BASICS OF ACCOUNTING FOR BEGINNERS | Preparing Financial Statements & Journal Entries | Chelsea T | Skillshare

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BASICS OF ACCOUNTING FOR BEGINNERS | Preparing Financial Statements & Journal Entries

teacher avatar Chelsea T, Passionate about accounting!

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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

12 Lessons (1h 4m)
    • 1. Introduction

    • 2. The Accounting Equation

    • 3. The Profit Equation & Practice

    • 4. Accounting Assumptions & Principles

    • 5. Cash vs Accruals

    • 6. Statement of Comprehensive Income & Practice

    • 7. Statement of Financial Position & Practice

    • 8. Debits & Credits & Practice

    • 9. Prepayments & Supplies

    • 10. Unearned Revenue

    • 11. Depreciation

    • 12. Final Practice & Wrap-up

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About This Class


Learn the basics of accounting with easy-to-relate examples! This course has been taught to many Accounting diploma/ bachelor students. Many of my students have a strong Accounting foundation after attending my course, with them going on to score As in their examinations.

Having studied 7 years in Accounting, and teaching it for many years, I have mastered the techniques and important information one should know. You don't have to know every single bit of technical information - just the important ones! 

These are the topics that are covered:

  • The Accounting Equation
  • The Profit Equation
  • Accounting Assumptions & Principles
  • Cash vs Accruals
  • Financial Statements (Income Statement & Balance Sheet)
  • Debits & Credits
  • Recording Business Transactions (Prepayments & Supplies, Unearned Revenue, Depreciation)


This course has been designed for beginner level students who do not have any experience in Accounting or Finance. If you do not have any background in either, fret not as this is a course that is easy to digest and understand. 

This course is also great for people who learnt Accounting before and needs a refresher.


Practice questions are also given throughout the course to test your understanding. Do stand by a piece of paper and calculator before starting the course. Detailed answers and explanation will be given.


Feel free to drop questions in the Discussions section, and I will get back to them.

Meet Your Teacher

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Chelsea T

Passionate about accounting!


Hello, I'm Chelsea.


I enjoy teaching and sharing my knowledge. I have been teaching for the past 4 years to various ages from 5 years old to as old as 23 years old. As such, I am an expert in making my audience learn even the most difficult concepts. My passion lies within Accounting, as I enjoy helping students to understand the concepts by breaking them down into simple terms and real-life examples. 


If you'd like how to study smart for accounting or want to have a crash course in Accounting, please follow me as I go on to share more about this subject.

