We all know that accounting is nothing but number crunching. Accountants simply add numbers and subtract numbers while drinking copious amounts of coffee. Just kidding. Go hug your accountant or your closest accounting student, because accounting is a challenging process of measuring, validating, and reporting financial information for an entity.

Most would say that accounting is the language of business, and without it, you can’t talk the talk. Just like any language, there are words that cause great confusion for those learning it for the first time. Here are a couple of accounting terms that disgruntle fresh-faced accounting students (as well as established accounting professionals):

Deferred Revenue

You see the word revenue and automatically think, ‘REVENUE, REVENUE, REVENUE! Money is immediately coming my way!’ Put on the breaks there, pal. What if I told you that Deferred Revenue is actually a liability, an obligation to pay? You saw the word revenue, but did you happen to see that word in front of it—DEFERRED? This means that you can’t claim any revenue just yet. Some people find it helpful to use the word ‘unearned’ as opposed to ‘deferred’ to make it clear that the revenue isn’t yet realizable.

Unearned/Deferred Revenue is a liability account that represents the obligation to provide goods or services to a customer in the future. Unearned/Deferred Revenue is recorded when a business receives a payment in advance from a customer, but the business has not yet delivered the good or provided the service. Once the business fulfills its obligation to provide goods or services, the liability is reduced and the revenue is recognized. Say it with me, ‘Unearned/Deferred Revenue is not a revenue account!’

Prepaid Expense

You see the word expense and automatically think, ‘EXPENSE, EXPENSE, EXPENSE! Wait, wait, is this similar to Deferred Revenue? Where the word ‘prepaid’ makes the word ‘expense’ behave differently?’ Yes, you got it! Prepaid Expense is in fact NOT an expense account, but rather an asset account.

A Prepaid Expense is an asset that represents the right to receive goods or services in the future. Some common examples are prepaid rent or prepaid insurance, where a company pays for rent or insurance in advance of the coming month or year. At the time of the payment, the transaction is recorded as an asset, and as time passes, the asset is reduced and the expense is recognized. Say it with me, ‘Prepaid Expense is not an expense account!’

Want to learn the language of business and develop an essential understanding of financial accounting, business analytics, and economics for managers? You may be interested in HBX CORe, an interactive online program from Harvard Business School! 

Last week we featured part 1 of our list of economic relationships you need to know (found here). This week we are rounding out the list with three more key economic relationships:

3. Interest Rates Up, Investment Up: How does a business, household or country determine how much money to invest? There are a lot of factors that go into that decision, but probably no other factor is as important as the prevailing interest rate. Interest is the money received for lending one’s money to another party (or, from the opposite perspective, the money paid to a lender for the right to borrow). The interest rate is then the ratio of money paid as interest to the amount lent/borrowed, usually quoted as a percent (so if you pay $5 to borrow $100, the rate is 5%). As an investor, you want to look for the highest possible rate of return for your money. Thus, the higher the prevailing interest rates in your country, the higher will be your incentive to invest your money. As a result, when interest rates increase (as they did in the US recently), investment will typically go up.

4. Money Supply Up, Interest Rates Down: If interest rates determine investment, what determines interest rates? Well, in a way, the interest rate is the “price” of borrowing money and, in economics, prices are usually determined by quantities. Quantities of goods, quantities of services and, in the case of interest rates, the quantity of available money. Interest rates are largely determined by the supply of money in the economy. The more money there is available to firms and individual borrowers, the less banks and other lenders will be able to demand for the right to borrow that money. If a bank charges too much, potential borrowers can just go to another source to get money. This gives lenders the incentive to all charge around the same amount for access to that money. This relationship is what gives central banks so much power. A central bank, such as the U.S. Federal Reserve, has the legal right to print money and thus effectively controls the supply of money in the economy. If the Fed wants to stimulate the economy, like it needed to during the Great Recession, it can (effectively) lower interest rates by printing money, pumping money into the financial system and providing businesses the incentive to invest more. There’s more to it than that, but if you hear that the Fed plans to raise (lower) interest rates, just know that it’s doing so by decreasing (increasing) the supply of money.

