.

  • This is called resource-allocation decisions.

  • External stakeholders need a business'

  • financial information, so they can make decisions

  • with regards to providing resources-- generally,

  • money-- to the business.

  • Businesses are involved in thousands of activities

  • every single day.

  • They record their business activities

  • in the accounting system, an information system that

  • collects, groups, and communicates a businesses

  • financial position-- including its financial health

  • and profitability.

  • The end result of an accounting system

  • are the financial statements.

  • Financial statements tell a business a story-- what they do

  • and how well they do that.

  • They provide a business's financial performance--

  • its current financial position and its cash flows.

  • External stakeholders use the financial statements

  • to analyze the business and make resource-allocation decisions--

  • decisions about whether or not to provide resources, often,

  • money, to the business.

  • So how does the accounting system

  • move from business activities to financial statements?

  • The accounting system collects and groups the activities,

  • so it can eventually produce the financial statements.

  • Who decides how to group business activities?

  • Generally Accepted Accounting Principles

  • specify the categories, called financial reporting elements,

  • that all business activities are divided into.

  • By grouping the activities into elements,

  • we can eventually provide financial statements

  • to external stakeholders that are useful for decision making.

  • So what are the financial reporting elements

  • we use to group business activities?

  • There are five elements-- assets, liabilities, equity,

  • revenue, and expenses.

  • Each element has characteristics that define them.

  • When we record the activities of the business,

  • we use those characteristics to determine if the transaction

  • will affect the element or not.

  • Let's start with assets.

  • Assets have three characteristics.

  • Assets are owned, they provide future economic benefit,

  • and they are due to past events.

  • Let's go through each of these characteristics

  • and expand on them.

  • First, assets are owned.

  • The concept of owned is pretty straightforward.

  • For example, my cellphone is an asset because I own it.

  • Second, assets provide future economic benefit.

  • That means that assets will be used either directly

  • or indirectly to help the business.

  • The concept of future economic benefit is critical to assets.

  • What are future economic benefits for a business?

  • Well, an asset might be used to produce a good

  • or provide a service to customers--

  • like a machine that's used to manufacture potato chips,

  • or a lawn mower that's used to provide lawncare services.

  • It might mean that the asset will

  • be used to get another asset, like giving up cash

  • in order to get a machine.

  • Or the business might be able to use the asset

  • to get rid of a liability, like paying down a loan with cash.

  • Assets must have future economic benefit for the business,

  • or they're not considered assets.

  • The last characteristic of an asset

  • is that they're due to past events.

  • That means that there is an event

  • in the past that transferred ownership of the asset

  • to the business.

  • Why is this last characteristic important?

  • Because it means that if I plan to purchase

  • an asset in the future, I can't claim

  • that it's an asset now because the event has not

  • as yet happened.

  • It has to be a done deal.

  • The transfer of ownership must already have taken place.

  • So to summarize, everything that a company owns

  • is considered an asset-- a resource obtained

  • through a past event that will benefit

  • the business in the future.

  • Assets are defined as owned, providing

  • future economic benefit, and due to a past event.

  • Stop right now and list all your assets.

  • Everyone has assets.

  • Listing yours will help you to better understand

  • the concept of assets.

  • Think about what past events caused your assets

  • to become yours, and also how your assets will benefit you

  • in the future.

  • How do companies get their assets?

  • They often use liabilities, the next element

  • of financial reporting.

  • They take on debt in order to increase their assets.

  • Liabilities also have three characteristics

  • that define them.

  • Liabilities are owed to third parties.

  • They will be settled in the future.

  • And, finally, liabilities are due to past events.

  • Again, let's go through each of these characteristics

  • individually.

  • First, liabilities are owed-- an obligation or debt.

  • Important also is that they are owed to third parties--

  • individuals or groups who are outside of the business.

  • A personal example of a liability

  • is a student loan you might owe as a debt to the bank.

  • Second, liabilities will be settled in the future.

  • How are they settled?

  • Through the giving up of either cash, goods, or services.

  • For instance, a student loan will

  • be settled through the payment of cash in the future.

  • But other obligations might be settled by providing a service

  • or delivering a good.

  • Third, liabilities are due to past events.

  • Again, why is this important?

  • Because if you plan to borrow money next year,

  • that's not a liability yet.

  • And, therefore, you can't record it as a liability.

  • The event-- borrowing money-- has not yet happened.

