1-HOUR Bookkeeping Course (Bookkeeping & Accounting) | Calvin Lee, CPA, CA, MBA | Skillshare

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1-HOUR Bookkeeping Course (Bookkeeping & Accounting)

teacher avatar Calvin Lee, CPA, CA, MBA, Instructor / Consultant / Author

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

10 Lessons (52m)
    • 1. Introduction

      1:03
    • 2. The main characters (accounts)

      2:56
    • 3. Balance sheet and income statement

      4:15
    • 4. Debits and credits must equal

      5:00
    • 5. Which way? Assets in debit position

      8:20
    • 6. Something we all do: pay taxes

      4:45
    • 7. I want to get paid! Accounts receivable and accounts payable

      5:51
    • 8. Buy and sell widgets: inventory

      7:10
    • 9. What you need to earn money: capital assets

      7:19
    • 10. Don't get in trouble: shareholder loans

      5:28
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About This Class

Bookkeeping & accounting is easy! Learn bookkeeping & accounting in just 1 hour! You can see how simple accounting & bookkeeping really is.

Are you a business owner who wants to better understand your business finances?

Are you someone who is interested in bookkeeping and accounting?

Well, this course is for you, and all you need is 1 hour! Bookkeeping doesn't have to be hard. Accounting is not all about math. If you can understand the concepts and know how to use a calculator, you can be an excellent bookkeeper.

This course takes you through the basics of bookkeeping in 1 hour. By the end of this course, you will have a solid understanding of the main accounts in bookkeeping, the different financial reports, and I will show you step-by-step how to do bookkeeping.

You will learn:

  • The main accounts in accounting
  • Balance sheet and income statement
  • Debits and credits
  • Tax
  • Accounts receivable and accounts payable
  • Inventory
  • Capital assets
  • Shareholder loans
  • Revenue and expenses
  • and more!

Register for this course now!

Meet Your Teacher

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Calvin Lee, CPA, CA, MBA

Instructor / Consultant / Author

Teacher

Calvin K. Lee, MBA, CPA, CA, CPA (Illinois) is a consultant, accountant, teacher, author, and composer. He has lived in Canada, China, France, and Hong Kong, and traveled to many countries.

Calvin is a top ranked instructor for Schulich School of business at York University, Canada’s Top MBA school. He helped transform the lives of students taking them from NO accounting experience to helping them find successful work in the accounting industry. His biggest passion is inspiring and helping others achieve their goals.

