Bus 1050 1st Edition Lecture 17 Outline of Last Lecture I Veblen Pecuniary Emulation and Conspicuous Consumption from Theory of the Leisure Class Outline of Current Lecture II Littleton The Evolution of Accounting III Pacioli Particulars of Reckonings and Their Recordings from Ancient Double Entry Bookkeeping Lucas Pacioli s Treatise A Memorandum B Journal C Ledger Current Lecture Introduction to Accounting Generally speaking accounting is part of Finance The head of accounting is called the controller What is the purpose of accounting Is it about information collection Is it about internal and external reporting Is it about the need for accuracy At the end of the day accounting is about providing useful information for decision making Internal reporting is designed to make decisions that benefit the stakeholders of a company External reporting is the process of providing financial information to the outside world Public companies in reporting to other companies must follow certain standards which are FASB We need standards in accounting in order to make comparisons In other words to make sure that everyone is reporting using more or less the same system Another function of accountants is to safeguard goods for the company GIGO Garbage in Garbage out If the data put into the accounting system is not useful then neither will what comes out These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Deception Opportunism Sellers know more Conspicuous wastes leads to leisure time which may be good or bad The purpose of accounting is to provide useful information for decision making It s also about manipulating a perception in order to make something look good which is manipulating the results In other words it s more about the judgment than it is about the truth Littleton Antecedents of Double Entry Bookkeeping Double entry bookkeeping is the basis for accounting all across the globe It has been around for over 500 years and it has only changed slightly since it started being used The system itself that is its structure is essentially the same The reason that it hasn t changed very much over five centuries is because it is reliable and it does what it s intended to do The perfect storm Antecedent means what came before The materials of capitalism are private property commerce credit which is an incomplete transaction because you give something for a promise and it s not a complete transaction until you ve received something of value for something you gave and the concept of capital The languages are writing money and arithmetic All of these existed at one time and in one place and that was in Venice They existed in Venice because Venice used to be the location where demand and supply flowed Back in the day you had the wealth of Europe who wanted commodities from the orient China and India and they had two options Their first option was to go down the Silk Road which was a very dangerous route and the safer option was to travel to the orient by boat While taking a ship was safer than going down the Silk Road the ship would either end up at the bottom of the ocean or be raided by pirates so who knows if it was actually that safe There used to be joint ventures predecessors of the venture There needs to be a system that results in reasonable and accurate accounting In order for a business to survive business must be done on credit If one wants to purchase something but they don t have the money at the moment then one make a deal with them on credit Lucas Pacioli Treatise on Double Entry Bookkeeping Lucas used to be a monk and although he did not invent the system of double entry bookkeeping he did document it He considered the real business of life to be salvation One starts their books by writing In the name of God In 15th century Europe Lucas had the ability to read write and do arithmetic He always put God first and was a man who knew how to do business In other words he was a monk that worked for the Church 1 Cash is the final resting place for all businesses This is because the business is either liquidated or sold to someone in which one receives cash in exchange 2 One needs to be a good bookkeeper and ready mathematician 3 One must arrange all transactions in such a way that they may be read at a glance creditor or debtor Cr Credit owned by Cr Probably came from the source and the first and last letter of the word Dr Debit owed to It refers to something being owed to me Double entry means that debits must equal credits This system is divided into inventory and disposition Under Inventory 1 Cash 2 Jewelry 3 Clothing Etc tablecloths and other personal assets Lucas writes down his personal assets because during his time there was no distinction between personal and business assets Nowadays there are two separate worlds which include the business world and one s personal world One goes to work and then goes home In the description of skins this shows the importance of detail It s important to measure things in a detailed manner The first 13 things are more or less tangible The 12th item is real estate and the 13th is land Liquidity means proximity to cash Land tends to be the least liquid asset but things like clothing and jewelry are easier to sell Lucas lists his assets from most liquid to least liquid The 14th item is the number of debtors who they are and how much the owe him AR accounts receivable which translates into debit The 15th item is a list of people he owes money to AP accounts payable which translates into credit Inventions are something that most retailers do not like to sit on because they are fairly liquid Land on the other hand is very easy to turn into cash and retailers like to sit on that If you sell something on credit then something is owed to you but if you buy something on credit you owe something to someone else The Second Part Disposition Consists of three books Memorandum no longer exists in this form Journal Ledger In Ch 6 we learn that the Memorandum s function is to contain whom what and where every detail must be recorded for everything This is used as a reference for lawsuits lets say but other than that the memorandum merely contains data the details but not the information Although the physical form of the memorandum no longer exists the digital form has replaced it Data v Information One wants to know how their business is doing but they will not learn