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1. Introduction: hi. Everyone will come to this course all about accounting. This cause was designed in mind for anyone who like to learn accounting from scratch with easy to relate examples. These are the topics that will be covered during this course. After the completion, you should be able to understand the basics off accounting and how to apply them in their life business transactions. 2. The Accounting Equation: the country in creation establishes the relationship between three elements. A sets, liabilities and owner's equity. So, as you can see here as sets, Tequesta liabilities Plast Owner's equity, what is assess? A. Says it's basically resource is owned, all controlled by the business and have future expected economic benefits. So some examples off assets could be cash buildings that the business own it create months or invent tree liabilities are amounts that are owed by the business to add us outside the business with supplied goods or services on credit. Ah ho may have don't money to the business. For instance, if you know your supplier money, it is considered a liability to your business. Or if you brought funds from the bank, it is also considered liability to your business. Some examples would be accounts payable. Wishes your trick. Creditors ran payable as well as loan people For owners Equity. It will be financing contributed by the owners off the firm into the business. So, for instance, if you invest a certain sum off money into the business at the start, then it will be considered your share capital from retained profits. It was also part of owners equity. And what retained profits basically means is that the accumulated profits over the years the county immigration actually forms the fundamentals off accounting in general. So this is a very important equation to memorize as you look at financial statements down the road. 3. The Profit Equation & Practice: next. Apart from the accounting equation, the prophet equation is equally important, so profit equals two revenues, minus expenses. So what is revenues? Exactly? Revenues are earned when goods are sewed up. Services are provided, for example, sells our interest in cup. On the other hand, expenses are encouraged to generate revenue. Some examples are we just rent as first Texas. So now you have learned about the accounting equation as well as the prophet equation. Let's put this into practice so the fooling were taken from the records off Harry's caffee on it. 2020. Please classify this accounts into a sets, lively teeth, owner's equity, revenue or expense. You may posture screen to write it down on a piece of paper, and we will go through the answers next. Okay, let's go through a dances Now. Firstly, we have cash. Cash is a resource that's owned by the company. Therefore, it is an asset, so I can we have marketing expense. So this is definitely an expense because you incurred this expense to generate revenue said We have known people so long. Payable is when you borrow money from a bank or financial institution, so this will consider s still liability. Fourth for furniture and equipment. Desire. Also resources that would buy the firm. Hence, there will be cuts and fight us a set. But if for Foot and Bever shows, this will be classified as revenue because Terrorists Cafe is in the food and beverage industry Knicks for capital, this is actually the initial investment that almost put into Harry's Calfee, so it will be classified as owners equity. So, as mentioned in the accounting equation, owners equities make up off two components. First is share. Capital wishes this case as well as accumulated profits. Seventh pre payments are classified as an assets, so pre payments are expenses that has been picked in advance. For example, rental for the next month seems your has already paid and then not must provide you the space for the next month. Heads. It is considered an asset to Harry's Cafe. It advanced catering deposits are classified as a liability to House Cafe. Does this because customers have already pre paid for the goods that have his cafe have not so food. Hence the business have toe obligation toe for fueled the sell off growth in future. Hence it is an ugly t to defend. Lastly, for retained profits, certain profits accumulated profits off. Other. Yes, so this will be classified as owner's equity. One common misconception is regarding how do we classify and a set verses and expense. So, for instance, let's look at this account caught stationary. Is this actually and a set to the firm or an expense to the firm before deciding whether isn't I set on expense? We must always look back into what industry dis company is in. So, for example, if the company is in a stationery and office supplies, industry stationery would because he did that in Ben Tree, which is the asset. However, if you look at Harris Calfee, stationery would not be an asset to them. Instead, you will be an expense. Hence, it is very important for you to always look at what industry the company is in. Before you classify any off this accounts 4. Accounting Assumptions & Principles: makes were becoming accounting assumptions. So accounting assumptions are needed in place because it's self's as a general guy to prepare financial statements as objectively as possible. Also, this haps toe from a foundation when you compare two different companies. Financial statements There are three main assumptions that accounting uses, firstly, the monetary assumption. So transactions that are affecting the business I always assumed to be expressed in monetary. TOUPS. Secondly. Business Entity Assumption with treat the business as a completely separate entity from its owners. The accounting period. Assumption whereby we divide business economic life into artificial time periods for the use off preparation off off financial reports moving on took accounting principles There are two main accounting principles that will be considering, firstly, matching principle. So what has that Chris matching principle? It says that the expenses for one accounting period must be matched with their revenue generator and recognized for that same pew It. So an example could be, ah, salesman UNSA 5% Commission on sales shipped a record it in January, so the commission, off $5000 is then picked in February. Even though it is pitch in February, you should still record a commission expense in January. According to the matching principle, the second principle is from a new recognition principle. So this principle say's that revenue is recognized and recorded when UN, regardless whether cash has been received or not. So, for example, goats were sold for $10,000 in December and the payment WAAS only received in January. So the revenue shoots Toby recorded in December, even though the cash was received in January because revenue should