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Transcripts

1. Introduction: Welcome to this one hour bookkeeping course, where you will learn the fundamentals of bookkeeping in just one hour. My name is Calvin and I'll be your instructor. I am a designated CPA in both the USA and in Canada with over ten years of work experience, working with bookkeepers, as well as being a bookkeeper myself, working with numerous small and medium-sized businesses. I've also taught accounting courses at university level as well as professional CPA courses. This course is designed so that you can learn the fundamentals of bookkeeping. And by the end of this course, you should have a good working knowledge of how to do bookkeeping. We will go to the main accounts in bookkeeping, as well as the financial reports, as well as I'll take you step-by-step on how to do bookkeeping. This course is perfect for business owners who are interested in knowing more about their business finances, as well as people interested in the bookkeeping career. There is no prior knowledge needed. All you need is a desire to learn. Please register for the course, and I look forward to guiding you on this journey. 2. The main characters (accounts): Welcome back everybody. So now I'd like to introduce you to the main characters in accounting. So these are the main types of accounts that you encounter every day as a bookkeeper or whether you are the business owner and you want to look at your company's books. So let me introduce you to them. The main types of accounts in accounting or bookkeeping include Assets, Liabilities, Owner's equity, revenue, and expenses. So now let's talk about each one of those in a little more detail. So assets, these are things that help your business to earn income. So for example, cash, accounts receivable, which are payments you expect to receive from your customer's inventory, which you can sell to earn income, or capital assets such as computers, your desk, or you're building. These are all things that can help your business to earn more income, liabilities. So these are things that your company is obligated to pay out in the near future. So for example, accounts payable. So for example, you need to pay your telephone bill or your rent to your landlord. So these are some things that you need to pay as well as mortgage payable. So if you have a mortgage on your building and then you have to and are obligated to pay your bank every month or whatever the payment terms are, and then also taxes payable. So these are sales tax or payroll taxes that your company is obligated to pay to the government. Next is owner's equity. So this we don't touch very often in bookkeeping or accounting. It basically contains common shares if you're the owner of your business or retained earnings, which is any surplus of income that you make over expenses in any particular year. Revenue. Now this is probably the most important thing that business owners look at. Because of course you need revenue to sustain your business, otherwise you won't be able to survive very long. So revenue is when you sell, for example, a widget or a product to a customer, or you render services to a customer. Last but not least, are expenses. So these are expenses that you need to pay every month or every year to keep your business going. So these example includes rent payments or telephone bills, or even bank fees. Or perhaps the biggest expense for most companies is payroll. And there you are. These are the main types of accounts in bookkeeping and accounting. 3. Balance sheet and income statement: Welcome back everybody. So next, we're gonna talk about two of the most important things in all of bookkeeping and accounting, which are the balance sheet and income statement. So when I was working in the private companies, we have something called month end. And as its name suggests, it happens every month. And so we're super busy for the first week or two of every month. And there's so much work that goes into producing a balance sheet and income statement. The balance sheet, the income statement itself looks very simple, but the work to produce it sometimes could be quite a bit of work. But anyways, the goal of bookkeeping is to produce financial statements. That is one of the main goals. And of which the two as I've already mentioned most important are the balance sheet and the income statement. Because these will show how well a company is doing or not doing. Balance sheet. Balance sheet consists of mainly assets and liabilities. And this another section called the owner's equity, which is often not looked at as much because it doesn't change very much. The balance sheet is sometimes also known as the statement of financial position, depending on which company or organization you're looking at. And then one of the most important things about the balance sheet is, well, as it's name suggest, it has to balance. If it doesn't balance, you don't have a balance sheet. And it's easier said than done sometimes because it's going to be rounding and a lot of other issues. But at the end of the day before it can be shown to the CFO or to your shareholders or to the owner of the company, You have to make sure that your balance sheet balances according to this particular formula known as assets equals liabilities plus owner's equity. This must always be true. And another interesting fact about the balance sheet is a snapshot in time. So it happens on a particular day. So for example, if today is January 1st or December 31st, your balance sheet will say as at January 1st or at December 31st, it's kind of like taking a picture on your smartphone. It takes a snapshot of the current financial situation of a company. So how much cash you have, how much accounts receivable you have, how many capital assets you have, and so on. And in the resources you're able to download a sample balance sheet so you can take a look for yourself how it always balances. And now we talk about the income statement. Income statement, which is a little bit different from the balance sheet, is not a snapshot in one part of one particular day. Rather, it contains the sum of the transactions for a particular period of