 Hello and welcome to this session, this is Professor Farhad and this session will look at the idea of accounts which are the building blocks of the financial statements and basically the building blocks of our accounting information system. This topic is covered in a financial accounting course or simply an introductory financial course. Yes, it will help you if you're studying for the CPA exam if you are looking for basic knowledge. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so, YouTube is where you would need to subscribe. I have 1600 plus accounting, auditing, finance and tax lecture. If you're an accounting student, not I only teach financial accounting, I teach all accounting courses. Make sure to subscribe, connect with me on Instagram. On my website, you will have additional resources such as PowerPoint sites, true, false, multiple choice, exercises. If you're studying for your CPA exam, 2000 plus CPA questions and exercises which are quasi CPA simulation, I strongly suggest you take a look at my website. So we're going to have to look at the idea of accounts and what is an account? The account are again, they're the basic blocks of the accounting information system, the basic blocks of our financial statement. So what is an account? If I ask you to define an account for me, how would you define an account? Well, think of your checking account. Well, I'm sure you might have some checking account. So what would your checking account do for you? Well, when it does two things, it keeps track of increases and decreases. So every time you make a deposit, your checking account goes up in value. Every time you go to the ATM machine or you withdraw money, if you go and you withdraw money from the ATM, your account goes up. So it keeps track of increases and decreases. Now, it's easy for you to think of the checking account, but all accounts in the accounting information system keeps track of changes either up or down. An account might go up or an account might go down. Now, hopefully you know at this point that we have three broad categories of accounts. We have asset accounts, liability accounts, and equity, and assets equal to liabilities plus equity accounts. So if you don't know this equation, see my prior lecture. What I'm trying to define here is to take a look at each account and the assets, liabilities, and equity that you might see in a financial accounting course that you'll be comfortable using with as the time progresses. So the first account we're going to look at is cash and we're going to look at the asset category. First, cash is an asset. We defined asset in the prior lecture. Assets are things that's going to provide future benefit. So when we look at the cash account and we see a number there, we see like you know, $50,000. What does this number represent? Well, simply put, what does cash represent? It represents money and funds, the funds, the bank accept as deposits, et cetera. Coins, checks, money orders, et cetera. So what is the cash account? It's how much money we control. Usually it's at the bank. That's the cash account. We look at account receivable. We see that we have 10,000 of account receivable. What does this number represent? What does accounts receivable represent? Well, when do we have an account receivable? Well, account receivable is created when we provide a service. So here's how it works. We provide a service. When we provide a service, we expect to receive cash. Well, sometime the customer don't pay cash. So what the customer would say, they will give us a promise to pay. That promise to pay, my friend, is account receivable. It's an asset. So it's an informal promise by the buyer to pay for services or goods provided on account, or sometime we say provided on credit. So we gave it to them on credit. It means we're going to give them some time to pay. This is what an account receivable is. Promise to pay, and eventually they will pay us. Notes receivable sounds very similar to account receivable, except it's a formal promise. And the reason I use the word informal, so I can use the word formal here. Formal means it's an official promise by the borrower. Usually what we call when we have a note receivable, technically the person that signed the note is a borrower. Although they might be buying the stuff from us, but when we make them sign the note, it means we are lending them money, then they're paying it back to us. They're like a borrower. To pay in the future at a specified date and plus interest. So the main difference between account and note is the interest. And in notes receivable, which we'll cover on later on in the different chapter, we charge them interest. Not only that we're going to give them time to pay, but we want interest. We want to finance the transaction, but we want to be compensated with interest on that. Account receivable, there's no interest. We don't charge them interest. Supplies, that's another account that are considered an asset. Well, supplies are assets. Why? Because we can use them to run the business. They give us future use. Office supplies, store supplies, paper, pens, etc. Now we have to understand that supplies will get used up. So eventually we're going to see later on that supplies will go down and supplies will turn into supplies expense, eventually, once we use them. Prepaid account, we see those prepaid account are very common. They give a lot of hard time to students. Prepaid accounts are assets until they are expired. What do they, what's a prepaid, represent prepayment of a future expense? Like when you prepay for your phone, if you prepay your phone. Well, guess what? You have an asset. You can use your phone for a month or two months. You could prepay your rent. You could prepay your rent for the full year. You can live at that place for a full year. You don't have to worry about rent. You can prepay any expense. Prepaid are expenses and what happened to them, just like supplies, they are eventually expense. They get consumed. Over time, they get consumed. Now the other thing I'm going to tell you about assets, assets are listed and we talked about this in the prior session on the balance sheet. Just they are listed on the balance sheet. They are a balance sheet account. They are a balance sheet account. Now we're going to look at the second category of accounts, which is liabilities. Well, actually we're not done with assets. We still have buildings. What are buildings? Stores, office, warehouses, factories. Buildings are assets that benefit future periods, more than one period, maybe two, three years. Assets that provide many benefit for many years, they get depreciated. What's the appreciation? We'll talk about this in chapter three, in future chapter. Equipment, office equipment, store equipment, computers. Also, they have the same characteristic as the buildings. They benefit future period. Therefore, we depreciate them. We're going to see what that means later on. Then we're going to have an account called land and what does the land represent? It's represent the amount that we paid for the land. And land is a separate account, separate than a building. So if we bought a building and we bought the land, the land and the building are two different assets, land is not depreciable. So in contrast to these two, we don't depreciate land. Now why? Well, follow the course and you'll find out why. The second category of accounts are liabilities. What are liabilities? Simply put, you owe something, the form of a debt. The most common