5. Economic Growth Up, Unemployment Down: As discussed, the amount of money in the economy plays a major role in determining interest rates. And interest rates largely determine how much businesses and households invest. Investment is crucial for a business to undertake new projects and be able to offer new products and services to consumers. But investment is only one part of the equation. To determine the overall “health” of an economy and the potential for individuals to buy their products, businesses also need to know how much domestic consumers, foreigners and the government are currently spending on goods and services. On the macro level, the amount spent on consumption, investment, government services and net exports (less imports) is known as gross domestic product (GDP). If spending on goods and services is not increasing (GDP is not growing) or has been decreasing (recession), it may not make sense for a business to bring a new product to market. And if that’s the case, businesses may not need as many workers to create such products. Thus, there exists a key link between GDP and unemployment. If GDP is growing, it’s more than likely that more workers are being hired to create products and services and thus unemployment will be declining.

Economics and finance is more complicated than the simple relationships described here, but these offer a rough depiction of how the decisions made by various actors play out in the real world to distribute resources and create an economy. As you hopefully see from these examples, economics and finance are largely influenced by human motivations. And by understanding humans, you just may be able to use those insights to improve your household, business or country.

When you sign up for CORe, you join a group of motivated learners from around the globe. The process of peer-to-peer learning that is so effective in the Harvard Business School classrooms comes to life on our interactive online platform where participants help support one another throughout the program.

What does social learning looks like in CORe?

• Engage with your cohort. Check out the CORe map and read the profiles of your learning network.
• Stuck on a particular concept? Post a peer help question and receive insightful responses.
• Read about your peer’s reflections to course concepts as you progress through the modules.
• See who’s online and schedule a Skype call with your new study buddy on the other side of the world.
• Post topical articles and network through the cohort’s closed Facebook group.
• Not the only student in your area? Host or attend an in-person meetup to help deepen the bonds that are made on the platform.

We hear it all the time – the community in CORe, with participants from all possible backgrounds and geographies, is truly tremendous.

HBX Faculty Chair Bharat Anand recently spoke with Sramana Mitra from One Million by One Million where he shared his views on what makes the HBX approach to online learning so different. Read the interview HERE.

Data is reshaping how problems are defined and how solutions are developed to address pressing social issues. With the evolution of data-collecting technologies and the ability to apply analytic methods in new areas, unique insights are advancing the common good through data.

These four initiatives use data analytics to bring about positive social impact:

Eliminating Medical Prescription Errors

Ensuring Equitable Working Conditions

Laborlink, powered by Good World Solutions, collects data from international factory workers using mobile phone technology. Empowering workers to report their working conditions, Laborlink collects real-time data about wages, safety, and worker satisfaction. Not only are companies better informed with Laborlink, but they can alter their practices based on this new source of data.

Saving Lives with Targeted Campaigns

DataKind, a community of data scientists and organizations, worked with data from the American Red Cross to identify counties in the US that would benefit from smoke alarm installation campaigns. The team’s work combined Red Cross data with other data sets to develop targeted recommendations for delivering the Red Cross program.

Driving Governmental Progress

In HBX’s home city of Boston, local officials are using data to drive government progress. From the data dashboard that hangs in the mayor’s office displaying critical citywide data, to monitoring the city’s trashcans to ensure timely collection, data is helping to build a stronger Boston.

Interested in learning more about data analytics as well as economics and finance?

Six HBX CORe participants share study tips to help incoming students get the most out of their learning experience.

1. Supercharge your learning environment

Richard

I had three screens up when on the HBX platform: one for the closed Facebook group, one for the HBX platform, and one for taking notes (take lots of notes)!

2. Organize and prioritize

Jim

Identify deadlines for quizzes and writing assignments, and make sure to pay attention to "max effort" weeks with multiple deadlines.

3. Take notes

Dan

Get three notebooks (one for each course) and make drawings, conceptualize things, and re-write the notions you have learned with your words. Writing down the material with your own language will force you to understand and increase the odds you'll remember the thing you learn in the long run.

4. Use peer help

Mary

Use that tab for peer engagement! As a philosophy major who graduated all the way back in 2011, having the "extra help" of some seriously smart and engaged students was invaluable. At times, it also was reassuring that I was not the only one struggling with certain elements of the classes.

5. Understand why you're taking CORe

Gaurang

You can complete the coursework quickly if you wish, or you can instead spend a good amount of time going through the material. The entire value lies in completely immersing yourself in the coursework so that once you have completed the course, you're equipped with the right toolkit to tackle the business problems in your life.