time. So for example, you could have your income statement from January 1st of the year until December 31st of the same year. Or you can have anything in between. So it could be like just January 1st or January 31st for a month end. Or you could have January 1st to March 31st, which would be a quarter end. And what happens in the income statement is it records the total revenue you have. So sales of your different widgets or sales of your services, and also the different expenses you have. So Payroll, rent, telephone, bank fees, and so on. And so what the income statement captures is the revenue minus your expenses. So if you have a $100 of revenue and you only had $60 of expenses, then you have a net income of $40, which is a 100 minus 60. And of course, if you have more expenses than your income, then you will have a negative net income. You have a net loss in that case. And you can also download a copy of a sample income statement from the resources. Okay, so that was a quick overview of the balance sheet and income statement. 4. Debits and credits must equal: Welcome back everybody. So now we're gonna talk about another very fundamental basis of accounting and bookkeeping. And this must be held true no matter what you do in bookkeeping is that debits and credits must equal. This is very fundamental because it is the basis of creating journal entries in your bookkeeping software. And this also maintains the integrity when you go and prepare financial statements. So we're going to talk a little bit about what journal entries are and how debits and credits relate to each other. Let's go. So the basic formula is very simple. Debits must equal credits. And if this is not true, then something has went wrong. So if you ever want to post something on the debit side, you have to make sure that whatever you post on the credit side must equal. And we're going to take a look at some examples of how this works. So let's take a look at an example because I think an example is a really good way to illustrate a point. Much easier to understand than talking about theory. So let's say for example, you go and purchase a computer for $300 and you pay with cash. The journal entry would be, you would debit to the capital assets and you would credit to cash. So in this particular case, we're talking about two assets. So as we talked about in a previous lecture, cash and capital assets are both assets. So in this case we want to debit capital assets because we're increasing that particular asset, you getting more assets to help your company earn revenue. So you debit to capital assets for $300, basically, increasing capital assets by $300. At the same time you're paying with cash, which is another one of your assets that you can use to help your company or business earn more revenue. In this particular case, since we're paying out cash, we're now having less of cash in our bank account. So that's why in this case we have to credit cash. So just to reiterate and make it very clear for assets, when you debit an asset that increases the asset. When you credit an asset, that lowers the asset. So capital assets is increasing by 300, so we debit it for 300 and cash is being decreased. So we're crediting cash. And then I just wrote a little note to say what the journal entry is for, so I write to record purchase off computer paid with cash. And it's always good to just label your journal entry so that you know exactly what the journal entry is for. It's very simple for this particular example. But in my work as a corporate accountant for a company that makes millions of dollars in revenue. You'd have to label your journal entries because otherwise, when there's like ten or 50 or a 100 journal entries, you will get confused really fast. So it's very important to label your journal entries whenever possible. So you have to notice in this particular case that the debit equals the credit $300 and both sides. Let's look at another example. So let us look at revenue from a client. So for example, you perform a particular service and then you receive $50 payment from your client. The journal entry in this case would be debit to cash for $50 and you would credit to revenue. And so, as we talked about earlier, assets, when you debit an asset, it increases the asset. However, for revenue, when you credit revenue, it actually increases revenues. So don't worry about the different sides right now. But this is just to illustrate that if you start thinking about debits and credits and how it balances. So that is the main key here right now. So don't worry about what I should I debit to increase, what should I credit to increase? So in this particular example, just know that debit increases an asset and credit increases revenue. And later on we can talk about more about which side to debit or credit to increase. So once again, it's good to label your journal entries because when there's one, it's really simple, but when there's like a 100 journal entries, it's good to keep things organized and write a little note to yourself what the journal entry is for. So notice once again that the debit $50 equals the credit of $50. 5. Which way? Assets in debit position: Welcome back everybody. Okay, so in a previous lecture we talked about debits and credits. Now, you might have been wondering, OK, so do I debit something to increase it or do I credit something to increase it? And in this lecture, we will talk about the assets, liabilities, revenues, and expenses. And for which one do you debit to increase and for which one you credit to increase. The last slide of this lecture, we'll have a summary, so it will be a pretty useful thing to refer to. And I also created a PDF for you to download and so that you can always keep it handy so you know which things to credit and which things to debit. So I worked with a lot of accounts payable clerks, account receivable clerks during my time as a corporate accountant, and they sometimes get the debits and credits mixed up. So when we received cash, instead of debiting it correctly, they would put a credit and then I would look at our balance sheet. I will be like, Okay, we have so little cash this month. I'm pretty sure we received