Lesson #6 - The Fourth Element – REVENUE

Definition:
REVENUE (also known as Sales) are inflows of economic benefits or cash.

Imagine REVENUE as your “river” or “stream” of cash flowing inwards, and ASSETS as your “lake” or “reservoir” of cash where it flows into. The larger the cash inflows i.e. REVENUE that occur, the larger the corresponding ASSET that will be formed as it gets collected and stored.

Let it flow! Let it flow! Let if flow!

REVENUE is measured over a period or duration of time (for example over a year, a quarter or a month) whereas ASSETS are measured at a certain date or a point in time (yesterday, today or tomorrow).

Example:
Revenue from sale of goods or a service
When you sell a product or a service to a customer in exchange for cash, that creates REVENUE for you. The REVENUE is the inflow of cash that you receive from your customer.

The Nature of Revenue:

REVENUE is CREDIT in nature.

When REVENUE gets BIGGER or INCREASES, it will head in a CREDIT direction, which is its nature. Conversely, when REVENUE gets SMALLER or DECREASES, it will head in a DEBIT direction.

In Conclusion:
As REVENUE are inflows of economic benefits, which moves much like a river into your “cash reservoir”, then let’s listen to a song that talks about a "river". Here’s “Proud Mary” by Creedence Clearwater Revival.

Enjoy!!!

Lesson #5 - The Third Element - EQUITY (and the ACCOUNTING EQUATION)

Definition:
EQUITY is the residual interest in the ASSETS of the business after deducting all the LIABILITIES.

Just like Einstein introduced us to the famous equation E=mc2...

Who you lookin' at?

...accounting has an equation too and it is...

EQUITY = ASSETS - LIABILITIES

When you spin it around, the following equation is also true...

ASSETS = LIABILITIES + EQUITY

REMEMBER THIS EQUATION!!!

Equity is like your "net worth" i.e. add up all the ASSETS you own, then subtract from that all the LIABILITIES that you owe.

Examples:
1. Share capital
Capital that is contributed by yourself to start-up a business. This is usually in the form of cash but can be in the form of fixed assets as well.

2. Retained profits or reserves
When your business makes a profit, that profit is "retained" and "channelled back" into the business, accumulated and brought forward to the future. This INCREASES your EQUITY.

On the other hand, when your business makes a loss, that loss is "taken out" from the business and deducted from your equity. This DECREASES your EQUITY.

The nature of Equity:
EQUITY is CREDIT in nature.

When EQUITY gets BIGGER or INCREASES, it will head in a CREDIT direction, as that's in line with its nature. Conversely, when EQUITY gets SMALLER or DECREASES, it will head in a DEBIT direction.

In Conclusion:
As EQUITY is what's left over from your ASSETS after deducting your LIABILITIES, and it introduces us to the Accounting Equation, let's listen to a cheesy song, that has another "equation" in it.

Here it is! "Me - You = Blue" by Glenn Medeiros.

Enjoy!!!

Lesson #4 - The Second Element - LIABILITIES

Definition:
LIABILITIES are future sacrifices of economic benefits arising from present obligations as a result of past events.

Remember two key things here that give LIABILITIES their meaning: -

1. Future sacrifices of economic benefits
2. Present obligations

Firstly, "future sacrifices of economic benefits" means you have to give up CASH in the future.

Secondly, "present obligations" means you are currently, at this very moment, obliged to give that CASH up.

Examples:
1. Creditors (also known as Trade Payables)
Cash that you owe to your suppliers after you have bought something from them in credit, and you haven’t paid them yet.

2. Bank borrowings, bank loans or overdrafts
Money that you borrowed from a bank and that you are obliged to make repayments to on a regular basis.

3. Revenue received in advance (also known as Prepaid Revenues)
Revenue that your customers have paid you in advance, for example an invoice that was paid to you upfront or in advance, BEFORE you actually deliver the product or service. At the very moment that you receive the advance payment, it's a LIABILITY to you!

However, once you’ve done your part and deliver the product or service to the customer, then it is no longer a liability (it becomes "REVENUE" - we'll talk more about that later...)

Short Term or Long Term:
LIABILITIES can classified into Short Term or Long Term.

Short Term Liabilities = Current Liabilities = Liabilities that last for less than one year i.e. 12 months

Long Term Liabilities = Non-Current Liabilities = Liabilities that last for more than one year i.e. 12 months

The Nature of Liabilities:
I'm sure you've heard of something called "DEBITS" and "CREDITS". In accounting, "DEBIT" means "Left" and "CREDIT" means "Right".