  • A liability will only exist after you get the money.

  • So to summarize, everything that a company owes to a third party

  • is considered a liability-- an obligation due to a past event

  • that the business will settle in the future.

  • Liabilities are defined as owed to third parties,

  • to be settled in the future, due to a past event.

  • Stop again and list all your liabilities.

  • Some students don't think they have any,

  • but if you use a credit card, and have not as yet paid

  • your bill, or you have a cell phone bill,

  • you probably have liabilities.

  • Let's move on to equity.

  • Equity is a difficult concept to grasp,

  • so we're going to keep it simple right now.

  • Equity is equal to the wealth that

  • is due to the owners of the business.

  • And it is made up of two items.

  • First, equity is the capital provided by the owners.

  • For instance, if you start a business

  • with $20,000 of your own money, then you

  • have $20,000 of capital in the business,

  • which is recorded as an equity.

  • Second, equity is the profit that the business generates

  • and keeps in the business.

  • For instance, if the business has

  • profit of $10,000 during the year,

  • then the equity would go up by $10,000.

  • If a portion of that profit was paid out to the owners

  • in the form of dividends, then equity

  • would go up by the amount of the profit,

  • less the amount of the dividends.

  • For instance, if the business has a profit of $10,000,

  • but it paid out dividends of $2,000,

  • then equity would increase by $8,000, which is the profit

  • that the business kept.

  • This is called retained earnings,

  • meaning the profit kept or retained

  • in the business for future expansion.

  • So, to summarize, equity is the capital invested by the owners,

  • plus the profit, less dividends retained by the business.

  • Equity is owed to the owners of a business by the business.

  • Equity-- capital plus retained earnings owed to the owners.

  • So what is your equity or wealth position?

  • It's easy to calculate your equity.

  • All you do is take the value of your assets,

  • and deduct the value of your liabilities.

  • What is left over is equal to your equity or your wealth.

  • Let's move on to the element revenue and its definition.

  • Revenue is the income a business earns.

  • There are only two ways to earn revenue.

  • Businesses either provide a service or a good.

  • The key to revenue is that it must be earned.

  • What does that mean?

  • It means that the business has done their job-- past tense.

  • For example, if a lawn care business

  • plans to mow a customer's lawn tomorrow,

  • that is not earned revenue today because they have not

  • done their job yet.

  • After they finish mowing the customer's lawn,

  • they'll have to earn their revenue.

  • If a retail store plans to sell a product to a customer

  • tomorrow, revenue is not earned because, again, the business

  • has not as yet done their job.

  • Revenues can only be recognized when the business has

  • finished their job, provided the service, or delivered the good.

  • Notice the past tense.

  • That's very important with regards to the element revenue.

  • To summarize, revenue is income earned

  • through the day-to-day activities of the business

  • when a service or a good is provided.

  • Revenue-- earned by providing services or goods.

  • Your revenue should be easy to figure out.

  • If you have a job that earns you income,

  • then you know what your revenue is.

  • The last financial reporting element to define is expense.

  • Expenses are the cost of the resources

  • that are used, consumed, or incurred

  • to help generate revenue.

  • Expenses are best described through an example.

  • If you use gas in a lawn mower when you mow a customer's lawn,

  • then the gas that was consumed during the mowing of the lawn

  • would be an expense, a cost of earning revenue.

  • Why?

  • Because the gas was consumed in order to help

  • generate the revenue.

  • Note that the concept of used, consumed, or incurred

  • is important.

  • But so is the fact that these things must have

  • happened to help earn revenue.

  • Costs or expenses must be matched to the revenue

  • they help to generate.

  • Expenses-- costs of what is used, consumed, or incurred

  • to help generate revenue.

  • So, what expenses do you use, consume,

  • or incur to generate the income from your job?

  • Likely, it includes transportation

  • to and from work.

  • Because that would be the cost of generating your income.

  • We just defined all the elements used in financial reporting.

  • These elements are used when recording business activities.

  • Business activities are grouped, so that we can eventually

  • produce financial statements that

  • will be used by external stakeholders

  • to make resource-allocation decisions.

  • In the next video, we'll be talking

  • about combining the definitions with the accounting equation.

Hi, Else here.

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第2章 動画1 財務報告の要素 (Chapter 2, Video 1, Financial Reporting Elements)

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    陳虹如 に公開 2021 年 01 月 14 日
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