Introduction to Accounting

What is Accounting?

• Systematic process to record, analyze, and report financial information
• Communicates financial health of a business
• Known as the "language of business"
• Essential for informed decision-making

Story of Claudio's Business

• Claudio runs a souvenir business in Italy
• Sells a single item: a colorful glass plate
• Starts each day with 100 euros
• Buys 100 plates at 1 euro each
• Sells plates for 5 euros each

Importance of Accounting

• Records daily business activities
• Produces financial reports (financial statements)

Key Financial Statements

Income Statement (Profit & Loss - P&L)

• Shows business profitability
• Example for Claudio:
  • Sales/Revenue: 100 plates x 5 euros = 500 euros
  • Cost of Goods: 100 plates x 1 euro = 100 euros
  • Profit/Net Income: 500 euros - 100 euros = 400 euros

Balance Sheet

• Shows company's assets, liabilities, and equity
• Elements:
  • Assets: Items of value owned by the company (e.g., cash, inventory)
  • Liabilities: What the company owes (e.g., loans, supplier debts)
  • Equity: Residual value (Assets - Liabilities)
• Balance Sheet Layout:
  • Assets = Liabilities + Equity
  • Visualized as a "T" account

Claudio's Balance Sheet Example

• Starts with 100 euros cash (equity)
• Purchases inventory (plates), reducing cash
• Sells inventory, increasing cash to 500 euros
• Initial balance: 100 euros cash = 100 euros equity
• Post-sales balance: 500 euros cash, inventory zero
• Profit (400 euros) added to equity to balance sheet
• Net income links income statement to balance sheet

Conclusion

• Accounting basics illustrated through Claudio's story
• Upcoming topics: Debits and credits, detailed balance sheet discussions
• Encouragement to follow for more videos on accounting basics