6. Apply your knowledge

Nupur

Learn in CORe and try to apply that knowledge in the real world. It will help you in your learning and will also give you new and interesting insights. Don’t shy away from extra assignments you may get in CORe, you will see the benefits.

What do you think of when you hear the word “economics” or “finance?” For many, words like these bring to mind complicated formulas and jargon, men in suits making irresponsible decisions with other people’s money, or bad memories of supply and demand graphs from college.

Fair enough. But economics and finance don’t need to be difficult. And you certainly don’t need to know a lot about either topic for you or your business to benefit greatly from them. Indeed, as a manager, employee, or policymaker, even a basic knowledge of economics and finance can be enough for you to make informed decisions that can result in increased profitability, smarter investment decisions, and better public policy.

Here’s a list of some key economic relationships for a business owner or policymaker to remember when making decisions:

1. Price Up, Demand Down: This relationship is the foundation behind those pesky demand curves you may have had to draw in Econ 101, but is absolutely necessary for any business to understand in order to make money. Luckily, it’s pretty easy to comprehend, so we can skip the graphs altogether. Here’s the chase: when a business increases prices, it will almost always see sales for its product or service fall. This is because consumers prefer to pay less for something than more for it (but you probably didn’t need to be told that), so fewer people will be able to afford the good. Price up, demand down. It’s common sense.

2. Price Up, Supply Up: This is the flipside to the previous relationship. When prices go up, consumers demand less, but, boy, would businesses sure like to supply more. Why would they not? If the product or service a business is supplying can command a higher price, it’s in the business’ best interest to supply more of it to make more revenue. So, price up, supply up. Like demand, its incentives at work here too.

 

Where are you working?

I am currently the Principal of Pacific So West. When I initially began my company, I only offered web design and front-end web development services. My passion lay in bringing traditional brick and mortar and small businesses to the online space.

As I was completing CORe, I began to apply these new toolsets to my professional services and strategy, resulting in rapid growth of my clientele and an expansion on what I could offer to them. I had previous experience in copywriting and marketing that I was able to incorporate into my service offerings. CORe significantly helped me to identify ways to combine my passion for small business and technology.

Why did you decide to sign up for HBX CORe?

I had valid work experience in management and marketing, but I knew I lacked a solid foundation in the language of business. The tech industry really fuels my drive, and I had focused my education on programming and engineering. There was a gap there that I needed to fill. CORe bridged this gap between my education and experience.

 

Leslie and her daughters at Disneyland.

What was your favorite part of the program?

"Participating in the student discussions and answering cold calls was empowering. It ignited a drive within me to learn and absorb as much as I could."

I wasn't afraid of giving the wrong answer. Having the perspective of my peers and all the constructive conversation encouraged me to think in new and creative ways. So much of the business world is about working with others to accomplish a common goal; knowing that your peers were rating your participation and reading your contributions was truly compelling.

How are you applying what you've learned in CORe?

In my current position, I am not limited to one set of duties. I am a technologist, designer, content strategist, marketer, analyst, and data scientist. Even before I had completed the program I was able to fully understand the process my company had created, identify the blockages, and make the necessary changes. I also firmly believe that balanced gender diversity in business is crucial to innovation, success, and a higher collective intelligence. When the decisions of a woman positioned in the corporate world make significant impacts fiscally or culturally, then you begin to see the tangible value of a diverse enterprise. HBX has given me the foundation to exemplify this in the services I offer my corporate clientele.

The poster Leslie’s daughters and fiancé made to celebrate her completion of CORe.

Any advice for people who will be taking CORe?

If you're entering CORe, it's important to view the program as more than a personal commitment. It needs to become one of your top priorities. CORe isn't something you can cram at the deadline or complete in your spare time, but the experience is incredibly gratifying and rewarding. Falling behind is not an option; the CORe program is very hands on and requires daily involvement. The peer help area, cold calls, and discussion throughout the modules allow for a discovery process that garners a significant intellectual return.

The CORe community consists of a rich and diverse group of learners. Want to learn more about other students who've participated in the program?

How much are you willing to pay for the right to pollute? If you drive into work like I do, maybe you would be willing to pay quite a lot. In reality, most individuals do not directly pay for the right to pollute. Instead we pay via the price of oil, coal, natural gas, and electricity.