a million dollars or something. But anyways, it's very important that get the debits and credits right, so that you don't have to go and make adjustments later on. That's what we're going to talk about today. Debits and credits for each of the four different types of assets, liabilities, revenues, and expenses. So assets, assets are usually in a debit position, as we talked about in a previous lecture. So for example, when you gain an asset like a customer pays, you (oh hurray!), then you would debit cash for the increase in cash because cash is an asset. And on the other hand, if you have to make a payment, for example, you pay for rent, then you would decrease the asset cash. And in this particular case, then you would credit cash and it would decrease it on the balance sheet. So to remember, assets, you would debit to increase an asset and you would credit to decrease an asset. So here is another example of the journal entry. Now you'll do so for example, your customer pays you a $150 cash for a service. You would debit cash for a $150 and you would credit revenue and always write yourself a little note for the journal entry, what it is for. So it is to record Cash received on sales. And later on in this lecture, you'll see that revenue. When you have to increase revenue, you put it in the credit position. Liabilities. So opposite to assets, liabilities are usually in a credit position. So for example, you decide to take out a mortgage for a particular building, you're increasing your liability. This is money you will have to pay back to the bank eventually. So you would put that in a credit position. You would credit the mortgage payable account. On the other hand, every month you make payments on your mortgage and you're decreasing the mortgage account. In this case, since you're decreasing a liability, you would actually go and debit the liability account in this case would be the mortgage payable accounts. So to remember, liabilities, you have to credit to increase a liability and you would debit to decrease a liability. And there's the example of taking out a mortgage. So when the bank advances you, for example, $150,000 for a mortgage, you would debit cash because all you're getting an asset because the bank is forwarding cash to you. So you debit cash $150 thousand and you would credit mortgages payable because that's a liability. Eventually you have to pay that back to the bank. So you're increasing an asset and you're increasing a liability at the same time. And once again, debits and credits have to equal revenue. So as we talked about, revenue is one of the most important things in a business because that's what keeps your business going. Revenue is usually in a credit position. When your revenues in a credit position that needs your company is doing well. And so for example, let's say you sell a product or a service to a customer, you increase your revenue. You would credit the revenue side. And on the other hand, if a customer is not satisfied with your product for whatever reason, like the sweater doesn't fit them or something and they return it, then you have to return, for example, cash to them. So you would debit your revenue to decrease it. And you would credit cash because your cash is now being decreased because you'll refunding the money to your customer. So remember, for revenue, you increase revenue by crediting the revenue account, and you decrease revenue by putting a debit into the revenue account. So here's the example to make it very clear, using the sale to the customer. So when you make a sale to a customer, you increasing your revenues. So you credit the revenue account and you also increase your assets, which is cash in this case, because your customer has given you cash, which is an asset, you are increasing your asset and you're also increasing your revenue. Expenses. So expenses, there's a lot of different expenses. So for example, at the company I used to work for, we have a lot of different expenses. So you have advertising, bank charges, office expenses, your wages, your professional fees you pay to your accountants and lawyers. So expenses make-up are usually pretty big part of the income statement. So expenses decrease your net income on the income statement. So for example, when you pay your accountant, let's say you pay them $250 for their accounting services. You are increasing an expense. So you debit your expense. And then you would credit cash to lower your asset for cash because you're paying it out. So we'll see that in the next slide. To make it very clear. So to increase in expense, you would debit an expense, whether it's rent or professional services or, or advertising, and to decrease an expense, you would put a credit in. So this happens quite a lot in business. For example, when a vendor issues a credit memo, which is like a credit on your account, let's say you you paid for our telephone bill, but you didn't use all the services or they give you a refund, then you have to decrease your expense. So in that case you would credit your expense. And so back to the example of paying your accountant, you would debit professional fees, which is an expense account. You're increasingly expense and for cash, as you're paying out cash, you have to decrease your asset. And as we talked about earlier this lecture, you would then credit the asset, which is cash. And to give you a quick summary here, you might want to take a screenshot of this, this slide, or you can also download the PDF in the resources to help you remember. But I think once you do a few of the journal entries for these assets, liabilities, revenues, expenses, there are not too difficult to remember, but for now, you might want to print this out. So assets again, you increase it by putting a debit for liabilities and revenue. To increase it, you would actually put a credit and for expenses, if you want to increase an expense, you would debit the expense. And then you do the opposite if you want to decrease those accounts. Okay, so that's it for this lesson. 