hello everyone Warren Buffett once said accounting is the language of business but what is accounting this is what we would learn in this session what is accounting and why is it important to start by defining accounting because eventually as we add more Concepts theories about accounting it's very important to understand the big picture which is what is accounting and in this session we would explain a little bit more why accounting is considered the language of business also in this session we will discuss the users of accounting information we're going to break them into two major group external users and internal users and we will discuss the role and the uses of each group separately and we're going to focus I'm going to tell you right now about two specific groups of external groups investors and creditors and you are going to see why and we're going to connect this concept to accounting as the language of business stay motivated in this course let's go ahead and get started before we proceed any further I have a public announcement about my company forat lectures. our financial accounting course is best for online students and students who are struggling in their financial accounting courses we cover all the essentials from debits and credits adjusting entries closing entries financial statements and all balance sheet accounts our comprehensive course include lectures multiple choice true false as well as practical exercises start your free trial today to help you pass your financial accounting course your success starts here so what is accounting well accounting is a system that system could be a manual system or it could be a computerized system for information and measurement simply put accounting is a system that keeps track of certain information by measuring their activities when we say manual it means we can keep track of this information with a pencil and a piece of paper in physical books now obviously these days no one keeps track of their books of their accounting information manually you might have you know small businesses mom and pop that's possible but these days most accounting system are computerized computerized you could have a software like QuickBooks you could have what's called enterprise resource management system you could have large software you could have small software you could keep track of things on the Excel sheet that's considered computerized that system does three things the accounting system does three things it identifies record and communicate business activities the company's business activities to certain group of users so the purpose of accounting is to do what whether you're doing accounting manually or on a computer system computerized we're going to assume it's computerized I just wanted to tell you that in the old days we we keep track of everything manually and this system looks at looks at transaction identifies the transaction record the transaction and communicate this transaction and in the process of communication we can analyze and interpret the activities of the business to a specific group of users now the first thing I'm going to do I'm going to illustrate each step in the accounting system separately identifies record and communicate starting with identification identification involves recognizing economic event that is relevant to a business what does that mean it means when you have a business you need to know what transaction and events that should be recorded usually which transaction and event are recorded transaction and event are of Financial nature where there's an exchange some sort of an exchange think of a bakery think of a business of a bakery that's the organization that's the business entity what would the bakery do well the bakery will buy ingredient flour sugar eggs to make Goods they will sell baked goods that's a transaction they will make payments to employees that's a transaction they will pay their utility bill their water bill they will purchase a new oven a new piece of equipment all these are what all these are transactions and the first thing we need to do is identify kind of okay is this a trans is this a transaction that is relevant to the business if the answer is yes we identified it what do we need to do once we identify a transaction we need to record this transaction this is the second step recording involve keeping a systematic and a chronological log of the identified transaction So when you buy ingredient when you buy ingredient you log it in you record this transaction chronologically usually by date now this is done through either manually if you're using a manual system you'll manually or automated so you could record a transaction automatically a case in point scanners in supermarkets when you go to a supermarket or to a shop and they scan your item when you are ready to buy it that's part of the recording it identifies that the company made a sale and it recorded the transaction for example in the example of a bakery the bakery what they would what they would do is they will need to buy ingredient so they let's assume they purchase $500 worth of ingredient this is a transaction we need to record this transaction this transaction will increase inventory or supplies or ingredient by $500 and will decrease cash assuming we paid cash $500 now when the bakery turns around and sell sells 1,2 200 worth of baked goods what's going to happen they will increase their cash by 1,200 and they will increase the revenue by two 1,200 now don't worry about the increases decreases Just For Now understand that the accounting system records these transaction they record them systematically and chronologically systematically means there's a system that you will keep recording the transaction now some transaction might have to be inputed manually but most transaction are recorded electronically automatically now after we identify records the accounting information system and this is the most important part the end product is communicate this information communication involve preparing accounting reports such as financial statements and specifically for our purposes for this course we would learn about the income statement where we would show revenues minus expenses we would look at the balance sheet where we will show assets equal to liabilities plus Equity we would also take a look at retained earnings which is beginning retained earnings plus net income minus dividend don't worry about all of those we're going to have a whole session explaining the financial statement but in the financial statements we communicate we make a statement about the business and we'll share this statement with users sharing this information with stakeholders people who are who wants this information like the owners of the business the managers of the business investors creditors we're going to talk about the users shortly so at the end of each month the bakery prepares its financial statements for example to make this example simple this Bakery sold 1,200 worth of goods and the expenses were $500 we would know that this Bakery made a profit of $700 so this is the part of the communication now this is basically a semi income statement there's a balance sheet we look we would look at the financial statements later but the point is you would identify the transaction you would record the transaction now during the recording you keep sales separately you keep expenses separately so you can so you can prepare the financial statements then you communicate this information now from the communication part investors creditors owners they can analyze interpret the information now why is accountant important why is accounting important why do we learn accounting accounting is the language of business what does that mean this is an understatement I mean what what does that mean it's an important statement I think it should be have we should have even a more important term than the language of business think if you want to learn if you want to go to friends and live there or go as a tourist or you want to communicate with French people you need to understand their language that's the language the French language to communicate business information with other people you we need to understand