Financial Accounting - Debits & Credits | Robert Steele | Skillshare

Financial Accounting - Debits & Credits

Robert Steele

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32 Lessons (7h 32m)
    • 1. Financial Accounting, Debits & Credit, Accounting Transactions

      4:35
    • 2. 100 Why Learn Accouning

      19:41
    • 3. 102 Accounting Objectives U

      9:24
    • 4. 120 Balance Sheet

      17:22
    • 5. 130 Income Statement

      13:24
    • 6. 131 Statement of Owner's Equity

      10:49
    • 7. 132 Balance Sheet & Income Statement Relationship

      23:47
    • 8. 134 Revenue Recognition Principle

      8:49
    • 9. 135 Cash Method vs Accrual Method

      16:19
    • 10. 150 Ethic & Profession

      22:02
    • 11. 155 Financial Transaction Rules

      7:48
    • 12. 160 Financial Transaction Thought Process

      11:52
    • 13. 165 Cash Transaction Accounting Equation

      16:25
    • 14. 170 Accounts Receivable Transactions Accounting Equation

      25:22
    • 15. 205 Debits & Credits

      15:49
    • 16. 210 Rules for Using Debits & Credits

      18:27
    • 17. 215 Journal Entry Thought Process

      13:40
    • 18. 220 Trial Balance

      15:02
    • 19. 225 Cash Journal Entries with Cash

      18:01
    • 20. 230 Accounts Receivable Journal Entries

      10:05
    • 21. 240 Accounts Payable Journal Entries

      22:28
    • 22. 245 General Ledger

      14:27
    • 23. Compare and contrast liabilities and equity

      7:51
    • 24. Describe accounting opportunities

      19:38
    • 25. Describe accountings role in the age of information

      18:28
    • 26. Does Accrual Method Overstate Assets & Revenue

      15:46
    • 27. Is Cash ths same as Revenue

      13:48
    • 28. What is objectivity and how does it support ethics

      6:48
    • 29. Compare general ledger and a chart of accounts 200

      6:29
    • 30. Describe source documents 200

      5:44
    • 31. Describe the recording and posting processes 200

      6:02
    • 32. Multiple Choice 1 Questions Accounting Terms Accounting Equation

      15:52
15 students are watching this class

About This Class

Accounting core concepts will be covered, foundational accounting skills needed for all levels of accounting including the accounting terms, the double entry accounting system, and recording transactions using both the accounting equation and debits and credits.

These are the accounting fundamentals which most accounting courses spend far too little time on. The better we understand these accounting foundation topics, the better we will do in all accounting concepts.

Like practicing catch or going over those musical scales, practicing the accounting fundamentals is time well spent for beginners as well as experienced accountants. We are never too smart to practice the accounting fundamentals. This course will thoroughly cover the fundamentals and will provide a foundation for learning concepts that limit the likelihood of learning rules that do not always apply.

We also offer practical practice problems in Excel, along with step by step instructional videos to walk you through an example problem. Learning basic concepts in Excel while learning accounting concepts will advance our ability to learn both topics much faster. We will only cover very basic Excel tops, using step by step instruction, including learning how Excel names cells, how to add and subtract in Excel, and how to use the sum function.

This course will provide much more structure to the journal entry process than most courses, including a detailed step by step process for thinking about how to construct financial transactions. This process will eliminate the problem of getting stuck and not knowing how to move forward. The process will also help us understand the transactions we are recording and eliminate the problem of learning concepts that do not apply in all circumstances.

I am available for questions throughout the course. I have been teaching and working in accounting for a long time, have a lot of experience breaking down concepts, and enjoy working with new people.