6. Something we all do: pay taxes: Alright, welcome back everybody. So now we're going to talk about a topic that's not pretty popular with most people because we don't like to pay taxes. But unfortunately, unless you live in some remote island all by yourself, you're most likely have to pay some taxes. And it's the same that goes for companies. So if you're a bookkeeper or if you're a business owner, I'm pretty sure by now you are familiar with the concept of taxes and you just have to charge taxes and pay taxes, which is just a regular part of life. So in this particular lesson, we're gonna talk about how to record taxes on business transactions. So if your business has a sales tax account, which usually happens after you reach a certain threshold on taxable sales, then you might have to charge sales tax as well. The other good side is if you make a purchase, say buy a new computer, and you have to pay some sales tax on the computer, you may be able to claim some sales tax credit which offsets the amount where you charge your customers and you collect sales tax. So the two amounts offset each other. So let's take a look at an example here. So say you sell a product that's worth a $100 and the sales tax is 5%. So you collect a $105 of which only a $100 is yours, because $5 belongs to the government, you're just collecting it on behalf of the government. So you would record revenue of a $100 and you would record a sales tax payable of $5 because that is a payable amount, which is a liability account. Here's another example, but this time it's you yourself making a purchase. So let's say you purchase a desk for $80 and the sales tax is 5%. And so since you are getting a desk which has an asset, you need to increase your asset $80. So capital asset of which a desk is apart of, and you also have to increase your sales tax receivable, which is also an asset because this is some money you're expecting to get back from the government once you fall your sales tax return and you have to pay the total of the two, which is $80 for the desk and $4 for the sales tax. So you pay a total of $84 in cash, which is something we're offer a familiar with by now. Whenever you purchase an item, you probably have to pay some form of sales tax on it. And when it comes to paying sales tax, Sometimes you collect sales tax on behalf of the government, and sometimes you pay sales tax and you want to get the credit back from the government. So most governments allow you to net the two together. So for example, from the two previous examples were you collected $5 on behalf of the government. And you want to claim $4 of credit for the desk that you paid. You owe the government $5, government owes you four dollars. So you net out the two. So you just have to pay a net amount of $1 to the government. And just to show you what the journal entry would look like when you record a payment. So if you use a sales tax receivable account to record what you paid and a sales tax payable account for what you collect it on behalf of the government, then you would have to offset them off each other. So because the payable account, you're trying to decrease it, you have to debit the payable account. And for the asset, which is the sales tax receivable count. You also want to decrease it. So assets, when you want to lower an asset, you would credit it. And because debits always must equal to credit, as we talked about in a previous lesson, $5 of debit must equal the $5 of credit. And if it doesn't balance, then something is wrong with the journal entry. So in this case would be debit payable $5, credit receivable $4, and credit $1 of cash. So both sides have $5, which means we did things correctly. Okay, so that was a quick lesson on sales taxes. 7. I want to get paid! Accounts receivable and accounts payable: Welcome back everybody. Okay, so for this lesson we're going to talk about accounts receivable and accounts payable. And for some companies, including the company that I worked for, accounts receivable or AR for short, is usually a very, very big account. So whenever you make sales, sometimes you might get cash payment right away, but more often than not, sometimes customers or clients or allowed to pay later, Let's say 30 days later or 60 days later or 90 days later depending on the terms of the contract. So what we have to do is we still have to record the revenue as soon as the product or the service is rendered. But since you haven't got did the cash yet, so you have to record it into a temporary account called accounts receivable. So whenever you have accounts receivable, say a client said, "Oh, I'll pay you in 30 days." You haven't received the cash yet. So what you have to do is you have to record it as a debit to increase the asset called accounts receivable. And in many different companies you have to watch out for AR because customers may or may not pay you on time. And if you don't, don't pay you on time, even though you have lots of sales, lots of revenue doesn't mean your company is doing well if you're not getting cash, because if your customers are not paying you, even though you have lots of revenue and you have no cash coming in, you might have some trouble paying your own bills. So AR is a very big and very important part of any business. So let's take a look at as an example of how to record an accounts receivable. So say you perform a service for your client for $200 and the client said they will pay you in 30 days. So you record debit to accounts receivable. You want to increase your asset so you debit it as we learned in a previous lesson. And you also want to increase your revenue. And as you remember from our previous lessons, that revenue to increase revenue increased by credit, crediting the revenue side. So this is how you record a sale based on credit, so accounts receivable. So now we have a debit in accounts receivable. But at the end of the day, you don't want that balance to keep building. You'll want clients to pay you. So eventually when the client pays you in cash, you would record debit to cash, you debit asset cash to increase it. And you want to lower your accounts receivable by $1,000 when you get paid $200. So as you remember in the previous slide, we increased the accounts receivable by debiting it. Now we are crediting it and we're decreasing it. So AR is net out to 0. Next is