be recognized when it is earned and not when the cash has been busy. 5. Cash vs Accruals: There are two kinds off accounting firstly, the cash accounting as well as a cool accounting. So if occasion counting the record transactions when cash is received or cash is paid for revenues and expenses respectively. On the other hand, for a coup accounting, we were caught transactions when revenues are earned and when an expenses are incurred. This is regardless off. But the cash has been received. All paid get business accounting stent that actually requires all transactions to be recorded on the accrual basis. So if you look at financial statements, you will see that the company's actually adopt accrual basis accounting instead of cash basis accounting the only time when you can adopt cash basis. Accounting is when you know that the company no longer can continue operations. All is going to become bankrupt in the following yah accrual basis. Accounting actually adheres to the two principles that we have been through a layer which is the matching principle as well as the revenue recognition principle. So revenues are only recorded when they are earned and expenses only recorded when they are incurred. We cut us off, but a cash has been received. RPG 6. Statement of Comprehensive Income & Practice: financial statements are used to provide information about the financial position and performance after business. Commonly, we have three different kind of finishes demons. But for the sake of discourse, we'll be covering the two more important ones. Firstly, statement of comprehensive income. It is also commonly know Lester Income Statement. Why? Because it shows up rooting results off business for particular period of time. For example, if you look on the right to see Harris Caffee statement of Comprehensive Income for the year and TARIFAS December 2020 so the key any months off income state money include revenue and expenses, which is also the Prophet equation to 80 uses our financial statements. We actually have sub classifications off revenues and expenses for revenues re separate them into operating revenue and non operating revenue. So this straws back to what the business is actually doing the car business. So, for example, if they sell goods so off course will be classified under operating revenue as well as revenue from services provided some examples. US. Non operating revenue include mental income, interest income and dividend income. For expenses, we have three main categories. Firstly, selling and distribution, administrative and general as well as financial expense. So if we look at selling and distribution, what goes to the front in promoting cells, for example, advertising expense as well? As so spend a commission, this whole damn belong in the selling and distribution classifications. On the other hand, if we look at utilities, expanse administrators wages that dues with more administrative stuff, it will be classified under administrative and general. Lastly, for financial expenses, we look at maybe interest expense in generating cash flows for the company. However, the one thing to notice that different business operations were caught different revenue types and tinkle different costs, all expenses. So, for example, if we look at a company that is called business is to rent on shops and have tenants, then rental income, you will not be under non operating revenue. Rather, you would be classified under operating revenue in state now, depending on the type of entity. For example, treating our service the presentation off income statements differ on the left re situating entity revenue less cause off course, so too divisive course profit less expenses and then you will get net profit. On the other hand, for service entity, we do not see a line caught less squads off court sort, and we do not see cross profits. So the reason why is because service entities do not typically have any thing caught cause off good. So it's just a service that is provided to their clients or customers. The reason that is also human capital intensive, where they provide services that are based on humans, knowledge and services hens That would not be such a thing as cause of go. So in the income statement, let's put what West lens into practice now. So please classified its accounts into operating revenue, non operating revenues, selling and distribution, expense, administrative and general expense as well as financial expense. Please about your answers on a piece off people, and then we will go through in the next light. You have made possible screen now, so fastly marketing expenses classified this selling and distribution expense. So this is because when we part in money into marketing or advertising were expected to generate SOS, hence, it is classified a selling and distribution expects next for food and beverage shows. It will definitely be classified US operating revenue because Harry's cafe sells food. But me interest expense. It is also classified as a financial expense. When Harry's Cafe take a loan, interest will be generated on that loan. Hence, it generation generates cash flows for the business next for text expense. This is kind off. Debatable, because some companies actually classified M s financial expense, while other companies classified them as administrative and general expense. So, depending on which company the type of classifications might change, hence both answers, except to go stiff utility's expense for the office. This will be classified as administrative and general expense as it is not the storefront off Harris caffee rather than back end off the Calfee six Utilities expense for star fund. This will because it but selling a distribution expense because you need to pay utilities to keep the stuff from running seven mental expense for office. Same thing as stupidities expense for office. It is also classified us at men and general expense. It rental expense for Star Front. This is also the same for selling and distribution expense. Nine. Interest income, as always, tend rental income both off. These types of revenues are actually classified as non operating revenue because Harris caffee call off businesses to sell foot. It is enough food and beverage industry hence, both off this sauce is off income baby classified as non operating revenue. 