Lecture video 1

Lecture 1: What is accounting all about?

Study unit one starts off with, “What is accounting?” It talks about the nature of the accounting theory - the principles, the policies, the procedures. So a lot of information to take in, so we're going to break it down slightly differently. And what we're going to do is say let's take the definition of accounting, break it down bit by bit, and identify what's going on with each one of these, and we’ll understand it bit by bit.

The first thing let’s start by saying - It's the orderly and systematic identification and recording of the monetary values of the economic transactions of an individual entrepreneur or business. Reporting the results of these transactions and providing this information to users, and this obviously includes bookkeeping. This is the definition of accounting, and I've broken it down a little bit so we can make life a little bit easier for ourselves. Let’s start off with the first one:

When we talk about orderly and systematic:

If you take a look at that picture we looked at in the very first video, and you imagine your business - you've got sales going out; you've got purchases coming in; you've got deliveries; you’re paying people; you're running a shop; you’re running a factory as well. A whole bunch of costs; a whole bunch

of things are happening on a daily basis. It definitely makes sense for you to have a formalised approach to doing something, especially if you're not doing everything yourself. You want to make sure all your staff are busy; you want to make sure everybody is taking care of what they need to. But you want to have a formalised approach to how you get your information; how you calculate your information; who does what, so that people aren't paying people twice or not paying someone at all.

In order to have a formalised approach though, you have to learn the rules, and this is obviously what you're going to be doing in FAC1502. So the rules, the concepts, the theories before we can perform that, and then there’s going to be a lot of terminology. In terms of this process, there's a lot of specific terminology that accountants speak, and that's our language, and this obviously we're going to keep picking up as we go along.

An orderly and systematic identification and recording:

It's very important to identify everything that goes on with your business that is going to result in some kind of monetary value. We generally say, “Well that’s your transactions, right?”

If someone comes in and takes something off my shelf that represents a monetary value because whatever they're taking from me is mine, which means they've taken money out of my business and I want money back for that, and I expect that they're going to give me money. We need to make sure that we identify everything that goes on that may result in money, and sometimes this may be obvious, and sometimes it might not be obvious. I might build something myself for example, and I don't necessarily realise that it costs me, or how much it costs me to do.

I've got to identify that, and I've got to record it properly. I've got to make sure that I understand that every hour that I work for that business is worth money, and therefore I want to be paid for every hour, and your staff want to be paid for every hour. So we have to be able to identify anything that's going on in that business that's going to have a Rand value impact, that we need to collect the data for and record it, and we need to know how to deal with them.

We need to record them the same way every time it happens, and this is why your accounting studies are so specific, and we keep drumming and repeating the same thing because we're going to make sure that every time you do this, you do it the right way.

We can't have your calculating sales the right way for eleven months of the year, and then in month twelve, you get it completely wrong. You've got to make sure you do it the same way all the time, and that means being very comfortable with what you're doing and why are you doing it.

You're going to need to know how to record the transaction and what they are going to look like when they are recorded properly. What they are going to come together like. All that stuff that's going on in your business - all the sales; the income; the cost of sales; the salaries and expenses; and the telephone bills and security - all of that we're going to put in some kind of order, and we’re going to deal with it systematically. And we're going to make sure that there's nothing else going on in our business that relates to money that we just didn't realise, we didn't think about, we haven't taken care of. And this way we're going to make sure that we deal with everything.

The monetary values:

We've said already a whole bunch of transactions are taking place, and we've got to make sure that we give them a monetary value. Some of these are quite simple - if I buy something from you, the monetary value is how much money I'm handing over. Some of it’s not so easy though.

What monetary value, for example, do I give something that I built? If I had a whole bunch of stuff lying around my warehouse and I decided to build a machine, how do I give value to that if I build a machine that nobody's ever heard of? What value do I put on that? What Rand value do I put on it?

Do I just say, “Well I'm just going to take the cost of all the bits and pieces I use,” or do I say, “Well, how much can I sell it to someone else for?” If I'm building something that doesn't exist anywhere else - I can't go buy it from the shops; I can't go price it from somewhere else – how do I know how much this thing is worth?

So sometimes monetary values are easy, and at this level, it's definitely going to be simple, and later on monetary values and finding monetary values is going to be very difficult for us to figure out. So when we look at it, we're looking to make sure we're comfortable that we have an orderly and systematic identification and recording of any monetary values that affect the business.

So any monetary values, we’ve got to make sure we identify and record them, and we want to do that in the most specific way. We want to do it orderly, and we want to make sure we do it systematically.

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