a similar account, but on the other side, so this is accounts payable. So it's similar that this time it's you that is owing in other company or another individual some money. So for example, you have to pay your electric bill every month to keep the lights on in your building. So even though the electric bill is for this month, you might not have to pay it until two weeks later or a month later. And the accounting rules require that you have to record an expense in the month to which it pertains or to which it is four. So you have to record it as an expense, debit the expense, and then you have to credit accounts payable. You haven't paid it yet, so you do not credit cash yet. So let's take a look at an example. So let's say you have an electric bill for the month of December, which is $50, but the company doesn't have to pay until January of next year. But you still have to record it now. So you have to debit utilities expense for $50, thereby increasing expense. Remember you have to debit expense to increase it and you have to increase your accounts payable. So you would credit to your accounts payable for $50 to move it up. So your crew for your electric bill in December, even though you haven't paid it yet in January. This is a very important concept in terms of accounting and bookkeeping, which is a concept called accrue accounting. You have to accrue it for the month which the expenses for. So this December utility bill has to be recorded in December. And when you pay your electric bill the next year in January, now you have to reverse out the Accounts Payable. So you have to debit Accounts Payable. So that's lowering your accounts payable by $50. And you also have to lower your caches. You paid out cash, so you would credit cash for $50. So if you look at it with the previous slide, accounts payable was credited for $50. Now it's debited at $50, so those should net each other out. And it's very important to pay the bills and make sure accounts payable don't keep on growing. And this is something that companies, including the company I worked for, we keep an eye to make sure that accounts payable is not growing and growing and making sure we pay our bills on time so that we do not accrue interest and other penalties. Okay, so that's a quick overview on accounts receivable and accounts payable. 8. Buy and sell widgets: inventory: Welcome back everybody. Okay, so in this particular section we're gonna be talking about inventory. So businesses in general are categorized into two types. So you probably sell products or you render services. Or in some other cases, some businesses mixed sum of the two. So for example, Apple, they sell iPhones and iPads and Macbooks. So those are products, so they have to account for their inventory. Whereas they also sell services such as their, their, the Apple TV plus or their App Store. So those are not physical products, so those are more like services, but they have a mixture of the two. So depending on your type of business, if you only perform services that you might just want to skip this section altogether because it won't be relevant to your type of business. So whenever you purchase inventory, you probably have the pace some sales tax on it. And in relation to the sales tax, less than that we had earlier, you could probably claim some of the sales tax that you paid and get it back from the government. So for example, you purchase $50 of inventory and Joseph to pay a $5 sales tax. So what you would do is you would debit inventory because you're stocking up on your inventory. So you increase an asset inventory, so you debit inventory. And you also debit sales tax receivable because that's also an asset because you're expecting to get some, some cash back from the government. And then you would credit cash, which is an asset. So you want to lower that. So you would credit cash for $55. Okay, so next is when you make a sale to a customer. So we have to introduce something called cost of goods sold. So let's say you sell inventory worth $500 to a customer. So what kind of journal entry do you do? Well, you have to debit cost of goods sold, which goes on the income statement for $500. And you also credit inventory for $500. So we're lowering inventory goes for selling it, getting it off our shelves. And you're increasing costs of goods sold, which is kind of like an expense, special type of expense account, which offsets your revenue. You debit it because it's like an expense to record the cost of goods sold. And then you also have the record the sales, cash or receivable depending on how the customer is going to pay you. So for example, if your customer's going to pay you cash, then you would debit cash for $750 and you would credit revenue for $750. So in terms of inventory, there are several different methods of costing inventory because you have to decide how much cost of goods. So to record, when you so inventory you, there are several different methods that you could record. So the first one is specific identification method where each inventory is tracked with its own cost. And this is usually used for very specific types of inventories such as cars. Each car would have their own cost. So whenever you sell a car, that is the amount you have to take off of your books. The next method is called first-in-first-out method, which is a very, very common type of inventory costing method. So the theory behind this one is that the first inventory that you buy is also the first inventory that you sell. So for example, if you buy some inventory in November for $10 a piece, and then you purchase more inventory in December for $12 for inflation or the vendor just decided to raise the price. In this case, if you use First-In, First-Out or FIFO, then you would take out the $10 inventory first before taking out the $12 inventory. The next type of inventory costing method is called last-in, first-out method. Now, note that some countries have restrictions on which inventory costing method you are allowed to use. So you probably want to check up on that before deciding which method to use. So the LIFO is the reverse of the FIFO method. And in the above example before, in this case you would