[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]