liability is accounts payable. And what is an accounts payable? It's a promise to pay for goods and services purchased on account, on credit. Simply put, it's the mirror image of an account receivable. So we have company A and company B. If company A provides service to company B and company B promise to pay. So company B gave them, so we provided a service. Company B promise to pay in the future in 30 days. Company A will have an account receivable because company is expecting to be paid. Company B will have an accounts payable, AP. Okay. So company A will have an account receivable, AR, because they're going to be paid. Company B will have an account receivable, which is the mirror image of each other. Let's take a look at another similar sounding account called notes receipt, notes payable. Well, it's a notes payable. Simply put, it's a loan. It's a loan. It's a loan. Simply put, we are all familiar with the concept of a loan. Okay. It's a loan. It's a promise to pay the money back at a specified date plus interest. So what happened is you borrow money, you have to pay it back and you have to pay it back plus interest. Again, if we have A and B, let's assume A lend money to B. B signs a note, gave them a note, a promise to pay. Well, guess what? A will have a note receivable because they lend them the money and they expect to be paid. B, they gave the note. They gave the promise they will have a notes payable. So they're the mirror image of each other. Unearned revenue. Well, it sounds like something like revenue, but it's unearned. When does that happen? When money is received in advance of providing goods and services. Sports team, like when sports team sells their season ticket, they receive the money in advance. So they receive the money from the fans. So the fans, the fans pay upfront before the games. Now, when you are paid upfront before you perform your service, no revenue because you haven't performed yet. So what's going to happen? We receive the money. We have the cash. Now also we have to increase an account called unearned revenue. Now you might be saying, okay, this is unearned revenue. What would the fans have? The fans will have a prepaid ticket. So their cash goes down. They send the cash to the sports team. They have a prepaid ticket. The sports team will have an obligation to perform. Well, eventually the team will perform and this unearned revenue will turn into earned revenue. Okay. Let's look at the last liability, which is accrued liability. What are accrued liabilities? Accrued liabilities are created when you have expenses that are incurred, but not yet paid. The best example, let's assume March 1st, your rent is due, which is $1,000, just for the sake of illustration. So you have to pay $1,000 on March 1st. Well, March 1st came and you don't have the money. Do you still have the expense? Yes, you still have to pay your rent. You have an expense. Now, since you don't have the money, you have an expense and you have a liability because now you owe your landlord $1,000. Anytime you have an expense that you have not paid yet, it's called accrued liability. Any expense that you owe but you haven't paid yet, it's an accrued expense. Examples will be accrued wages, interest, if you owe any interest, if you owe any rent, if you owe any taxes. Anytime you owe money as an expense, it's an expense, but you owe the money, it becomes called an accrued expense or accrued liability. So if we call this accrued expense or accrued liability, they're the same thing. Okay. And we have many of them. We're going to see them later on in future chapters. The last category of accounts are the equity accounts. In under equity, we have four accounts. Common stock is the first one. What does it represent? If we have a million dollar in common stock, this represents what the owner invested in the business, what the owner, what the investors, what the shareholders invested in the business. Common stock increases equity. And by the way, liabilities also go on the balance sheet. Liabilities go on the balance sheet. Then we have an account called dividend. Dividend, what does dividend represent? An account for distribution to owners, which are the common stockholders from profits. So when we make a profit, we might distribute some money. Now, how do we make a profit? Well, we're going to generate revenues first. What are revenues? Revenues are accounts for proceeds from sales of goods and services like sales revenue, rent revenue, consulting revenue. So what we do, whatever our business is, if your business is teaching, you teach and you generate your revenue. If your business is selling, you sell and you generate revenues. You call sales revenue. If you have an office building, you rent it and you have rent revenue. So you have the revenues. But the bad news is when you have revenues, you might have to incur expenses. What are expenses? Account for the cost to run the business. You need your utilities. You need to pay taxes, salaries, rent, insurance. There are many expenses you have to pay. Now, if you take your revenues minus your expenses, the difference between those two gives you net income or net profit. Hopefully, we have more revenues. Let's assume we have 10,000 in revenues, 6,000 in expenses. We have a net profit of 4,000. Then from this net profit, we might pay some of it in dividend. Let's assume we paid 1,000 in dividend. So of the 4,000, we paid 1,000 in dividend minus 1,000 and the company kept 3,000. What we kept is called retained earnings. It's what the company made and kept, retained earnings. Now, the 4,000 minus the 1,000 equal to 3,000, this is retained earnings. This is how we compute retained earnings. Now, revenues and expenses, they go on a financial statement called the income statement, and we saw this in chapter 1. Income statement minus dividend goes on the statement of retained earnings. Common stock goes on the balance sheet, and retained earnings goes on the balance sheet. So simply put, common stock and retained earnings, what survives from all these three accounts to go on the balance sheet. Last but not least, few other terms we need to be familiar with. The ledger is a collection of all accounts and their balances for an accounting system. So this is the ledger right here, the all the accounts. Now, how big should be the ledger? Well, the company's size and diversity will determine how many accounts do we have. And what is a chart of account? Well, it's a list of all the accounts, and with each account, we're going to have an identifying number, something like this. Cash is number 101, accounts receivable 106, supplies 126, prepaid 128, equipment 167. Notice all assets start with the number one. Liabilities start with the number two. Equity with three, revenues four, expenses with six. You're wondering, worse five, well, could be gains or losses. Okay, so this is the chart of accounts. Now, this lesson basically help you understand the basic idea of an account. In the next session, I'll have to introduce the basic idea, the important concept of debits and credits. As always, I would like to remind you to visit my website. If you are interested in investing more in your career, invest more in your education, you're going to study for your exam once, you're going to study for your CPA exam once, take your, take this investment seriously, it's paid out, it's going to pay down dividend down the road. Profit means down the road. This is an investment, not an expense. Good luck, stay motivated and study hard.