7. Statement of Financial Position & Practice: Now we look at another important financial statement, which is called the statement, or financial position, more commonly known as the bad and sheet. So the fellowship shows a set. Reliability is owned by the business at a specific point in time. If you look to the right, we see Harris Cafe statement off financial position as a 31st December 2020. Unlike that income statement, this balance sheet is actually accumulated. Talents of all your assets, non current assets, liabilities and Owner's equity from the start off their business. So the key elements off this include a set slab Utzon owner's equity, which is the same as the accounting equation. One thing to know that is very important, that a sets must always equals toe lovely teeth plus owner's equity. As you can see on the right, the total assets is $60,000 as well as a lively tous plus on US equity similar to the income statement. The balance sheet also have sub classifications, So for a sense, we have current a set and non current assets for current assets. This means that it is the resource is expected to be sort used or collector reading one year from the bell and shit date. Some examples of current assets include cash accounts, receivables, invent trees and pre pit expenses, wanting to know that breeding the sub classification off current assets to be further classified, the kind off assets according to the liquidity off the assets. So what does liquidity means? Is the amount of time needed to actually ton the specific assets into cash to use so off course being cash? It would definitely being the most liquid. The second it could be accounts receivables, because you can receive cash by collecting from your trip detectors, but it could be in Ventress, but it will take a longer time, then accounts receivables to actually ton in venturing into catch. Therefore, if you look at many financial statements, they were half a typical sequence off. Firstly, cash. Secondly, accounts receivables for load by invent trees moving on to non current. That's it. We will be covering three different kinds. Firstly, long term investments so long term investments are held longer than one year from the balance sheet date, and it generates revenue in the form off evidence. So some examples are not sweetie bubble investments in shares and bones of other companies as well as then help for future expansion. So long term investments, as the name suggests, is considered a non current assets. For those who are unfamiliar with the concept off evidence, the readers are actually ah, form off revenue where you are owner off the company. So if the firm is doing very well, the bottle starters can actually declare a dividend. Wishes us sort off a form off payout to the shareholders. If the time is not doing about, they also may draw the evidence. I would not declare any dividends for the year for fixed assets. Similarly, the useful life must be more than one year. So fix a sets off physical, all tangible resources that are used to produce or sell products, all to provide services, for example, office equipment, motor vehicle and furniture and fittings. One thing to note is that if you know that you are going to sell this picks ascent reading one year, then you should classify this under current assets instead, loss non current assets for intangible assets. The useful life must also be more than one year, so intangible assets usually neck physical form and have uncertain benefits, but they still constant long term resources that will benefit the firm. Hence it is considered and non current assets. Some examples include patrons treat mouths, copyrights, franchisers or even good bill now moving on to lovely teeth and equity. Timid Ali liabilities have current our ladies and non current liabilities. The way they are separated is that for current liabilities is the obligations that are due to be paid or settled reading one year from the date off the statement off financial position. So, for example, it could be bank overdrafts, accounts payable, tax payable, accrued payables and under revenues for non current lovely taste. The obligations that are not do reading one year from the date off the financial position. So examples can include markets payable, bonds payable and Long Term bank loan. Similarly, toe assets Non carol abilities. If you know that you are going to set out it reading one year, you should then classify it under current liabilities instead off non current liabilities. Lastly, we have owner's equity. Sonus Equity represents all the monies that the owner off the farm is entitled to, so this includes share. Capito retained earnings and other views us so dividends, as we mentioned earlier. The pit out off retained earnings because they are formed off the remaining profits off. But the firm has next. Therefore, the butt off directors can declare David in tow, pay out off this profits. Now you understand the different sub classifications off the balance sheet. We like to put this into practice, so please classify this accounts into the following current assets. Non current assets can reliably tastes non common lab elitists, all owner's equity. Please post their screen and write the answers down on a piece of paper. Okay, First we have cash. Cash is definitely a current asset because it is expected to be utilized reading one year second loan payable. This is due on 31st December 2025 because now, currently, according to this question, it is it made. 2020 has this loan is probably do about five years later. Hence it is considered a non current reality that we see that this known is actually do on 30 off June 2020 which is about 2 to 3 months later. Hence, it is reading one year and hence issued because if I as a current liability. Far furniture and equipment. This will be classified under non current assets under fixed that specifically. So why? Because the useful life off furniture and equipment definitely exits one year. See if we have capital initial investments. This is owner's equity. Six. Pre payments. This will be classified under current assets. This is because pre payments are usually satisfied. We didn't one year from the bell and shipped eight. Next, we have in funds catering deposits. So this is a lovely tea because Harry's cafes have collected the money but have not provided their services yet. So why is it a current liability is because this is expected Tobe A for food. We didn't want you off on the balance sheet. Date it. We have retained profits. This is also Owner's equity nine accounts receivables. He's will definitely becoming a set 10 ingredients, which is also known at Invent Tree. This will also be classified under current assets 8. Debits & Credits & Practice: makes will be covering debits and credits. So yes lends the different various accounts, which are assets, expenses, drawings, lively teas, revenue and Capito. So what is done? Neutra. Exactly. So for a sets, expenses and droppings, they increase debits well. Library tears, revenue and capital. They increased credits. So what this means is that if we have a debit balance, often asset. This means that it is positive. However, if we have a credit balance off a asset dismissed that it is negative. Similarly for expenses and drawings. On the other hand, liabilities. Revenue and capital If they have a credit balance, this means there are positives if they have a