accounting because accounting is the language of business when we use the term net income net income is a well-known term any business owner any investor there's one definition of it this is the language of business when I say assets when I say property plant and Equipment those are terms accounting is referred to as the language of business because it conveys data that helps in Mak an informed decision user of accounting information falls into two categories external users and internal users but before we proceeds into external users and internal users I want to explain the importance of this language so let me explain the importance of accounting let's assume let's not assume anything we are all familiar with company called Microsoft msft Microsoft most likely you are using their product there's a good chance you are using one of their product msft now Microsoft was founded by Bill Gates so Bill Gates had a great idea to start a software company the best idea ever that's great now Bill Gates he can produce maybe he can write uh maybe it's going to take him a year or two to write the software then it's going to take him another two years to to produce and sell and Market because he's by himself so it's going to take him four years to do so let's assume that's the case or Bill Gate go to investors and ask for I don't know $5 million where he can hire other programmers hire people to produce the software quickly Market the software up and running and expand and make this company worth3 trillion now when Bill Gates talks to investors to people who are with the money so you have people with idea so you have ideas here people with ideas could be Bill Gates could be and I could be anyone and we have people with money the people with ideas they need to communicate with the people with money the people with money we're going to call for short investors now how do they communicate with each other they communicate with with each other through the language of business through accounting so through accounting Bill Gates can present his numbers these are my profit my balance sheet my retained earnings my projection for the future this is how much money you can make if you invest With Me based on my on these numbers numbers and these numbers Bill Gates understand them and the investors understand them why because they're using the same language now let's go back to users of accounting information so who would use accounting information we have two group of users we have external users and we have internal users now when we say external external in terms of the company external to the company internal users it means people who are inside the company so we have external users internal users we're going to emphas ize these two groups later on shortly but you have to understand when we are dealing with external users we call this accounting Financial Accounting it's a term called financial accounting and this course is a financial accounting course when we are dealing with internal users we use the term managerial accounting it caters to the needs of internal users let's talk about each group separately and explain the role internal users of accounting are individual within the organization as I told you internal relative to the company why do they need this information well they need this information to make decisions related to what operating the business managing the business who are these people management right these users need detailed timely and often specific information to perform the role effectively I cannot run the company if I don't know how much inventory I have if I don't know what's in my pipeline if I don't know how much ingredient I need to produce the product so the groups are management all level of management lower level mid-level higher level marketing managers production managers they all need information accounting information employees they need accounting information total sales so they know how much to produce internal Auditors the company might have Auditors that make sure everything is running smoothly they need accounting information board of directors people who are in charge Etc so those are called internal users now obviously these are internal to the company obviously external users are what external to the company external users are individuals or entities outside the organization who uses this information who uses accounting information to make decision related to their interest in the business usually who are we talking about we're talking about two groups of people I already mentioned one of them those are the investors investors are also called shareholders are also called stock holders obviously investor shareholders stockholders the same thing and the other group are creditors creditors are the people that lend money to the business they give you money but they lend you the money they want their money back investors they're in bed with you once you are an investor in a business that's it there's no way out they're part of the business they're the owners of the business these users generally required summarized information presented in the financial statements and this group are consists of investors creditors so those those two are the main users of accounting information why because those are the groups that provide the funding to the company the investors are the owners they invest their own money that's how you become an investor you buy stocks you buy shares in the company creditors they are lenders think about banks are these the only external users not at all you have Regulatory Agencies you have tax authorities like the government you have customers you have suppliers many other anyone that's outside the organization is an external user now can be can you be an external and internal user at the same time of course you can be an investor in a company and you could be working for the company and most small businesses are owned by the people that in that that that found them so they have the investors SL owners so for example for hat lectures I am the owner and I am also I work for the company I'm an external and an internal user so that could that could happen but for the sake of illustration we have to understand we have internal users and external users and each part of these groups they're interested in some information for example the government is interested in colting their taxes regulatory agency or agencies they are interested in making sure you are following certain rules and regulations customers they want to know your Financial Health before they buy from you suppliers same thing suppliers they are Outsider to the company now suppliers could also be considered creditors because they lend you money now let's take a look at this multiple choice question from farat lectures. to reinforce what we just learned which of the following is an example of an internal user of accounting information well is it a or b investors and creditors those are the main external you need to know this those are external users and those are the people that invest money in the company government Regulators government is an outsider company managers you guessed it company managers they manage the company now could you be a company manager and be an investor yes could you be a company manager and be a creditor yes you can work for the company and also lend money to the company if you have if you have money why not they will if they need money they would lend it I would better off investing rather than lending if I'm working for the company right but the point is you need to understand the difference between internal users versus external users remember external users we use the term Financial Accounting or financial reporting internal users we use the term managerial accounting and both financial accounting and managerial accounting are courses you need to take as any business major if you're an accounting major you need to take more and for hat lectures we'll have course for financial accounting this is the course that you are taking now and managerial accounting as well invest in yourself go to far hat lectures look at additional mcqs to practice what you learned invest in yourself accounting is important good luck and stay safe