Accounting Basics 101 | Cash Course | PragerU Kids

Before we start this episode, here's a quick preview of what's coming. Ready to take charge of your finances and master the art of money management? Cash Course is your ultimate guide to financial literacy, from personal budgeting to macroeconomics. Check out more episodes at PragerU.com. In 2001, American energy company Enron infamously collapsed after it was discovered it had manipulated its finance reports to hide billions of dollars of debt. Not only did this accounting scandal lead to serious legal troubles for the leaders and the collapse of a major accounting firm, it also wiped out most of its employees' retirement savings. Accounting plays a crucial role in the overall economy. Without it, businesses would have no idea how they're performing and whether they can be trusted by customers and investors. Good accounting can help a business succeed and grow. But, as we've seen, bad accounting can lead to catastrophic failure, not to mention tax and legal penalties. So, let's get ready to balance those books on this episode of... Accounting, also known as bookkeeping, is the work of tracking financial transactions. It helps businesses and individuals understand their financial standing and puts them in a position to make more informed decisions. I just mow lawns. Do I really need that? Well, even though you may have a simple operation, you've still got plenty of income and expenses to keep track of. Let's say you mow lawns during the summer and have 30 regular customers paying you different amounts for their specific lawn needs. You also have an older mower that you fill up with gas every three to five lawns, plus a couple of additional tools. You'll also need to consider the cost of meals on the job, maintaining your equipment, and paying your little brother Jedidiah, who sometimes helps you out. Oh, I just let him keep track of it because that's too much to remember. I hope he's at least using the simplest form of accounting called single-entry bookkeeping, with columns for dates, transaction descriptions, income, expenses, and ending balance. As you conduct your business, you record a single entry for every financial transaction. Every time you get paid, you record it as income. And every time you fill up or purchase something to keep your business running, you record it as an expense. This system allows you to easily track your costs and revenue, which is the amount of money you have regularly coming in. Once you see your finances laid out like this, it can help you decide, say, whether you can purchase that new, more efficient mower you've been eyeing. For a small business or company with few or no employees, few daily transactions, and few physical assets, single-entry bookkeeping is usually the most straightforward option. Mega mows mowing. That's the dream, baby. If that's the goal, you might consider using double-entry bookkeeping, which is used by businesses that make many transactions daily and own real estate, vehicles, and business loans, among other things. This system also helps catch any fraud or errors in a company's finances. This system uses debits and credits, which in this case, aren't the same thing as the debits and credits in your bank account and are neither good nor bad. They simply represent two sides of an accounting equation. Assets are things a business owns, like cash. These are recorded as debits. Liabilities are things a business owes, like loans. These are recorded as credits. Equity is the owner's interest in the business, which is the difference between assets and liabilities. These are also recorded as credits. The key to double-entry is that every debit must have a corresponding credit of equal value and vice versa. Can you give me an example? Sure. Instead of paying for gas every time you fill up your mower, say you have an agreement with the gas station to pay for all your fill-ups at the end of the month. In accounting, gas is considered a supply, and supply is considered an asset. So, each purchase would increase the debit side of our equation. Then, there would be a corresponding entry on the credit side, under liability, as accounts payable. This is just a fancy term meaning any money owed to a supplier. As a result, debits and credits are equal. This is what makes it double-entry bookkeeping. Okay, I kind of get it. This system is challenging and will require practice and professional help if you decide to use it. Regardless of the bookkeeping style, it's important to be accurate and thorough. Now that you know a little bit about accounting, let's consider some steps so your books don't end up looking like a patch of weeds. First, wrap your head around the accounting styles. Write down a list of businesses that would need single-entry bookkeeping and a list that would need double-entry bookkeeping. Next, talk to someone who runs a business. Being close to someone with experience could give insight into accounting in the real world and even lead to internships or new business opportunities. Finally, practice basic accounting. Find some simple scenarios online and record them in a practice ledger. It'll help you become familiar with the complicated and confusing subject. Ultimately, practicing the different scenarios that may occur in business is the best way to learn how accounting works in real life. Whether big or small, businesses depend on having an accurate understanding of their finances. Using accounting practices in your personal life will help you manage your finances like a pro and protect your hard-earned money. Wait a minute. These numbers don't look right. Jedediah. Watch more at PragerUKids.com And parents, don't forget to subscribe.