1. Accounting: The Language of Business

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Accounting: Principles of Financial Accounting

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IESE Business School

Accounting: Principles of Financial Accounting

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Курс 1 из 5 — Specialization Foundations of Management

Financial Accounting is often called the language of business; it is the language that managers use to communicate the firm's financial and economic information to external parties such as shareholders and creditors. Nobody working in business can afford financial illiteracy. Whether you run your own business, work as a manager or are just starting your career, you want to understand financial information and be able to interact with accountants, controllers, and financial managers. You want to talk business! This course will provide you with the accounting language's essentials. Upon completion, you should be able to read and interpret financial statements for business diagnosis and decision-making. More importantly, you will possess the conceptual base to keep learning more sophisticated accounting and finance on your own. Do not forget that, as with any other language, becoming proficient with accounting requires constant practice.

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Course Overview & Week 1: Introduction to Accounting - The Balance Sheet

Welcome! Before you start today's videos, please have a look at the syllabus. In this first session, I'll give you an overview of what accounting is all about and why it's important to have a basic proficiency in this "language." In addition, I'll introduce one of the most important financial reports - the balance sheet - and a practical real-world case so you can put theory into practice. Objectives: To gain insight into the essence of accounting and become familiar with the balance sheet and its purpose.

1. Accounting: The Language of Business6:17

2. Practice Case: The Campus Bookstore I7:07

3. Practice Case: The Campus Bookstore II3:09

4. Accounting for our First Transactions3:10

5. Accounting for More Transactions5:07

6. Explaining the Balance Sheet7:05

7. Defining an Asset6:04

8. Defining a Liability4:26

Познакомьтесь с преподавателями

Marc Badia
Assistant Professor
Accounting and Control

[MUSIC]

Welcome to the first week of accounting.

In this first video clip, I'm going to give you the big picture of accounting.

What is accounting all about?

Who are the people involved in the accounting process?

And the ultimate question, why learn accounting at all?

What is accounting all about?

Accounting is often called the language of business.

So no matter whether you work in finance, marketing, human resources, or

you just run your own business, it is essential that you know this language,

that you speak and understand this language.

In any firm, there are economic events that take place, business transactions.

And accounting is the process that records and classifies these transactions and

then produces summary reports for external users of the company.

Obviously, managers are also interested with this information, but

especially we are thinking about external users.

Now, my next question to you is,

who are these external users that are interested on our accounting information.

Who can be interested in the performance of the business that we manage?

So let me tell you who are the main external users of financial information

of these financial reports.

Well, first of all, investors, and

by investors, I mean current investors and potential investors.

Current investors are the owners of th company.

And they are interested in the performance of the firm for obvious reasons.

They have invested money in the business, they are not familiar with the day-to-day

operations of the business, and they want to learn what happened to it.

Then you have potential investors, and many times financial analysts,

who analyze companies on behalf of these potential investors.

So they might be considering investing in that firm.

Then you have creditors.

Among creditors you could have banks, for example,

that give loans to companies, or you could have also suppliers.

Every time that you purchase on credit on account from a supplier,

you will monitor the supplier.

Therefore, suppliers are interested, banks and

suppliers both, they're interested in the capacity of the firm to repay its debts.

Who else could be interested in this information?

Well, customers.

You're going to have customers who might be looking for

a strategic supplier that is there for the low hall, for the long run.

And therefore, they want to first examine these financial statements to

see that the company, the supplier is sound, has a sound business.

More examples, government agencies, tax authorities,

regulators, employees, trade unions.

Every time that they negotiate the salaries every year,

I'm sure that they're interested in knowing about the performance of the firm.

Competitors, who want to benchmark their operations with those of other firms.

So all these people, and I'm sure that more examples you have found,

are interested in the financial statements of the firms to analyze them and

extract useful information.

With so many users, and with so

many companies in the market, it is obvious that we need a common language.

So we need a set of rules that everyone understands, so

that we all speak the same language.

>> So in the world, we have two big sets of principles.

On the one hand we have International Financial Reporting Standards, IFRS.

And these rules are set by a standard-setter that is based in London,

the International Accounting Standards Board.

And on the other hand, we have US GAAP, US Generally Accepted Accounting Principles.

And this set of rules is set,

is determined, by the Financial Accounting Standards Board, the FASB.

In any case, you don't have to worry about these two sets of principles

because everything that we are going to learn in this course, all the accounting

concepts that we are going to learn, apply to both sets of principles.

We just follow some common sense,

to the extent that accounting is based on common sense to start with.

And so my next question is, who prepares this financial information.

Who prepares these financial statements?

Well, the managers in the company, they are the ones responsible for

preparing this information and presenting it to the shareholders of the firm.

Now, don't you see a conflict of interest here?

So on the one hand, we have the managers of the company, who prepare the financial

statements of the company that summarize the performance of their operations.

On the other hand, the shareholders of the company read these financial statements

and compensate the managers according to the performance that they're reading these

financial statements.

So obviously, there is always a temptation for

managers to make up the numbers to look a little bit better.

In order to solve or

alleviate this problem, we have a third party here, the auditors.

Auditors are in charge of certifying that the financial statements have been

prepared according to the accounting principles.

So now, we have the full picture.

Remember, first, we have real economic transactions that take place in a company.

Managers, accountants in the company record and classify all these

transactions, and produce these financial statements with approval of management.

These financial statements are for external users,

mainly the shareholders, and they have to be prepared according to the rules,

to a set of rules, to a set of accounting principles, and

auditors are the ones that make sure that that is the case.

Therefore, financial accounting is the process that records, classifies, and

summarizes the business transactions that take place in a business.

Our goal here in this course is that by the end of it you'll learn how to read and

understand these financial statements,

in order to evaluate the underlying performance of the business.

And at the same time, ,that every time you see a transaction in a business,

you understand what's the input of this transaction on the financial statements.

In order to do this, it is essential,

it is crucial that you learn the accounting mechanics.

>> So this is why we have to get a lot of practice.

So in the next video, we're going to get very practical.

[MUSIC]

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