debit balance. Disney. If they're negative, it's my symbol. Lots have I have managed to come out with this face cut after eating dinner. Let's read comics, so this phrase will easily tell you which site. Increase us by dub. It's a rich site. Increase us by credit. Another important concept in accounting is caught. The double entry concepts. This means that ish transaction affects at these two ledger accounts, and the total debits must always equal toe the total credits. So as you can see below here there's this t account. So on the left, that's a set swishes that bit in nature on the rights with reliably taste wishes, credit in nature. So this had the examples. Therefore, we didn't need a assess our liabilities. Next for Owners Equity, we have both sides which a stabbing in nature or credit in nature. Specifically, if we look at drawings that debit in nature because you withdraw money from the shack. Happy, though also expenses, which is part of the net profit. This will belong. Toe debit on the right Credit, in balance, includes share capital when you invest money into the business as well s when you Rick in revenues, whenever we want to record a transaction that has already happened. We must look at this five steps. So start why we have to identify the accounts that are affected. But step to classified accounts vented their assets. Liabilities of Owners Equity Step three. We have to determine if it increases or decreases. Step four. Determine whether it is in debit. All credit in nature. This is relating to the account in step two, for example, if it's an asset, then it will be a debit in nature. Step five is to calculate the amount. Okay, so now we have learned about debits and credits as well as five steps to record transactions. Let's look at this example. Harris Cafe sought five tots at $3 each on 10. May the customer pit in cash. So let's look at the five steps and determine what are the answers. You may pass this and write your answers, and we'll go through in the next light to remember that each transaction were always effect . At least two or more accounts so far. Step one. You will have to lose that. At least two on my accounts. Let's go through dances now for Step Wanda calls affected a cash and revenue because the customer paid in cash and the revenue is generated from that five tuts Harris Cafe sort Step to classify the accounts so caches and assets while revenue will go in tow. Owner's equity wishes pat off. Maintain on inks. Step three. Cash will increase and revenue will increase that spell. Step four Cash. Increase US hands in his habit because cash is habit in nature revenue when it increases, it is credit because revenue is credit in nature. Step five. Calculate the amount. So here we have five touch touch, $3 ish, so Total will be $15. After identifying the answers to the five steps, we will then put them into general entries. So on 10 May, we were debit cash, $15 credit revenue, $15. Now let's try another example. So this example is the same as the previous one. Just that the customer that's not paying cash but other customers as to his step. And then he will pay at the end off the month. So now you can try and write the answers down, and we'll go through in the next light. Okay, so for step one, accounts affected our accounts receivable and revenue, so it is no longer cash because the customer that's not pay upfront. Rather, it pays later at the end off the month. Step two accounts receivable is an assets where venue is an owner's equity. Step three. A cause receivable increased spls revenue step fall when they are increases is that bit in nature and while revenue increase us, it is credit in nature, so Step five is the same. Is that $15 so the journal entries to be passed for this transaction. GOP They're a bit accounts receivable, $15 credit revenue, $15. So what happens at the end of the month, when the customer actually pays his extending depth the annual record on 31st May debit cash? Because you received the cash from the customer $15 you credit accounts receivable $15. So when you credit and an asset we should, they are. This reduces the balance, so this means that the customer no longer also money hands you close that air to $0 parents . 9. Prepayments & Supplies: we will now go through more difficult accounts that will be contact for. So, for example, pre payments proof came ones actually cash paid and their prepaid expenses, the foot expenses or even payments in advance. So some examples are prepaid insurance premiums and prepaid rent for supplies. They are cash paid for supplies but not used yet. For example, you have stand US office supplies like stationary and people both off this pre payments and supplies a sets in nature. They will become expenses when used, so they used a portion will be an expense body. Unused portion isn't A SET, so we'll go through some examples toe. Get you familiarized with this. Let's look at this example off Pre payments. Harris Cafe paid three months rent off $3600 on 1st May 2020 for the next three months by called entries based on this transaction. So on 1st May 2020 they pre picked $3600 for three miles. Wealth off rent. One man passed on tariff US May they consumed Noven by one month. Another man passed on 30 of June. They consumed the rent again by another month and one month past again and 31st July, it consumed the last portion off the rent So fast. Bus. May 2020. Your debit Prepaid Rent 3600 Credit Cash Treat 1006 100. This is because pre picked Rennes and A set to us hence his debit in nature and cash credit , because cash is going up and is paid for the next three Jenna injuries, the other seen. So you would debit when expense. Because you have consumed the rent expense and then you accredit prepaid rent because you are reducing dependence off the set. The amount ISS $1200 which can be derived by 3.6 k divide by three months. So if you calculate on tarifas July 2020 the balance off per pigment should be zero. Because you have already they beat up repayment at a style, and then you have credited from 31st made with a defense. July. Bringing the balance from trip on six K towards $0 makes you go through. An example. Supplies her is caffee bought $500 worth off office supplies on 1st May 2020 at the end off the man stock. Take no supplies on hand, Waas at $300. McCarty and Truth based on this transaction. So on 1st may we see the purchase $500 on 31st May, this is a pleasant hand was $300. So on 1st may you record the Jena entries. They're a bit supplies on hand because isn't a set to you $500 as well as credit cash $500 Because you pick cash to get the supplies on 31st May we were debit supplies expense because you have consumed the supplies, which is $200. So how we get debt is we take $500 minus $300 which is the supplies remaining as well as we credit the supplies on hand $200 as you are reducing that set