Please join us in learning financial accounting concepts

Transcripts

1. Financial Accounting, Debits & Credit, Accounting Transactions: So if we are a business owner who would like to run our business better by better understanding, accounting concepts or a business professional would like to advance our career by better understanding accounting concepts or a accounting student who would like to better understand accounting concepts and work through problems much faster. This course is a course for us. Why choose this course? Although this course will have a lot of instructional video, it has much more than just instructional video, including PdF files that can be used as a reference can be used off line and downloaded. Four reference. We're also gonna have Excel practice files that will be used when we work. Excel problems. So rather than just seen instructional video and take it impassively, we'll also have some worksheets that will be used the Excel where ships already formatted so that we just need to do the basic formatting. We will pick up some Excel skills from Basic Excel scales those very important Excel skills , however, of adding and subtracting in its l learning cell relationships. We'll also have some test Banks which can be downloaded will have some in a PDF format. We'll also include some test type questions that we can interact with will also have discussion questions designed Teoh have discussion and facilitate discussion within the course. That's gonna be more open ended questions as we go through the course content, Who will we be learning from? We will be learning from a practicing certified public accountant, someone who has both business experience as well as teaching experience, teaching experience in accounting classes as well as business classes. Someone who has experienced putting together course content for individual courses as wells as Siris of courses, courses that need to go in a linear fashion to some degree for topics such as accounting. Someone who has a charter global management accounted designation of masters of science in taxation is a certified postsecondary instructor and has curriculum development. Expert Experience have put together courses of a complex nature courses of a business and accounting format. What will we learn? We're gonna be learning financial accounting. We're gonna talk about what financial accounting is, why we need to learn financial accounting. Then we'll talk about the double entry accounting system, and we'll discuss what the double entry accounting system is, why we would want to use the double entry accounting system. How to use the double entry accounting system in accordance with the accounting equation and using debits and credits will also learn Excel. As we go through this, we won't have excel in every component, but we will have some worksheets in Excel and as we to work those worksheets. They'll give us an idea to put our concepts into practice and work through some practical problems. They're also gonna help us learn excel, and it's really useful to learn excel as we dio. For one, it makes the accounting much easier, even on a very beginning level and to it is really useful to know excel in a lot of different areas. A lot of different components of business are actually mandating Excel at this point, and therefore accounting is perfect toe. Learn those fundamentals of excel, so we'll learn the fundamentals. Addition, subtraction within Excel and sell the relationships. How will we be taught through viewing and then doing we will have PdF files that we can download as well as Power point presentations that will go over the course concepts, but we will then go to another presentation that will be in practice that we will have an Excel files that we can follow along with and that will put some of our concepts into practice as we learned them and work through the problems within Excel worksheets. We're also gonna have test banks that we can download, some of them being in pdf file. We're also gonna have test type questions that will be in a video format, that we can see what a multiple choice question will looked like and how the thought process should work. When we go through some of those multiple choice types of test questions, we're also gonna have discussion forums and discussion questions that are designed to be open ended questions, questions that we can talk to each other on. We can relate to other students within the discussion, forms questions, and that really helps us Teoh think about more different ways to apply these these concepts . And with these concepts mean to different people, please join us for financial accounting debits and credits accounting transactions. It will be great 2. 100 Why Learn Accouning: in this introductory presentation, we will start where every introductory presentation should start, and that is what is in it for us. Why would we want to learn accounting? What are the reasons for learning accounting? We're going to start off to answer that question and say, because it's we will return to this after we see the objectives, the objectives being, we will be able to at the end of this presentation list and describe reasons for learning accounting list and explain types of accounting list and describe types of entities back to our question. Why would we want to learn accounting? I'm going to say the first reason is because it's fun. This may not be the first thing that popped in your mind. This may not be the first reason you're actually here taking this course in accounting, but I want to start off with this premise for a few different reasons. One is that it can be fun. There are areas within accounting that can be enjoyable to do and to and want to focus in on those areas because that will make the process of learning accounting mawr enjoyable to Dio. So we will get into the more traditional reasons for learning accounting. What is in it for us? What can we get out of accounting? How will that help our lives? But first, let's take a look at this fun factor. Accounting can be compared. Teoh accounting to putting together a puzzle a puzzle can be an enjoyable task, although at first glance it would look like a rather tedious task to put a bunch of puzzle pieces on the table and actually put them together. But the process of putting them together is an enjoyable task, and many aspects of accounting will be much the same in that we will have different components will have to put those components together in certain ways in accordance with a set of rules. And we may have to reorganize those components, knowing that they will fit in a different format. Just as we know the puzzle pieces will fit together in order to match the image on the box . We can also compare the accounting to learning something like music. Music has a lot of patterns to it. We have to learn the patterns whether we learn those patterns in terms of an actual song pattern or the progressions in terms of chords or the progressions in terms of notes that we need to