This is part one of our introduction to managerial accounting. In this video
we're gonna start with a brief review of your financial accounting course.
Then we're going to discuss the significant differences in financial and
managerial accounting. So to start with we're going to look at a quick review
from your financial accounting course. Specifically we're going to talk about
the accounting equation. So this is something you definitely should remember.
The accounting equation is of course the foundation of financial accounting.
The accounting equation is assets equals your liabilities plus your owner's
equity. So we want to be able to define each part of our accounting
equation. We define assets as economic resources or future economic benefits. So
some examples of assets would be cash, accounts receivable, equipment, land, notes
receivables. Some students think about the definition here and they think about
cash and they think well how is cash a future economic benefit when I have the
cash in my hand right now? Well having cash in hand really isn't a benefit
until you actually use it to accomplish something.
For example paying a utility bill or buying a piece of equipment then it
becomes a future economic benefit.
Liabilities these are your creditors claims on your assets, more commonly
referred to as your debt. So these would be things like wages payable, accounts
payable, notes payable. Those have something in common, it's the word
payable. So any time you hear the word payable or see the word payable that
account is a liability. Then we have owner's equity. Owner's equity is your
owner's claims on your assets. This would be common stock or retained earnings,
preferred stock. So now let's look at some examples of some principles. The
principles that you learned in financial accounting you really have to carry with
you throughout your accounting career. So we're just going to talk about two of
the main ones, one of those being the matching principle. So you recall the
matching principle. It stated that we record expenses when expenses are
incurred not necessarily when cash is paid. I say necessarily because you
can incur an expense and pay it at the same time. But either way you need to
record that expense when it is incurred. That way we're matching the expenses
with the revenues those expenses created. So you've heard the old saying "you have
to spend money to make money." So we just want to match those up. Let's look at
an example here. Let's say we pay wages on the 15th of the month and a month's
worth of wages is $10,000. So from the first of the month to the end of the
month is $10,000 worth of wages and we pay on the 15th.
What is the journal entry required on December 31st? So this also goes back to
your adjusting entry so you have to remember how to make adjusting entries.
What's happened here on the 16th of December through the 31st of December is
we have incurred a half of a month's expenses that we need to record before
moving on to the next period. So to do that we would debit our wages expense
and credit our wages payable, but we're only recording a half of a month so it
would be for $5,000 because a full month is 10,000 but we're only expensing
the 16th through the 31st of December.
Now let's look at the other side of that. Well what happens on January the 15th?
Because on January the 15th we're actually going to pay a full month's
salary or wages in this case. So from December the 16th through January the
15th we're going to pay this $10,000 in wages. So obviously we're going to credit
cash for $10,000. But what do we debit? Well we've incurred another one half's
month's wages expense, so we're going to debit wages expense once again
for $5,000. Well we don't balance but if you look at our original entry we credit
wages payable for $5,000 meaning we owe wages payable of $5,000.
But now we're paying all that off so we no longer owe it so would we would also
debit wages payable for $5,000 thereby making our journal entry balance. Another
principle I want you to recall is the revenue recognition principle. Remember
the revenue recognition principle requires that you record revenues when
revenues are earned not necessarily when cash is received. So for example the
Widget Corporation sold 5,000 units of the Tripple-Widgie on account. So recall
what that means on account-that means we're not receiving cash right away,
we'll get paid later. So we need to journalize an account receivable not
cash. Each unit costs Widget $2.50 each and it is sold for $6
each. Journalize the sale and the cost of goods sold for this transaction.
Please remember when you make a sale there are two entries. One entry is to
record the sale, the other entry is to reduce the amount of your inventory and
record the cost. So the first entry we would make is to
record the sale. Remember it said we've sold it on account so we would
debit our accounts receivable for the amount of the sale which was 30 thousand
dollars. We sold 5,000 units at $6 apiece, that's $30,000. We also earned revenue.
Even though we didn't get the cash yet, we earned it, and the revenue recognition
principle states we record revenues when they are earned. So we would credit sales
revenue for the $30,000. But in addition to that we have to reduce our inventory
and record the cost of that inventory that we sold again matching the expense
with the revenue that expense created, so referring back to the matching principle
as well. So the cost was $2.50 each
times 5000 is $12,500 so we would debit our expense in this case as cost of
goods sold for $12,500 and we would reduce or credit our inventory for
$12,500. Also you should recall a form of the income statement that you discussed
in Financial Accounting called the gross profit income statement. In this case
we can calculate our gross profit at this point. Remember that gross profit is
sales less cost of goods sold equals gross profit. So in this case it would be
$30,000 less 12,500 would give us gross profit of $17,500.
The last thing we want to talk about in part one of this
series is financial versus managerial. So what's the difference in the two?
Financial accounting provides financial statement data to external users for use
in making informed decisions about a company. So for example I as an investor
I may go look at your financial statements and decide whether I want to invest in
your company or buy stock in your company. If I'm a banker and you come to
me wanting to borrow money I may look at these financial statements to see if
you're a going concern whether you're going to be in business for the long
term and you're going to be able to pay me back my money.
Managerial accounting provides financial data to internal users for use in making
decisions for a company. For example the managers they would require certain
amounts of information certain types of information to make decisions for a
company. What direction do we want to go from here? So now we want to look at the
users. We talked about a little bit of them here a second ago.
Financial accounting users would be creditors that would be your bankers,
people lending you money, the IRS, the government, and potential investors or
current investors. Managerial accounting would be used by managers
again to make decisions for a company.
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