supplies on hand. 10. Unearned Revenue: another special come you look at is uninjured revenue, so unearned revenue is the payment received in and facts, but a revenue has not been hunt, so some examples are prepaid revenue de foot revenue revenues received and add funds. So when cash is received by the revenue is not yet on, this is actually an obligation to the farm, so the ant portion you can put it under revenue account. But 40 on importunate will be a liability to the fun because they have already received money, but they have not performed any. Services are. Send the goods Nestle can test example to show you how to a council and and revenue. Harris Cafe received $5000 in advance catering deposits for customers events on 1st May 2020. That event was to be held on 2nd June 2020. They're called the entries based on this transaction. So looking at the timeline below first maybe way, sift the deposits of $5000 on 2nd June, the services that are provided on the Event Day, which also shows that the revenue has been owned. So how will record for first me 2020 The journal Entry to be passed is their big cash and Kredi on a revenue off $5000 each. So why debit cash is because you received $5000 in cash and credit on an revenue is because it is a lively tea tree off some, and you have not get on that revenue. On 2nd June, we would Debbie unravel new and credit revenue off $5000. So why would they be on? And revenue is because you want to bring down the balance off this liability. Tate, with $0 as we have now performed disservice. Us every credit revenue is because we have already under the revenue. Hence we can credit it toe form, part off our revenue gunned. 11. Depreciation: now we recovered depreciation off fixed assets. So depreciation is the location off cost off the fix A set over its estimated useful life. This is caused by wear and tear when the asset is in use. So why we have representation is because the estate were loses ability, Toby used in the business when yours over extended period of time. For example, when you purchase a cup, the value will definitely drop after five years due to wear and tear. So the coming weather on ascent requires depreciation. We have to see if it is a fixed assets. So, for example, we look at this two examples your laptop in an office for such laptop in an Elektronik stop . So let's top in an office will. Because if itis fixed a set well, laptop in an Elektronik star will be classified. As in Venturi. We must look back, toe the purpose off the asset. And what is the main purpose off buying this asset? So a laptop is definitely used in an office environment for workers to do their work. And you will, because the violence of fixed asset have a laptop in an electronic star is to sell as you would be classified as invent tree. Next for stationary in an office visits deliver event stationary in an office. It will be classified as supplies on hand delivery. Van will be classified as fixed assets, so supplies on hand will not be needed to depreciate. Rather, when it ISS used, it wouldn't be expensed off. However, delivery van will be needed to depreciate s the value of it would decrease over the yes. So it is very important to distinguish wishes, a fixed asset and wishes not in order to record depreciation for the assets. Some examples are fixed. Assets include furniture and fittings, office equipment, motor vehicles, buildings, land and machinery. Important thing to note is that for Len, it might be a special because it is freehold land. Then you wouldn't need to appreciate as the value will not go down and future. Now, if understand how to distinguish fixed asset, we need to know when she'll be actually recognized depreciation. So we look back to the matching principle which say's that expenses are to be reported in the same period as the revenues toe, which they relate to. So for fixed assets, they approaches to generate revenue over several periods. Hence the depreciation expense should be matched to the revenues and need to be recognized reading the same accounting period when we account for depreciation than many terms that will be used. And I will be covering some off them here. So depreciation expense will be the cost located across the whole those who life off the fix assets. So there is also accumulated depreciation. So what this means is the cumulative parents off the depreciation expense from the purchase date off the assets? So a committed depreciation, it is a special account because it is actually a contrast set. So what this means is that instead off being elaborate e or a set, it is a contract, a set that is credit in nature. It deducts the amount from the fix asset in the balance ship for cost. It will be the purchase price off the assets for net book value in shots and BV, it is the cost minus the accumulated depreciation. Lastly, for residual value, this means that how much does that is worth at the end off the used to life? Let's now look at the two different metals off depreciation so there are two main methods which where companies use to depreciate the assets. The 1st 1 will be straight line matter, and the next will be double declining matter. So for straight line better, the precision expense annually is the same. How we calculate it will be costs minus residual value and the whole thing divide by useful life. So this method is often used for assess that have equal usage over the years. However, if you look at double declining method, the depreciation expense would decline over the years. So why? Because this are used for assess their heavily used in the first few years, The annual depreciation expenses also calculate as cost minus accumulated depreciation the whole thing. You're times two and then you're times one over useful life. Now we understand better about depreciation. Let's put it into use. In this example, Harris Cafe purchased a new oven on 1st May 2019 which cost $8000. The useful life off this oven is estimated to be five years, with residual value off $2000. Record the depreciation off the oven, so the table below shows the two different the precision matter, which is straight my metal and double declining matter. Let's go through the straight line met at first, So every year the depreciation expense will be the same. So if you look at tight April 2020 would take the cause, which is $8000 minus $2000 which is the residue of value and the whole thing. You would divide by the useful life. So this will amount to $1200 depreciation expense and willing. So from 30 of April 2020 to 30 years April 2024 These are the five years that Harris Cafe will record depreciation expense for the annual aven. Next, we look at double declining method. So for depreciation expense, we take the cost, which is $8000. We multiply by two and then we developed by size. We shall give you $3200 so dist. $3200 will be the depreciation expense