In some cases individuals are paid to not pollute as with subsidies and tax rebates given to households that install solar panels as a form of clean energy. In light of the recent climate talks in Paris, we are taking a closer look at pollution markets and their role in today’s climate.

In many industries, the idea of paying for the right to pollute is increasingly prevalent. There is world-wide agreement on the need to limit pollution, specifically by reducing carbon emissions, but there is no such agreement on the policy or mechanism to do so.

One mechanism that has been used in the past is the creation of a pollution market, also known as cap-and-trade. In this system, companies are allotted a pollution allowance and then are allowed to trade those allowances with other companies. In this way, the market decides how much a pollution allowance is worth and distributes these allowances efficiently among all companies.

The major benefits of a pollution market are that the market creators, governments, or international organizations decide the total amount of pollution they wish to allow but do not have to figure out how to most efficiently distribute these allowances. Pollution markets have been in use since George H. W. Bush implemented them in 1990 to curtail sulfur dioxide emissions and the resulting acid rain.

More recently, there was a loud call from industry leaders for a cap-and-trade system to be discussed at the Paris climate talks. On the other hand, some argue that a cap-and-trade system is outdated and won't work in today's economy.

What do you think? You can read more at Marketplace here.

Seven HBX CORe participants share tips to help incoming students avoid procrastination, balance the course work with other commitments, and position themselves for success.

Bethany

First, be prepared for a time commitment. The material is challenging! It takes time not only passing through the modules, but also participating in peer discussions, both of which are extremely important for mastering the material.

Gaurang

I've noticed that it is equally important to get your loved ones on board - it can be your family, your partner, your best friend, or your manager at work. Make sure you clearly communicate the time commitment you'll need to complete CORe.

Emily

Keep up with the rest of the cohort. At the beginning of the course, I'd finish the modules just before they were due. But when I completed the modules earlier, I was able to participate in more real-time discussions with other students for two reasons: 1) because people were still online and 2) because we had more time to talk about concepts rather than scramble to quizzes before the deadline.

Richard

How do you calculate the time needed to complete HBX work? Try module timing: work on a module with your best effort for an hour and see what percentage you've completed. Then it is a simple matter to do the math that will give you an estimate of how much time you will need in order to complete that module.

Conor

I was able to balance CORe material with my full-time teaching schedule due to the accessibility of the CORe platform. Even if you only have 45 minutes free, you can log in from anywhere (home, coffee shop, library, etc.), make some progress through a module, and then get back to your daily tasks feeling like you've made some headway.

Holden

Look at the course syllabus beforehand and try to set aside appropriate time to be able to digest the material and to be able to interact with others in the discussion tabs. It is important to offer help to those who might not be as quick as you, for you may be in the same boat down the line!

Jim

Allocate "hard" study hours each day. Put a pad between each module's targeted completion date and the quiz deadline. Stay focused and remember that there is no freeze button once HBX starts - the clock is always running.

Materiality. Can you use it in a sentence please? No, it’s not related to the accumulation of physical wealth or some obsession with material possession. That’s materialism. Materiality is a key accounting principle utilized by accountants and auditors as they create a business’s financial statements.

Materiality: an accounting principle which states that all items that are reasonably likely to impact the decision-making of investors must be recorded or reported in detail in the financial statements of the business.

Why does it matter? In essence, materiality is related to significance. Is some transaction or business decision significant enough to warrant reporting to investors or other users of the financial statements? If it is, we say that the information is “material” to the business.

What’s considered to be material will differ based on the size and scope of the firm in question. For example, while a small mom and pop grocer may need to record a small expense for promotional coupons, Whole Foods may not need to record a large one for a similar customer offer. It’s all relative.

Material items can be financial (measurable in monetary terms) or non-financial. So a business might need to report a pending lawsuit to the same degree it reports its revenues. Indeed, of late there has been a big push to include more non-financial material information in financial statements.

For example, with a bigger investor focus on sustainability nowadays, a business might want to include information related to its environmental, social, and corporate governance (ESG) practices to assure shareholders that the business itself is a “green investment.” In fact, as Professor Robert G. Eccles discusses in a recent HBR article, there has even been talk of creating new accounting standards to better measure material information related to sustainability.

Interested in learning more about materiality and other topics in finance, economics, and business analytics?