okay look I get it right accounting how boring [Music] crunching numbers I just want to run my business but look at this research shows that 9 out of 10 businesses actually fail because they don't understand their numbers [Music] and the truth is that when you understand accounting you understand your business so in this video I'm going to break down accounting step by step here's what we're going to cover what accounting is and why it's important the key accounting principles that you need to know must have accounting reports and my favorite and one of the most important how to analyze the financial data and to make sure we stay on the same page I'm going to give a couple maybe even a lot of real world examples to help us understand the concepts and look by the end of the video you'll understand accounting and in the process understand your business so if that sounds good let's get started and learn some accounting okay accounting is a process of recording organizing understanding reporting on and analyzing financial data now that may sound complex but we can break this down into three core Parts recording all transactions reporting with key financial statements and lastly analyzing the data now if you go back to the definition you'll notice how I said accounting is a process because it's not something that you do one time right before tax time right it's an ongoing system to track your numbers monitor performance uncover insights and make better decisions and help you forecast right into the future and if you don't believe me here's how you see recording the transactions shows you where you've been financial statements shows you where you are right now and Analysis shows you where you're heading so to bring this full circle let's look at an example so let's say you run a landscaping company called Green Grass and in the beginning it's just you right and a Truck and guess what business is booming because you have five star service and clients just can't seem to get enough so naturally you want to expand higher Mark Cruz buy more trucks take on bigger projects but then you start thinking how much can I really afford how much can I really invest into the growth of this business should you get a loan should you go into your savings what is the true cost of all of this expansion all right so all of that was the intro right helping you to understand what accounting is and why it's important but now let's get into the meaty stuff the good stuff right the three-step accounting process let's go through it step by step and step number one is to record all Financial transactions that happen in your business and that process is known as bookkeeping or data entry you see every time money comes in your business or out your business that transaction must be recorded and yes I mean every single transaction of which there are five main types that you need to know the first one is revenue right most people understand it it's the money that comes in your business from all products and services that you sell so for green grass that's the income for services like mowing fertilizing and planting trees then you have expenses and these are costs that are incurred to run the business so payroll advertising rent then there's assets and those are the valuable things that your company owns and assets can be physical like equipment or intangible like your brand name and those sweet dollar bills cash that's also considered an asset all right the fourth type is liabilities now your liabilities are typically money owed by your company right so loans debt lines of credit unpaid invoices and taxes and then last but not least we have Equity now your Equity is also called owner's equity this would be your own ship stake in the business and the portion of assets funded by the owners rather than creditors so you want to properly categorize each one of these transactions into one of those five buckets or categories and that portion of categorizing is literally the entire Foundation of accounting okay so you have all of this financial data right your transactions are categorized step number two is to create financial statements based on that transaction data and I want you to think about financial statements as different views into your business and with that there are three financial statements that you need to be aware of the first one is the income statement the second is the balance sheet and the third is the cash flow statement each one being equally important in each one giving you a different view into the finances of the business so let's go through them the income statement that shows your Revenue your expenses and your profit over a period of time it it helps answer the question how profitable is this business so think of that like a scorecard for your business right the goal of business is to be profitable the income statement shows you how profitable it is going back to our example from Green Grass Company the income statement will show the revenue that came in the cost to deliver all the services that we provided and the leftover profit Now by comparing months and years of income statements you can start to see the trend of your business hopefully going up right in profit okay so if that's the income statement what's the balance sheet well the balance sheet is like a snapshot into the financial position of your business at any given moment the balance sheet outlines your assets AKA what you own your liabilities AKA what you owe and your Equity so for green grass company the balance sheet will show the trucks the lawn mowers and Bank balances under asset if we had any loans and unpaid bills well that would show up under liabilities and owner contributions and retain profit that shows up under Equity okay so now you know about the income statement you know about the balance sheet the last financial statement that we need to know of in step two is the cash flow statement now the cash flow statement is important because it tracks the real-time movement of cash in and out of your business it literally breaks down all the money coming in from operations Investments and financing and for green grass company the cash flow statement helps to answer questions like are we collecting payment from our customers fast enough our investments or debt eating too much into our cash reserves or are we investing our cash wisely right all important question and all things answered by the cash flow statement so if step two is creating financial statement that leads us right into step number three which is analyzing the financial data look this is where the magic happens this is where you take raw numbers and turn those numbers into insights insights that help you build a stronger and more profitable business and to do that you calculate key metrics and ratios that give you these insights for example your profit on the income statement shows pricing power or the current ratio on the balance sheet assesses liquidity risk and cash flow lets you forecast growth potential so let's look at how Raj who owns a tofu business can analyze his financial data to explode his profit margins Raj turned to his accountant Jenny for help he says look I looked at the income statement and I realized that my profit is only 10 percent and Jenny says yeah I see that too and if you don't get it under control you'll be serving yourself bankruptcy papers pretty soon but after analyzing his expenses very closely Jenny identifies the problem Raj is spending way too much money on pricey ingredients from Whole Foods his costs are way out of control and Jenny says holy tofu Raj simply switch to locally sourced produce and you can knock those costs down by at least 30 percent that's the magic flavor to boost your profit margins so of course Raj follow his accountant's advice and found a farmer's market with amazing fresh and most importantly affordable produce so armed with the new affordable produce Not only was he able to boost his profit margins but he was also able to lower his prices and have better margins than before so as The Story Goes customers came in drove back to Roger's restaurant because now the prices were more affordable but just as delicious and within a month Rogers profit doubled to 20 and this my friends is the power of accounting and analyzing your financial data right benchmarking against historical performance past data industry averages and looking for those patterns and those outliers hidden within the data but with this you're going to see a couple of things patterns problems but also potential but the key here especially for the potential part of it is to start tracking your finances right now right garbage in garbage out you need clean clear and concise financial data to help you make better decisions alright so we covered a ton of ground here let's go over a recap we learned that accounting is crucial for managing and monitoring every aspect of your business and we also learned that it's a process right of recording reporting and analyzing the financial data and the key principles of accounting include transactions financial statements and Analysis I have another video where I went in depth is super popular on bookkeeping right so if you want to learn about bookkeeping for your business watch this video next either way make sure you smash that like button for the YouTube algorithm it truly helps the channel I'm Karan from Life accounting and I'll see you in the next video