Welcome, in this video I'm going to set up a problem that we're actually going to use

across several videos.

The goal of all of these videos is to help you understand the accounting cycle.

We're going to break it out into pieces, but

I do want to give you the overall layout before we get into that.

So here's what we're going to do for an example of the accounting cycle.

We're going to take a simple wholesale business with a very small number of

transactions.

I chose a wholesale business so that we're not going to get caught

up into all the accounting we'd have to do if we were actually building things.

Create an inventory,

thinking about how we're using up things to create that inventory, etc.

Now, you don't get off easy, we are going to cover that in this course.

We're just not going to cover it here, because we don't need to get into all that

complexity to meet our goal of understanding the accounting cycle.

What I'm going to do is give you one month of activities for a newly created firm,

and the goal of creating financial statements for that month.

To get a little more specific, it's a made up company called Liber of Wisdom, and

what what they do is they're a fictional book distributor.

So an author will self-publish a book, or

a small publishing house will create some books, and they'll send them in bulk.

And what Liber of Wisdom does is break these up into smaller orders, and

sell them to individual bookstores that way.

Okay, what kind of transactions are you going to see?

I'll just run you through the eight.

The first thing is we're going to start the company, so shareholders will

contribute 100,000 in exchange for the common stock of the company.

Then we're going to sign a lease for a warehouse and offices, and

we're going to pay for that in advance.

Next we're going to acquire fixtures and display equipment.

We'll pay for part of that and we'll take out a loan for part of that.

Then we're going to purchase some books that we're going to use for

inventory to be sold in the future.

Next we'll sell those books, that's a good thing.

If we're in the book selling business we actually want to sell some of the books.

We're going to sell them on account, meaning people can pay us in the future.

Then we're going to collect some of those accounts, not all of them, but

some of them people will pay us.

We're also going to pay off our suppliers,

because remember when we got those books we didn't pay the suppliers.

We're going to have to recognize the fact that we're going to have to

pay our employees, but we're not going to pay them until the next month.

So in that first month we're not going to give them any cash.

And finally we're going to pay a dividend to our shareholders.

We're going to look at how to record all these transactions, and

we're going to look at creating a set of financial statements.

In fact, let me review the accounting cycle to tell you exactly what we're

going to do.

We'll do an entire video on those externally prompted transactions, taking

those eight transactions and thinking about how they changed the company.

That means we're going to analyze, journalize and

then post each one of these following that accounting process.

Once we're done with all that, we're going to review for

adjusting journal entries.

When we identify one, we're going to analyze, journalize and

post, once again following the accounting process.

Once we've got all of our adjusting done, we're going to do yet

a third video where we're going to look at the closing entries.

There there's no analyzing, remember that closing is relatively mechanical.

We're just going to journalize what we have to to close out all those temporary

accounts.

Get the net impact over to the permanent accounts, and

then add up the permanent accounts.

Once we have everything posted,

we're going to do a video on how to create a set of financial statements.

So we'll have an individual video for

each of these four steps drawing on this one problem.

When we're all done, what's going to have happened?

Well, we're going to have taken you all the way through the accounting cycle for

one company.

Even though it's a made up company,

this is going to allow you to really know where accounting statements come from.

My experience is, until you've gone all the way through the cycle and

created a set for yourself, you just don't really get it.

What I want you know is any other statement you'll ever see will have been

generated by the same process.

Real companies are going to have more transactions, and

their going to be more complex underlying transactions, but

the same basic approach applies to all of them.

What that means is, once we've gone through these videos and

you understand the accounting cycle, you'll be able

to take any financial statements you see and think about it in that same process.

Immediately allowing you to think more about how

to use a financial statement to really make better decisions.

How to use a financial statement to really inform other people.

And basically how to use a financial statement for

the goals that they were created for.

Let's get started on those other videos.

Comprehensive Example Set Up

Accounting for Decision Making

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