learn. We have to learn something before we get to the enjoyment of actually playing something that's usually the difficult part. That learning part, that memorization part before we get to the actual task of playing something and the same thing is true with accounting, we're gonna have to learn some memorization how to set things up before we can use that to get enjoyment out of the process and in order to a quiet for practical purposes. We can also compare accounting to something like a game of checkers and noticed that a game of checkers is played on a spreadsheet, something that accountants will appreciate There. We're gonna play the game of checkers on a spreadsheet. We're gonna move these pieces in accordance to a set of rules. First thing we need to know in order to play the game of checkers is to learn those rules First rules. How do you set up the board? Where do you put the pieces? Then how do you move those pieces that will be much of the same and accounting we're gonna have to learn the rules of setting up the board. Where do we put the pieces? Then the learn the rules for moving the pieces if you've ever taught someone a game of checkers or if you remember learning the game of checkers, that first process learning how to put the pieces together and where to move them is the difficult part after we know that it becomes much more enjoyable to play the game. The same is true with accounting. Also note that if we were to play a game like chess, it would be much more complicated to learn those rules to first set up the board. But it's a lot more difficult to master chess, and therefore we actually get more long term enjoyment from a game as chest because of the complication that is there after we learned those rules, the same is true for accounting. There's that there's we're never gonna master the game, but we need to know the ground rules before we can play the game and then continually continue to improve within it. Other reasons for learn accounting. If you're a student, then this course is going to be the basics so If you're going into the first counting course, you probably want to take this and you can learn the accounting concepts before you go into the course accounting it will be something that will accumulate upwards. Therefore, the fundamentals I compared to something like a sports. If you're playing baseball, just playing catch, you're gonna play catch every game, whether your first practice, second practice. So if you've been playing for 10 years, you're still gonna be playing. Catch is still gonna be digging out ground balls. You're still gonna be doing batting practice. Those are the fundamentals. And whether you're a first year student or your work in the accounting department, it's always good to go back to the fundamentals, even reviewing the fundamentals myself, Uh, I learned new things, just doing that all the time. It's good refresher to have. So if you're going into the course, you really want to pick those up because you can't move forward until you learn these concepts these air concepts that will be needed throughout the entire process of accounting . No matter where you go within account, it's just like playing catch. You're gonna need to be going back to the fundamentals every time. If you've already in a new accounting class or if you're in advanced accounting class, it's always good to have AH, course that is ready and available to go back to. In order to revisit those fundamentals, those core concepts will go through the accounting cycle here, and this is something that can provide that process and of that information. If you work within an accounting department, then it's often the case where on accounting department, especially for larger corporations, you may work in a specific area and you specific software and and that's because of separation of duties. And many times we don't really see the big picture, and a course like this will go through the big picture may need. It'll go through the normal accounting cycle that all companies go through, and therefore whatever department we are in, we'll get a better idea of what the other departments are doing. For example, there's an accounts payable department accounts receivable payroll. We might have different budgeting areas. It really depends on the size of the company. But whatever that the amount of compartments we have within the accounting department learning the overall cycle will help us relate to those different departments. It will also help us understand what we're actually doing. Oftentimes, if we're if we have data entry, then we're entering data and we may not really know what the software is doing. This will give an idea of what the software is doing. The more understanding we have of what the software is doing, the more valuable we are in the accounting department. Because if there are problems, we're not just entering data. We can actually go in and see what is happening and be a problem solver. And those are the more valuable skills. The core accounting skills are also helpful with personal finances. So the same idea in terms of accounting is applicable to personal finances as well as business. Finance is one of the first things we will do. It separate the personal from the business and we're going to focus in on the business accounting. But on the personal side, the same things can be applied. It's just that we have a different objective and therefore the same principles can be applied to personal finances as well, which is an area that everybody needs some understanding of accounting in other reasons for learning accounting if your student or if you're thinking about continuing your career somewhere within accounting, accounting has a lot of different areas in it. So it might be thought that if you work in the counting, you go work in accounting department, and that's all you can do with it. But really, the accounting department and the accounting field has grown a lot, so there's a lot of different areas you can go within the accounting field. For example, if you graduate in accounting, the most traditional path might be the CPI a license and get certified as a seat as a c. P. A. You could continue to the n b A. These air kind of a typical pass for students to take. Once they graduate in an accounting major, they make either go for C P lessons and or an MBA license. The CPA license is really a nice option to have, because oftentimes it's not as costly as an N b A license and can provide a lot of value in terms of job seeking skills. So you have that available where some other professions may not have that type of certification option available, which could be a very marketable. There's also a charter global management accountant and AH, certified management accountant. These air geared towards managerial accounting so we can focus our career more towards managerial accounting. And again, look for these certificates, which can be very valuable in terms for job placement, to show employers that we have the skills needed. And