account on 30th April 2020. We next find out what is the sample value off the oven on 30 of April 2020 after we deduct the depreciation expense. So we think the cost $8000. We minus the depreciation expense off 3200. This will give us $4800 net book value on 30 off April 2020. Once they found out the NDVI wishes 4800 we can now go on to calculate a depreciation expense for the second year. So what we do is we'll take $4800. We multiply by two and then we deep that by five again. This will give us 1920 which is the depreciation expense for 30 of April 2021 a game. We find that end BV. We take 4800 my Nestor and no depreciation expense off 1920 to give us 2880 for the next year again on 30 off April 2020. We do the same. So we take the NBD 2880 with times two and every developed by five. This will give us 1152. However, we need to note that the remaining and baby after we did that this year's the position expense should not exit the residue of value off $2000. Hence we need to take the lower off. 1152. All we have to take the 2800 a D minus The residue of value wish will give us 100 80. Hence the lower off. This too will be 100 80. Hence, 100 80 will be the depreciation expense on 30th April 2022. Since the restive jewel value off $2000 has bean bitched, this means that the asset has been solely depreciated. Hence the remaining two years end on 28 April 2023 30 off April 2024. You wouldn't need to recognize any depreciation expense after we have calculated the very rest depreciation expense for the different. Yes, we now have to pass the Jena and trees. So on 1st May 2019 as we put chase the oven at $10,000 reward Debbie Halvorson wishes and assets and we were credit cash $8000 each. So on today if April 2020 the first year has passed hence we must recognize the depreciation expense off last year. So here you can see the two different methods on how we will account for them for straight line better, we would a bit depreciation expense off 1200 we were credit accumulated depreciation off 1200. Similarly, for the double declining method, the amount will changed to $4800 each. So my radar been depreciation expense. So as mentioned earlier, it is allocating the different costs off the set over the estimated useful life handsomely Jebalya depreciation expense. It is an locating part off the assets value, so credit accumulated depreciation is in contrast set. So this brings down the assets value toe. It's very state of value After depreciating the second year Todos April 2020 mile We also have to buy caught depreciation expense again. So straighten I met cut would be to say Mr Previous Yes, I have also doubled the tiny meta The depreciation expense were changed and he will be lower than the previous year. So Odysseus will be 1920 not a your past and you study off April 2022 again. The straight line method depreciation expense will be the same. While the double declining method will decrease to 100 $80 for the last two years after five years estimated Useful life of the oven treat. My meta depreciation expense will be the same, however, for double declining method, as the asset has a really be fully depressive that there's no need to pass an e journal entries. So at the end of five years, on that day of April 2024 if we go and calculate the accumulated depreciation balance, we will get $6000. This will be the same saw both that but declining method as well. A straight line method. This is how you were presenting a statement off financial position for the year and the 30 of April 2024. Under non current assess, there'll be oven less accumulated depreciation off minus $6000 this will give you a balance off $2000. So, as mentioned earlier, why accumulated depreciation is here instead Off in liabilities is because it is a contract , a set account. So this wraps up all the topics that will be covering in this course. I have also a touched a final practice in the next light, where you can practice more questions that summarizes all the concepts that we have covered during this costs 12. Final Practice & Wrap-up: so this final parties will sum up everything that ref learned doing this cause you me attempt, and we will go through the answers later. The following are transactions for the month off ME. 2020 For fast fashion cooperation, FFC prepare a jina entries for the following transactions and the state run off comprehensive income and statement of financial position for a month and that May 2020. You can post your screen now, and there's a next page to this question. - Nice go 30 Incest Now for the first transaction on 1st May 2020 owners invested $500,000 for 10,000 shares in FFC hands. Who, a debit cash $500,000 as you received cash and your credit Shake happy toe off $500,000. Next, on 2nd May, you purchased a fabric off $30,650 from an overseas supplier on credit, including Fred Costs off $650 as far biggest cause it got in Venturi. We were debit in Venturi off $30,650 as cities on credit, we will credit accounts payable on that May FFC so goods on credit to James Retail era Wolf $70,000 as it is on credit, we would debit accounts receivable as James Returnable Holes FFC $70,000. Also, since the goods have already been given, we will then credit revenue $70,000 as FFC has really earned this revenue on 5th May as FC , so as a serious toe. Every Stella cool Well, $15,500 on credit. Similar to the previous transaction that B A, R 15,500 credit revenue 15,500 makes FC Patraeus the new machinery on credit. $450,000 which rested jewel value is $10,000. The machine has 10 years. Useful Life FFC uses the straight line depreciation met that. So on 7 May we will record the Patriots off the machine, which is debit machine 150,000 and credit accounts payable 150,000. However, we must know that on that you passed me 2020. As the machine works, it will have wear and tear. Hence we must record depreciation expense. So on Cardiff, US May we were debit depreciation experience off 1167. How we get that s we take 150 k which is the cost. We minus the residue of value. The whole thing you divide by 10 years useful life. And then you divide by 12 months because there's this nine month. Also, you credit accumulated depreciation and off the same amount on the same day. 7 May FC also decided to invest $20,000 into shares off Amazon. So this will be debited investments $20,000 credit Cash $20,000. S investments is an asset to FFC, and you have to pay cash to get this sheriff's moving on on it. May FFC pit rent for the months off May to August 2022. The landlord. The rent for Fishman is $15,000. So on it may we were debit prepaid when $60,000 which is $15,000 rent Pellman times four months and then we credit cash $60,000. So where we debit prepaid rent is because we have not yet been cut, That been expense hence is and a set toe us on Lee When rian card that rent expense also caught consumed that rent, Then we have