sell it the last inventory you bought, which is the $12 inventory first. And both these methods have pros and cons. But this is a very beginner level course, so we're not gonna go into too much detail about them. At this point, all you need to know is there are different methods of inventory costing. And then the next method I'm going to introduce is called the Weighted Average Cost method, which is kind of like a in between FIFO and LIFO, which averages the cost of all of your inventory purchased during the year and just uses that average amount as the cost. And just one more thing I want to mention for inventory and this goes back to my days as an auditor, where we go and look at some companies books and we compare their inventory value, the market value at year end compared to what they have on the books. Now because some of the inventory, they kind of expire or they do not, they're not worth as much as time ages. So let's just take, for example, an iPhone. So if you have an iPhone from last year, it's market costs is probably not as high as what's on the books. So $100 iPhone from last year, people probably won't buy for $1,000 anymore whether new model comes out, so it might be worth $950. So there's some, there's some lowering of costs because the product is not worth as much anymore. So in this case, in some countries, they require you to lower your cost on your books to what the fair market value of that inventory is. But in most cases, a lot of countries don't allow it the other way around. So if your inventory actually is worth more at the end of the year, you might not be able to write it up. So accounting is a very conservative type of a practice in which if an inventory is worth less than you have to write it down. But if it's worth more than you don't write it up. It's just a the conservative side of accounting. Okay, so that was a quick introduction to inventory and its costing methods. 9. What you need to earn money: capital assets: All right, welcome back everybody. So we're gonna go on to the next topic of capital assets. Now, most businesses have some kind of capital assets, whether it's building vehicles, computers, etc. and capital assets, or sometimes known as fixed assets or property plant and equipment or PP&E, as we like to call it. So let's take a look at some examples. So I mentioned if you are ready, so land is another one, software vehicles, leaseholder improvements. So if you make improvements to your building, then you could also capitalize those n amortize them over the life of the lease holder, which is usually 20 years, 15 years, or however long the least hold improvements are expected to last for as long as I was saying. So capital assets typically last longer than one year. Very rarely they are under a year. For example, computers typically last for 2 to 3 years and buildings last 35-40 years, etc. And capital assets usually are used to enable the business to earn income. And each class of capital assets should have his own account. So this is because each capital asset depreciates at a different rate. So cars depreciate a different rate than say, software, which could have a much shorter lifespan. And the only capital asset generally that do not depreciate is land, because land usually appreciate instead. But as I said before, accounting generally follows quite conservative rules. So generally you do not write up the land to its fair value unless specifically allowed by whatever accounting standards to follow. So depreciation of capital assets usually happens around month n or year end and s, When I was a public accountant in an accounting firm, generally, most of our clients have no idea how to depreciate their capital assets. And then the accountants that come in that the higher generally would come in and do the depreciation for them at month n or at year end. But just to give you a quick overview of what depreciation is, so you have a general idea because I believe even if you don't do it yourself, is pi, still good idea to have an understanding of how things work? So say you purchase a computer that costs $600 and it has a useful life of say, three years. Then you have to record it first of all on your books with a debit to capital assets for $600, followed by a credit to cash for $600. That's just to set it up on your books. And then every year you are required to write it down according to the depreciation that happens every year. So if it's a computer is good for three years, so every year it should depreciate by $200, which is 600 divided by three. And then once you would record in your books, is you would do a debit to depreciation expense of $200 and also $200 to a balance sheet account, Interestingly, Call accumulated amortization for that particular class of asset. So to this accumulated amortization, it's basically an offset to your capital asset account, which is computers. So I'll explain it a bit more in the next slide. So this balance sheet account accumulated amortization is an offset accounts which goes just right next to your capital asset account. So your capital asset account on your balance sheet as $600, right underneath it is the accumulated amortization account, which is minus 200. So you can see the net of those two is 600 minus 200, which gives your computer a net book value of $400. So what does net book value mean? It basically means what it would be worth at this time. Of course, it's an estimation, but that's what we do. On the books, the computer will be worth $400 after one year. So the method I just talked about was a straight-line methods so that assume over three years, it's $200 depreciation. So 600, then it becomes 400, they becomes 200. At the end of three years, the computer is worth 0. But that generally does not reflect the real value generally of capital assets. Of course it's an estimation. So straight line method might not work for all capital asset classes. So that's why we also have something called Declining Balance Method or Double Declining Balance method. This is to at least in theory, more accurately reflect on the useful life of a capital asset. So generally what happens is it takes a percentage of a capital asset and it depreciated it