they're often times take less time and money than in a traditional MBA. We also have bookkeeping, weaken, go into bookkeeping, weaken, go into different departments like accounts receivable, accounts, payable payroll, these air, all specialties that we can do. If we if we do bookkeeping, we're probably thinking where we're working with smaller companies and we're doing mawr of the bookkeeping. That's kind of a specialty. We might be an entrepreneur. We work in a larger company. We could specialize in accounts receivable accounts payable. Payroll is becoming a bigger and bigger topic all the time. As new laws are being put on the books, payroll has become a specialty in and of itself. We can also have public accounting, so that's audits and taxation area that we can work in and entrepreneur we could be working for ourselves and apply these accounting skills to our personal business. So the accounting skills are really applicable, and there's a lot of different areas weaken go within accounting. If you're taking this course and you're already in one of these areas are focused in one of these areas. These are gonna be the core fundamentals you'll need in order to expand to any of these types of areas. If you're a student and you're just starting an accounting, then you can thinking about going and continuing with accounting. At some point in time, you're gonna have to specialize. And these are the types of things you're gonna want to think about, accounting to steal a very broad major, and you're gonna want to narrow that broad nature down to something either related to one of these. Also by industry. You might want to work in construction versus merchandising industry. You might want to break it down by whether the company has inventory or not, but there's there's a lot of options within the field of accounting. Also, accounting is just good in terms of mental capacity, so things like math skills and thinking about puzzles, often times people actually enjoy doing those. And it's also good for your brain just to work through puzzles and worked through problems were through the math problems. Accounting ISn't SO MUCH of MATH. Problem is more related to, um ah, puzzle like this, putting pieces together, moving different pieces around. Once you learn how to use software like Excel, then it becomes a lot more like a puzzle. We're just basically kind of moving the pieces around in many areas of accounting, and that's really good. Just mentally, it's just really good practice toe. Do those types of of activities. What is accounting? Accounting is gonna be the compilation of information that is going to be financial transaction related. For example, we may have invoices or bills. We're gonna compile those financial transactions in something such as using debits and credits. This is a trial balance. So all of our financial transactions we need to compile that information in some way that is useful. We can imagine all the transactions. We have all the transactions we make in terms of cash transactions every day that we're gonna have to compile that data. We need a way to put that data in a format that we can then use it in order to make decisions. So the end product generally will be financial statements, financial statements, including the balance sheet, the income statement, the statement of equity, the statement of cash flows. These air typically the end product for financial accounting, and the goal of this end product is that it's in a format. It's taken this financial data that we have been putting together that we needed to do throughout a certain time period, a month or a year. And it's putting that information into a relevant form for us to make decisions and for other users to make decisions. External users such as creditors such as vendors such a thanks. There's gonna be two broad categories of accounting we want to think about when considering accounting. We can break these categories up into many different sub categories. But these air the to very broad categories. You wanna have in mind win considering accounting that will be financial accounting. What we will be focusing in on here and managerial accounting. Financial accounting is going to deal with external users, whereas managerial accounting is gonna deal with internal users. This can be confusing because it is the case that Manager accounting is going to use much the same data that we will be using in financial accounting in order to make those manager RL decisions. However, the financial accounting is geared towards the external users, those being creditors. So if we want to get a loan, the government in the form of taxes is one way the government would need the data, possibly customers and investors, especially if we're publicly traded. We're gonna need to provide this information to investors because these individuals are outside of the company, they don't have intimate knowledge of the company, and they may not have the same kind of level of trust within the numbers that are within the company. Therefore, they have. They have different needs in that they need some more standardization of the numbers and they need more regulation of the numbers. So although the numbers are going to be the same basis on which those financial transactions being the basis on which the Manjural data will be set, the financial accounting data will have much more regulations. It'll be much more strict in terms of how exactly are we gonna put these financial statements together What exactly does a balance sheet look like? How is it put together? What is an income statement look like? How's it put together? We need to have very strict rules so that these external users can have a good idea of what it is they're looking at in terms of managerial accounting were geared towards management. The internal users management is still very concerned with those same financial transactions. So we're gonna use those. Same financial transactions, however, were not tied down. Teoh having to make the financial information exactly the same as the financial statements . We may start there. That's gonna be usually the bigger based, the broader based the big picture. But we may want to compile that data and different types of ways, using different active reports, often narrowing down in different areas so we can make decisions in terms of how different departments are doing in comparison to the business as a whole. For the reason that the Manjula counting is internal and they have intimate knowledge of the of the industry, there's not as much regulation within Mandrill accounting manager accounting is regulated by best practices were gonna dio what we think is best we're gonna follow those best practices in order to make the best decisions. Business entities, types of business entities will include the sole proprietor. That's where we're really gonna focus on. Here is the sole proprietor Note that the principles of the transactions will be the same for our other type of entities. But the sole proprietor is a good