Huh? So what? Why are you telling me this?

Just remember for now that LIABILITIES are CREDIT in nature.

Another thing to remember is - When LIABILITIES get BIGGER or INCREASE they will head in a CREDIT direction, as that’s in line with their nature. Conversely, when LIABILITIES get SMALLER or DECREASE, they will head in a DEBIT direction.

In Conclusion:

As LIABILITIES are cash that you are obliged to pay or that you owe someone else, let's pay tribute to LIABILITIES through a cheesy song!

Here it is! "IOU" by Lee Greenwood.

Enjoy!!!

Lesson #3 - The First Element - ASSETS

Definition:
ASSETS are future economic benefits that you control as a result of past events.

Remember two key things here that give ASSETS their meaning: -

1. Future economic benefits
2. Control

Firstly, "future economic benefits" means that the item is CASH or can be readily converted into CASH.

Secondly, "control" means you OWN it (it's yours!) or you can deprive someone else from using it as you have full power over it. No one else can "touch" it but you.

Don't we just love those baggy pants?

Examples:
1. Cash and cash equivalents

RIP Johnny...

No, not THAT Cash...

...THIS Cash!

2. Investments
Equities that you purchased from the stock market, or government bonds that you have bought

Maybe 2008 wasn't a very good year for the stock market after all?

3. Inventory
Goods or raw materials that you purchased for resale

So...Which shelf do you want these to go again?

4. Debtors (also known as Trade Receivables)

Cash that your customers owe you after they have bought something from you in credit, and haven't paid you yet

5. Fixed Assets
Property, plant and equipment that you bought for use in your business e.g. land, building, machinery, office furniture, laptops, motor vehicles etc


6. Prepayments (also known as Prepaid Expenses)
Expenses that you have paid in advance, for example a bill or invoice that you pay upfront or in advance, BEFORE you consume or use the product or service. At the very moment that you pay for it, it's an ASSET to you!

However, once you consume or use it, then it is no longer an asset (it becomes an "EXPENSE" - we'll talk more about that later...)

Short Term or Long Term:
ASSETS can classified into Short Term or Long Term.

Short Term Assets = Current Assets = Assets that last for less than one year i.e. 12 months

Long Term Assets = Non-Current Assets = Assets that last for more than one year i.e. 12 months

The Nature of Assets:
I'm sure you've heard of something called "DEBITS" and "CREDITS". In accounting, "DEBIT" means "Left" and "CREDIT" means "Right".

Huh? So what? Why are you telling me this?

Just remember for now that ASSETS are DEBIT in nature.

Another thing to remember is - When ASSETS get BIGGER or INCREASE they will head in a DEBIT direction. Conversely, when ASSETS get SMALLER or DECREASE, they will head in a CREDIT direction.

In Conclusion:
As ASSETS are future economic benefits that you control or OWN, let's pay tribute to ASSETS through a cheesy song!

Here it is! "Everything I Own" by Bread.

Or if that doesn't tickle your fancy, here's a cover version by a lesser known band from Malaysia called Lost Souls.

Enjoy!!!

Lesson #2 - The 5 Accounting Elements That You MUST Know - An Introduction

Let's get started...

The first step in understanding accounting is to know the 5 "Elements", let's call them "Teams". Just like there are 4 different "Houses" in Harry Porter i.e. Gryffindor, Hufflepuff, Ravenclaw and Slytherin...

...you have 5 "Elements" or "Teams" in accounting. And they are, drum roll please...

1. ASSETS

2. LIABILITIES

3. EQUITY

4. REVENUE

5. EXPENSES

Lesson #1 - What Is Accounting?

Accounting or bookkeeping is an old ancient profession which involves the recording and measurement of financial information (mainly money related!) about a business or company.

The people who are qualified in the accounting profession are obviously called "Accountants".

Although accounting may sometimes be referred to it as the "Language Of Business", I'd like to refer to accountancy as "Counting Beans" and the accountant as "The Bean Counter".

"1001, 1002, 1003, 1005...D'oh! Looks like I have to start again!"

So, what's the BIG DEAL about accounting anyway? Why is it important?

Accounting provides owners and businesses a financial snapshot about the health and profitability of a business so that solid business decisions can be made.

Without accounting, owners and businesses would simply be doing business "blindly", without knowing if they are profitable and without future direction. That would be disastrous! In short, we could say that they would be "Dancing in the Dark".

Here's Bruce Springsteen...

Enjoy!!!