based on that. And what you will see is that there is a higher amount of amortization At the beginning of the asset's useful life. And then as it tailors off, it kind of becomes less and less those kind of like a curve like this. So there's a lot of depreciation at first, and then it kind of slows down towards the end of its useful life. And in the next slide we have a, an example. So say you have a capital asset worth $1,000 and we take a 20% depreciation every year. So 20% of 1,000 is two hundred. So for the first year we take off 200 in depreciation. So the book value at the end of year one or at the beginning of year two is a $800. And then we take 20% of a 800, which is a 160. So third year becomes $640. And then similarly for the third year we take 20% of 640, which is a 128, and it goes down to 512 for the fourth year. So you can see there's a big difference between the depreciation off straight line versus double declining method. Because if you were doing straight line, it will be 1,000 for the first year and then down to 800 at beginning of the second year and had down to six hundred and forty, and then down to 512 and so on. It would be 400. By the end of year four, you've used the straight line method versus 512 using the double declining balance method. And you can also see depreciation is a lot harder at the beginning, which is 200, and it becomes a 160 and that becomes a 128. Whereas if you use straight line it will be two hundred, two hundred, two hundred, two hundred and two hundred. So that's just a quick overview of a capital assets. And lets we will move on to the next section now. 10. Don't get in trouble: shareholder loans: Okay, welcome back everybody. So the next topic we're going to talk about is shareholder loans. This is one area where especially like owner type business types where there's only one owner of the business. And I have a lot of trouble separating what's between their own finances and the company's finances. But legally, if you incorporate your business, your incorporated business or the corporation and you, the shareholder are considered separate legal entities and the finances should be kept separate. So separate bank accounts, separate credit card to use. So just keep things separate between the two is the way to go. Because you don't want a tax auditors come in at the end of the year and look through your books and tell you that, OK, you owe a lot of money because the company paid a lot of your expenses or vice versa. So you don't want to get into trouble like that. So it's good practice to maintain separate accounts for personnel and also for the company. But sometimes say, the shareholder pays out of pocket on behalf of the company. And this happens quite a lot because the shareholder might just, oh, I can just use my personal credit card to pay for a business meal or something like that. And this happens all the time and it's okay as long as you keep a clear record of what's going on. So let's say the owner of a company and pays a business meal out of his pocket. So how did the record that? Well, you would do a debit to meals and entertainment for example, where music expense of $20. And then instead of crediting cash or crediting credit cards payable, because the shareholder pay out of pocket. It actually goes against a special account called the shareholder loan. And what the show with alone means is, as you can see, it's in the credit position and it's also a liability accounts. So why is it a liability? Well, it's because the company now owes the shareholder $20. That's why you have to credit a liability account called shareholder loan. So because the owner did not use the company credit card, you do not use any of the company's accounts, so you use the shareholder loan account. So later on, the company say reimburses the owner for the meal. So the owner had used his own personal credit card, and now the company decides to pay the owner back, or the owner just withdraw $20 from the company's bank account. So what happens now? You just use just debit to shareholder known for $20. So this basically wipes out the credit that we saw in the previous slide. So the shareholder loan becomes nothing becomes nil. And you would credit cash on the company's books because the company and now has paid back the share holder for the out-of-pocket expense. How about in the case where the company pays for the shareholder, which also happens quite frequently in my experience. So the shareholder has a company credit card and he wants to collect points like arrow, arrow plan points or something like that, or collecting points to get a plane ticket or other perks. So what happens is the company pays for the shareholder, and now the company expects the shareholder to pay the amount back. So say the owner use the company credit card to pay for personal vacation worth $100 on the company's books. Why would we recorded is debit to show it alone $100. So this is an asset because the company expects to get $100 cash back from the shareholder later on. And then the credit would be to credit card payable because the company's credit card was used. So this is money payable to the credit card company. So it's a liability. And then say the owner later on pays back the company for that person though vacation. So what happens is the company receives cash of $100, so you debit to cash and you would credit $100 to the shareholder loan. This is for the shareholder reimbursing the company back for that personal expense. Now it's very important that the show or does not keep using the company credit card to pay for expenses. Because this showed alone would become a debit position, which could be quite troublesome in some jurisdictions. So there would be penalties, for example, in some jurisdictions if the shorter loan is outstanding for X number of years, so and then you have to charge interest and it just kind of gets a bit messy because the jurisdiction, the law kind of wants to keep the shareholder and the company separate. So if you want to stay out of trouble from, from the government, it's best to keep the shareholder loan in a credit position. Ok, so that's a quick overview of how shareholder loans work.