place to start because it will focus in on the equity section of one individual for the entire equity section, which will simplify the process a bit. The downside of a sole proprietor is that they're generally liability problems in terms of there's less liability protection than, say, a corporation, the pluses to its sole proprietor or that they're very easy to form. So the sole proprietor in terms of the total businesses in the U. S. Is by far the largest number of businesses and the format of the sole proprietor. However, the revenue. If we broke out the revenue, the corporation would be the greatest revenue generator, so that corporation generates the most revenue in terms of total dollars for the US economy . But the sole proprietor in terms of number of businesses is by far the largest mainly due to the fact that there's ease in terms of being a sole proprietor, meaning if we just start doing business. In essence, we are a sole proprietor and we have our certain responsibilities. And one of those is to pay taxes on any revenue that the net income that we're gonna have basically in taxable income. Then we have a partnership also very easy to form. It's similar to the sole proprietor. We have the similar liability problems, but now we have two people involved, So the same ideas that we will put together in terms of a sole proprietor will be applied to a partnership. The major difference between a sole proprietor and a partnership will be the equity section . So when you move from looking at transactions from a sole proprietor to a partnership, were you really not gonna go back to the things that are the same meaning we don't need to go and revisit how to record the utility bill or how to record an invoice or how to record payroll? Those are the things that are gonna be the same. What we focus in on when we move from a sole proprietor to a partnership are the things that are different. The equity section is different, meaning the value of the company now has to be broken out between two warm or individuals. So a partnership could have two or more individuals, and we want to make sure that we're allocating the information to those two or more individuals. That's gonna be a very important component of the partnership. Then we have the corporation. The corporation is actually a separate legal entity, so it's legally a separate entity. From an accounting standpoint, this isn't ah whole lot different because from an accounting standpoint, we actually treat oh businesses as separate from the owner. So when we work the books, the business will be treated separate from the owner in terms of the sole proprietor and the partnership. However, the corporation, from a liability perspective, is also a separate entity, which mainly has the benefit one of the main benefits being that there's more liability protection within the corporation than either the sole proprietor or the partnership. It's also often easier to generate capital within a corporation in terms of selling stocks for for an equity interest within the corporation again. When we moved to the corporation. Most of the transactions, they're gonna be the same. We're not going to read Dio out how to record the utility bill again on the payroll bill, all the normal transactions that we typically dio will remain the same. The dollar amounts may differ in terms of a large corporation will differ in terms of a large corporation and, say, a sole proprietor, small sole proprietor. But the essence of the journal entries will remain much the same in terms of recording the payroll or recording the utility bill. What will differ will be once again the equity section, because who owns the corporation? The shareholders own the corporation, and therefore we're gonna have to break out that equity section by the owners who in this case will be the shareholders. We are now able to list and describe it Reasons for learning accounting list and explain that types of accounting listing describe types of entities 3. 102 Accounting Objectives U: hello. In this presentation, we will discuss accounting objectives, objectives including relevance, reliability and comparability objective. We will be able to at the end of this presentation, list accounting objectives and explain the reasons for accounting objectives. The accounting objectives will include relevance, reliability and comparability. If we take a look at these individually, we can see some or components within these objectives and the reasons for these objectives . But also note that as we look at these individually, they are related. Many of the aspects of why we need relevance will also be related to reliability as well as comparability. Weaken. Take a look at the reasons for these objectives in a scenario format to remember that the financial statements are the in goal of the financial accounting and the in goal. The financial statements need to be relevant, reliable and comparable. The end users then are going to be the external users. External users like investors, like a bank. In this case, we're going to be considering a bank. So the scenario will be that the owner over here wants to get a loan from the bank. This is, of course, a business transaction in Vit, the bank wants to provide the loan to the business if they believe that the business owner can repay the loan because the bank will then earn interest on the loan. Given, however, the bank is skeptical is going to be skeptical as to whether the business owner will be able to repay the loan. The business owner, of course, wants to receive the loan and is willing to pay a reasonable amount of interest on the loan in order to have the capital of the cash at this point in time, in order Teoh keep their business going. This is a typical type of scenario and the question is, Are these financial statements going to be relevant to the decision making process for the bank? So the bank's gonna be deciding whether or not the financial statements will be something they can help to use in order to determine whether or not the business owner will be able, Teoh repay the loan. Now. We would hope that the financial statements would be relevant in this case to the repayment of a loan, the financial statements, often being something that the business owner will ask for. The bank will ask for when alone is going to be granted because the financial statements should give an idea of where the company stands to balance sheet as of a certain point of time, it should give us the income statement at what has happened over a certain point in time, as well as the statement of equity and the statement of cash flows. What is the net value from the beginning to the end? And was the cash flow from the beginning to the end? This, we would assume would be relevant information when at bank is making the decision as to whether a loan should be given, because that will give us some information based on where the company stands now and on past history, whether or not the company will be able to repay the loan. Now, of course, in