to Debbie and when expense. So on 31st May s ever see has been cut the rent expense for May 2020. It would then have to record that been expense $15,000 credit prepaid rent $15,000. So it's crediting because it is reducing the balance off prepaid rent. So at this point in time 31st May 2020 the balance off prepaid events should be $60,000 minus $15,000 which will give you $45,000. Babbitt, in balance the next day. 9 May f f Cebull route from the bend, $200,000 for the upcoming expansion plans. This No one is do five years later, so the interest on this loan is 5% put. And on 9 May, we will have to record the Reese it off the bang. Known wishes. Debit, Cash $200,000 credit bank loan. $200,000. Bangla nous Credit in nature because it is a liability at the analyst. The Man 31st May 2020. FFC also has to record the interest expense that has been generated on top off the loan, so he will have to be interest, expense and credit interest payable. So the amount is $833. How we get there is we take the principal of Mount, which is $200,000.3 times 5% that interest. But because this is poor and, um, you have to divide it by 12 months. In this case, we assume the FFC did not immediately pay the interest expense, but toe the bank. Hence, we will credit as a liability interest payable to the point in time ready will pay up in cash on 10 May have seen received $50,000 on Janesville. Teyla, Outstanding payments. So on your Jane retainer actually purchase from FFC. But the purchase on credit. So now they have received cash. They should that be cash $50,000. And they should reduce the accounts receivable Bannon's so they should credit it. $50,000 on 16 May, as I've see pit the overseas supply of $40,000 off reached. The payment is to cover the Patraeus mate on six, mate and the rest will be used to offset future Patricia's with the same supplier. So this is kind of a tricky one. because first we have to offset and bring the balance off accounts payable back down to zero. And then we have to get the excess toe debit in tow. So called a prepaid expense. So how your record this is debit accounts payable 30,650. So this is bringing down the balance off the A P to zero. And then we will debit pre payments, which is the $40,000 cash minus 30,650 to give us $9350. So this pre payments is an asset to us by because now the supplier owes us goods that have not been ordered. Also, we credit cash because we painted overseas supplier $40,000. So for the last two transactions on 25th may ever see pit full fauna new machinery that was put cheese of your in the month since you must bring down the accounts payable to zero you debit AP $150,000 because of picking cash, you accredit cash $150,000 on 31st May, which is the last day of the month. Every Stella Kuok $20,000 for the purchase that was made on fifth me, with the access to be deducted for future purchases. So this means that we received cash off $20,000 handcuffs. We debit it. And because the customer has repaid the day our wishes, the previous, but just that they have made, we have to bring that they are back down to zero. Hence we have to credit a R $15,500. The remaining will be packed under another revenue. Why? Because we visit cash, but we have not yet provided and new services or give any good stood a customer. Hence we were credit on a revenue off $4500. So how we found this is $20,000 minus $15,500 shot cut. Where is also to find a balancing figure as all of their bits must always equal stool all credits. So now that we have wrote down all the Jena entries Toby past, we will then now generates the financial state months. Well, first prepared US Dickman of comprehensive income for the month and that very 1st May 2024 ff scene. So the first line will be revenue So how we get it? ISS we take $70,000 plus $15,500 to give us any $5500. So always amounts can actually be extracted from your Jenna entries with the revenue accounts in any off piece Jenna entries that you have passed earlier on. Next we go on to do that. Order expenses in cut for the month. So we have been expense, depreciation, expense as well as interest expense. And this will give us a net profit off $68,500 just for the month off. 31st May 2020 this net profit off $68,500 go, then going to return earnings, which is connected to the financial position. Moving on less, generate a statement or financial position s at tell you first, me 2020. So you start off with a sets first. So for current assets, we have the following accounts. So it was that with cash. So what you do issue at all the balances in the transactions? Arjuna entries that your past on your own and this will give us to $500,000. They are We will have that $20,000 3 payments 9350 prepared ran, 45 k Venturi, 30 K 650 lastly, investments 20. Kate. Remember the way that current assess Ah, sequenced if by their liquidity, the spit off, how you can convert them into cash. Next they will be non current assets off which we only have one machinery, which is the costs off 150 k We must end minus the contra and set accumulated depreciation off 1167 to give us the net book value off one $148,833. When we end up the non carbon, assessing the current assets will get a total assets spelling soft $773833. So one thing to note is that remember the accounting equation. Assets must always questo laboratories plus owner's equity. This means that when we generate undeniably tasteless o e, they must also equal to this amount. Now we're prepared a common lovely teas, Misha accounts payable andan revenue and interest payable. So far, all costs payable. We will see that you have a balance of zero so I'm just including here to show you how to direct the figure. However, if the balance often accountants zero, you don't have to include them into any off the financial statements. UNR revenue will before 0.5 k and interest payable 100 $33 moving on to non current lively tears. We only have one bank loans. So why does it classify under non carbon diabetes is because earlier we mentioned that the Bangla in is only payable five years later, this will be $200,000. So when you add up the total lively teas we get to 05333 Okay, so now the last component is owner's equity. So here we have two components. We have the share capital, which is 500 key as well as retained earnings and the accumulated profits. So this 68,500 is actually the net profit for the months. As I mentioned earlier, the net profit will go into a devotee non earnings. So the total owner's equity you get is 568 500. So when you add up liabilities and equity is the same as total assets, So this is when you know that your journal entries and your financial statements should be correct. So that's it for this costs and the final practice. I hope you have enjoyed this cause as much as I did. If you have any questions, feel free to live it in the discussion. Both and I will try my best to replied in.