 Hey guys, it's MJ the students Actory and in this video I want to give an introduction to accounting and the target audience are Actories and people who are interested in Bitcoin So this does form Chapter 8 of subject CT2, but like I said, I think the subject is very important for all Actories And for anyone who wants to you know get to know Bitcoin Under the hood from a more accounting and business side So in this video, we're going to be talking about What is the balance sheet? What is the profit and loss account? What is the cash flow statements and finally I'm going to talk a little bit about cryptocurrencies because remember Cryptocurrencies are built on this open ledger system and you can't understand what an open ledger is unless you understand What accounting is and how it all works So let's go back right to the beginning. I mean, what is the history of accounting and Doing some research on Wikipedia You'll see that they say that a form of accounting has always been there Since we learned how to write and since we've had money We've been recording it and keeping you know account of what's what's been going on But there was an Italian guy who was friends with Leonardo da Vinci who came up with the whole system of the double entry Technique which just made and that this is where the whole balancing the books comes from And he made sure that there was a lot more accuracy and all that in accounting Anyway, let's move on to the theory. So what is a balance sheet? Okay, a balance sheet summarizes the company's financial position and It all comes down to a very simple formula and that is assets is equal to liabilities plus equity So in this balance sheet is quite an important document I mean it's listing everything owned by the business and where the funding was for those sources it works on that double entry method of bookkeeping and This is kind of like the score sheet of a business The higher the assets and the lower the liabilities The better position a business is in now from the actual core reading I've taken just this little example to show you what a balance sheet looks like So you can see here are the assets now there's quite a few different types of assets that we won't go into in this video, but you have your assets and you have your equity and you have your liabilities over here and The formula assets is equal to liabilities plus equity. That's that's basically it so If your assets are bigger than your liabilities that residual would then be your equity Okay, let's move on to the profit and loss account. Okay profit and loss account this is going to record all your trading activities and It's got a very again another easy formula and that is profit and loss is equal to income minus expenses and Just very quickly you get something called gross profit and net profit net profit adjust for non-trading cash flows such as interest rates and taxes But essentially this is if you think of the balance sheet as the final score sheet The profit and loss account is like how you did in certain hearts, you know How is the money doing? How did we do this year? Did we make more? And if you make profit then you're gonna see the assets will increase If you make a loss then the assets will decrease and so you can see how the two will affect each other Very quick example again from the actuarial core reading and for anyone interested in learning the subject are highly recommend going to www.acted.co.uk and buying these Core reading books to actually take the core readings and expand on them but This is just a little Example of a profit and loss account so you can see There's the gross profit then they had some expenses And then that decreases it but you can see they've got gross profit operating profit They try that's what accounting does get a little bit tricky is there's all this jog and they they try and confuse you with all these fancy terms But in a sense profit and loss account is income minus expenses And if it's a positive number it's profit if it's a negative number. It's a loss. It's as simple as that Let's go into cash flow statements. Okay, these are out of the three these maybe not the most important You know in the sense that regulators and auditors will force you to have other two But this one's very important because this is showing cash movements and it's able to give all the details So more detail than the other ones think of the others as being more summaries These are the actual cash flow statements and there's a big focus on liquidity Okay, so this this statement is showing where the money has come from and where it has gone And it ignores the whole accrual concept remember accrual works in the sense that if someone buy something on credit You can write that off as profit even though you haven't got any money into your bank account and a famous case where where this happened was with the company of Enron They they were reporting massive profits, but their cash flow statements didn't add up and finally the company went bang Again, this is just a quick little example It's showing you where all the money is coming in and how it's going out and that is the final increase in cash now accountants are Are very important to society? I know I give them a lot of a hard time this channel because they are kind of seen as the other top financial profession You know rivaling act trees But they're very important and they they have some tricky situations that they have to deal with for example How much provisions they need to make for bad debts, you know, so let's say you buy something on credit The guy hasn't paid you in three weeks Do we set aside some money do we write it off? Do we wait for him to come back? You know, what do we do also methods of depreciation you buy a machine you start using it It's getting somewhere in tear. How much do you depreciate it by? And again, how to value assets. This is probably where act trees and accountants Can disagree quite a lot because there are so many different methods on how to value an asset Do you use the discounted cash flow model? Do you use the market value? Do you use fair price? You know lots and lots of financial arguments can be had there and you do need some discernment and judgment to get that correct and then finally, you know, how to interpret these accrual concepts We saw what happened with Enron That should not have happened, you know counting did kind of let us all down with the whole Enron thing So we have to come back and say how do we deal with accrual concepts? Now, how does this all link up to to Bitcoin? well, you know Bitcoin uses this whole open ledger and it's got this thing called the blockchain and In my opinion, this is going to disrupt the entire financial system because it's taking power away from centralized organizations and Decentralizing it amongst the internet However, I am going to make rather a future video to go into more detail explaining Bitcoin verse banks Otherwise this video will be way too long and I know not all of you guys are as interested in Bitcoin as I am But for those of you who are check out this thing called dog coin or doggie coin And it's a great way to to learn about cryptocurrency In fact, go check out my previous video where I show you how to open up a doggie wallet and In that video. There's also a link where you can get some free dog coin Post your wallet address in the comment section of that video and I'll actually give you some free dog coin I mean dog doggies are not worth a lot of money so it is essentially play-play and That's why it's a great way to just learn about cryptocurrencies if you're interested But other than that, I hope you've enjoyed this very brief introduction to accounting It is a massive subject But this is the core structure of it and I hope that this has helped you understand when you further progress in your studies Thanks guys so much for watching and please remember to like and subscribe. See you next time. Cheers