order for the, uh, the bank to trust the financial statements, they're also gonna want to make sure that those numbers are correct, and they're gonna want to make sure that the numbers are timely as well. We can't have financial statements that are gonna be too old to in the past, because that won't be relevant to the current decision making process. So of course, the balance sheet tells us where we stand. As of this point in time, the income statement, We're probably gonna go one the two years back, possibly more than that, to tell the story of where we got to this point in time. Then we've got to reliability so we can think about this transaction. We're trying to get a loan, the banks trying to decide if we should get a loan and the bank is basically asking, Can we trust these financial statements? So the idea of giving the financial statements to the bank the bank's gonna be questioning whether or not those numbers this number is just on paper can be trusted A couple different things that the financial that the bank could do in order to have more trust in the financial statements. One is just the standardization of the financial statements. So the fact that the financial statements are made in a standard format, we expect a balance sheet to be in the format of the balance sheet On the income statement . To be in a formats of the income statement is one thing that the bank could then use to have some security, some assurance that that the financial statements are correct. Well, they also may ask for financial statements to be specifically in accordance with the specific standard, such as generally accepted accounting principles. And therefore we're would have even more reliance that the financial statements at least, are claiming to be in the format of general accepted accounting principles. Of course, the bank is also gonna be, including, within those standards, the check that we're going to say, Hey, does the balance sheet at least is it in balance? That will give us some indication. Some internal control indication over the bookkeeping process that the financial statements are all time together properly are in proper form at the bank, then may ask for further assurance with something like an external audit by a c p a firm or possibly a review of the financial statement to get 1/3 party look at those financial statements. But the reliability of the financial statements has a lot to do with that standardization process, and that kind of leads into the last component here. The comparability part. The reliability also has to do with comparability because we need the financial statements to be in a standard format, and the bank then will be able to use those financial statements to compare to other clients that they may have. We may be asking the bank may have multiple clients that they're thinking about to giving a loan to, and the question here is gonna be well. Could the bank compare this financial statement, Teoh someone else's financial statements and make a decision between the two? Could the bank compare these financial statements to some financial statements prepared in the past, which would help them determine whether or not the company is doing better or worse than they had been doing in the past? Comparability will be done, will be achieved in part through the standardization. So one reason that the financial accounting they're gonna be very regulated, regulated by general accepted accounting principles is because it allows for this comparability to take place. It allows for external users such as the bank to compare the current financial statements, two prior financial statements of the same company and Teoh financial statements of related companies. So the three components the three objectives we are looking at our relevance, reliability and comparability. Remember that we're thinking about external users. When we're considering these components, external users like investors, investors would be making similar decisions that we have thought about here and that they're looking, really their external users looking at the big picture. And they're trying to think, Do I want to invest in this company? And the financial statements should be answering similar questions in that in that business transaction. Should an investor invest into the company well, are the financial statements will be relevant to that decision? They're gonna show past performance that passed for performance will, hopefully the oven indication of what future performance would be. Are they reliable? Can the investors trust the financial statements? And are they comparable? Can the investors compare those financial statements to those of the same company and prior time periods, and to those of other companies as well, the I. R. S is going to be an external user, and we all know that the iris is going, of course, want tax returns. Therefore, the IRS will look for standardisation as well. Not necessarily Julie accepted accounting principle, but the IRS revenue code, The Tax returns, is a format of financial statements in the format governed by the ire S or or the tax code . We also have management. Management's going to be the internal users and notice they're gonna have similar questions when they're making their decision making there. Probably they're going to start with those financial statement data as well, although, of course, management can change that data and in any way they want in order to use them for the internal reports. But the concepts of reliability, relevance and comparability will be the same for managerial decisions as, well. The questions of Can we use this information? Is it relevant for decision making? Is it reliable? Is it is it comparable two other data in order for management to make those internal decisions? So remember that the financial statements themselves usually get given or made with the external users in mind, those users being the investors at the I RS. But management is gonna have similar questions as well. On the internal user side of things objectives, we are now able to list accounting objectives and explain the reasons for accounting objectives 4. 120 Balance Sheet: hello. In this presentation, we will discuss the balance sheet. Object is at the end of this presentation, we will be able to describe the balance sheet, list the components of the balance sheet and define and explain each component of the balance sheet. When considering the balance sheet, we will be looking at components equivalent to those in the accounting equation. The accounting equation, as we have seen in a prior presentation, is assets equal liabilities plus equity. These will be the components of the balance sheet. Remember that the assets, of course, are going to be those things that the company has. They have those things in order to help generate revenue in the future revenue generation being the key, the goal of the organization liabilities being something that is owed in the future due to something that happened in the past, therefore past transaction, resulting in future obligation liability. Then we have the equity section, which could be in the format of the owner's equity for a sole proprietor or partnerships equity for a partnership or stockholder's equity for a corporation. However, all three of those formats represent, in essence of the same thing. The ownership or the book value of the organization, meaning assets minus liabilities is, in essence, the book value of the organization. It's important to remember that the balance sheet is, as of a point in time, this consume obvious. But it is not as obvious as it may seem, given that it's different than the income statement, which is reported as of a timeframe, meaning If we have our timeline here, the balance sheet will be reported as of a specific point on that timeline on Lee needing one date, then to define when the balance sheet will be reported. As of unlike the income statement, where we do need to dates on the timeline so that we have a beginning and an Indian date. When considering the balance sheet. And considering this concept of the balance sheet representing a point in time rather than a timeframe, I first would think about the major account on the balance sheet, the first account most people probably think of when they think of the balance sheet that to being cash and asking the question. If I was to ask how somebody as of this point in time, how much cash they have, they could then tell me as of this point time, they could check their pockets and say, This is how much money we have on me or I have on me at this point time. They may not want to say that, but if they chose to do, they could. They could tell me how much money they have on them at this point in time, unlike the income statement accounts like revenue and expenses, where if we were to ask the question, How much revenue do you earn? That's that's a verb statement. That's an action statement that has to have a time frame that has to have a beginning and an end time, not just a point in time in order to answer this question. Therefore, when we consider this timeline, the balance sheet will be as of the point in time, and the income statement will be some somewhere back and telling the story. So the income statements gonna need another point, and that will give you kind of the story of how we got from here, this point in time to that point in time, and the income statement will give you some of that activity to tell you where we got to at the end, in this case, our balance sheet account representing this point in time when considering our components of the bouncy, they will be the same as the accounting equation, including assets, liabilities and equity. Note that when we look at these components, we need to value these things differently than just counting the units that are there. For example, clearly cash is going to be counted in terms of dollars. So if we had $1000 of cash, that is what we would have no problem there. However, if we had four units of ink, cartridges were not gonna put those on the books as four units of ink cartridges. This may seem obvious, but it's actually a problem. It's a conversion problems similar to the text of problems that we would have if we go to a different country and have a different currency, and that we have to do some type of conversion. In this case, we're going to convert those four units of in cartridges $2 represent the dollar amount of in this case 200 you may be asking, How would we come up with that 200. Where does that 200 come from? Will start to talk about that later. Especially when we get to supplies like ink cartridges. We might have cost flow assumptions first in, first out, last in, first out, some kind of average method because all the in cartridges may or may not possibly not cost exactly the same amount, even though they are the exact same in cartridges cause prices change over time, so we'll talk about that later. But for now, we just We want to emphasize the idea that we're gonna have to report these things in terms of dollars. Everything's gonna have to be reported in terms of dollars. For example, the land. If we have land over here, we're not gonna report on the balance sheet that we have so many acres of land. We're gonna have to report that we have, in this case, $40,000 worth of land. And again, that conversion is going to cause problems because the value of the land will change over time. And there's a question as to what we should do as the value of that land changes. We have the same for the property plant and equipment. In terms of a building, we're going to say it's $60,000 not one building, Miss. And the car, we're gonna say $15,000 not one car. So, no. When we report, all of the assets were basically gonna add all these up. And remember that when we do that, as we do that we're going to report it, of course, in the measuring tool of dollars. But then recognize the fact that we don't have all those dollars. In order to get actual dollars, we'd have to sell the in cartridges, the land and the building in the car. So when we're considering the balance sheet we left, we have to keep that in mind, went to separate of these types of assets out and consider what type of assets we have, especially, how much cash do we have? And do we have enough cash in order to pay off? Our current aren't obligations that will be do relatively soon. So if we look at the acid section then of our balance sheet, we're gonna have assets. We're gonna break out generally current assets pretty much all the time. Typically, we're gonna have current assets and then a colon representing a subcategory, that subcategory of current assets. Then we're gonna put in the accounts cash being our first account almost all the time. It's gonna be indented because it's in the subcategory of current assets, and then we have our supplies. Also a current asset, meaning it's pretty close to cash, meaning we're gonna use it fairly soon. Therefore, it's gonna be a current asset current assets typically being mawr liquid assets or assets that will be used relatively soon in order to help achieve the goal of the business of that goal, Of course, to generate revenue, then we have the total current assets. Again, we indented it further here, and we're gonna pull those coal total assets to the right hand side. These two columns do not represent debits and credits. There just represent a sub total. No debits and credits will be on the financial statements. We will use debits and credits to build the financial statements, but we're not going to show the external users debits and credits because then we would have to explain debits and credits, so debits and credits are going to be a tool we will use we will not see them here on the balance sheet or any financial statement. Next component, property, plant and equipment. We then have a colon. This is going to be a subcategory as well. We have land that's gonna be our first property, plant and equipment. Notice that property, plant and equipment are gonna be those longer term assets, meaning that land is something that we cannot use very easily In order to pay off current obligations, we are going to use it for a long extended period of time into the future as needed in order to help achieve our goal. That goal being revenue generation. So we have land noticed. The property, plant and equipment are also often called the depreciate. Will assets sometimes pp and e another way to say the property, plant and equipment section and noticed that land, however, is not something that will be depreciated. Meaning land is not generally gonna go down in value. The dirt is the dirt. Unless we're drilling oil out of the dirt or something like that, we don't typically need to reduce the value of the land. The building, however, eyes going to be another property plant and equipment. Something again that we're gonna have for an extended period of time to help generate revenue into the future and achieve that goal of revenue generation. And it is something that will depreciate over time and therefore decline in value. And it is appreciable asset that we're gonna have to write down over time. Then we have the auto. So what? Auto, Here's another thing again. We're gonna use that for an extended period of time, so we're gonna put it under property, plant and equipment, and then we have the total property, plant and equipment. So we are adding up the 40 the 60 the 15 to get 115,000. We're going to end in that again, of course, and pull that sub total out into the right hand side. Once again, the left and right hand sides not representing debits and credits but representing the sub totals lined out here. And then and then the totals in the Outer column. Then we're gonna have total assets, and that's gonna be the some of the outer column. The 1002 and the 115 4 116 200 notes that were never typically going to be bouncing from calculations to multiple columns, meaning this 116 is on Lee. Adding up this outer column, we will never typically go from this column and then add a something in the other column over. And all this number here was added up just from this column were not typically gonna add these three columns and then jumped back over here and add something to the right hand side that will typically always be the case As you go to longer financial statements and other types of financial statements. It will really help to read them if you understand those concepts and will also help to create them. Next, we have liabilities, liabilities, air typically going to be less in number than assets. Most of the time. The liabilities. We will be dealing with the first liabilities typically dealt with in most textbooks and most types of one. Learning this process will be those dealing with vendors accounts payable more short term liabilities. Those do within 30 to 60 days, typically and longer term liabilities notes payable, being an example often being shown as a bank loan. When were first starting out of business, uh, might take out a loan, have a longer term asset or liability that needs to be paid back. These then, of course, will also be represented in terms of dollars dollars that are owed in the future. So we've got 170 in this case. If we were to look at the liability section, then over the balance sheet, we're gonna break out liabilities. That's the subsection than current liabilities. Current liabilities, those liabilities due within a year's time period. So note that that's a That's an arbitrary number. We just picked a year, a year's time, period. But it's important because a years a relatively soon time period. And what we want to know is we want to know, what are those obligations that are being coming up pretty soon, that we're gonna have to pay for pretty soon with cash that we're gonna need to have on hand pretty soon in order to pay for those those liabilities. So these are gonna be current liabilities. Those that are going to be due within a year's time period. Note the colon, representing the fact that we are going to pull these into a subcategory. We then indent the first account that account accounts payable accounts payable is going to be the most common current liability that we will be dealing with. And, um, we're gonna we're gonna put accounts payable and then put the total out there. That's the only one we're gonna have on this Ah, short example of the balance sheet so that we then have the total category total current liabilities, and we've got that 100 of accounts payable in the outer column. Then we're gonna have long term liabilities. In this case, we have long term debt. That's gonna be the bank loan here. The assumption then being that the entire amount do the 70,000 is due after a year's time period, meaning we took out a loan, We're gonna pay it back. We're not paying it back monthly. In this case. Note that we can We can make the loan terms. Whatever the loan terms, maybe most people are familiar with, like a loan for a car payment or alone for a mortgage or something like that. But, ah, business loan or many any type of loan could be formatted in any way possible so or in many different ways, maybe not any way possible, but in many different ways. So it's very possible that we take out alone and we're gonna pay back both interest in principle at later at a later time. Or it's possible that we take out alone and we pay back in just the interest and then pay back the principal at a later time. Also note that it is possible that if we had alone, such as a mortgage where we paid off monthly loan that had a payment schedule similar to that, then that one lone would have a current portion and a long term portion, meaning it would have a portion that is due within a year's time period and a portion that has not dio within a year's time period. In this case, it's all do after the time period will talk more about breaking out those types of problems at a later time. We then have total liabilities and the total liabilities. We're gonna pull out to the outer column and we're just adding up the current liabilities and the long term liabilities to get to that total liabilities. We then have the equity section equity section is gonna be the amount due to the owner, and I'm just gonna give the amount. As of now, that's gonna be 46 100. And I'll show you one way that we can kind of calculate the amount right now. And that's gonna be, of course, taking the assets minus the liabilities giving us that equity number in real life. Of course, as we create the financial statement as we create the balance sheet, we will be getting this number from the transactions that took place from the data that we input into our system from the try a balance that we have been generated from that data that we input into the system most of time when we start out, however, were basically going to give you the numbers and just and just look at a at the numbers that would be related to avoid completed balance sheet and then talk about how we are going to construct that so shortly we will then get into the construction of the transactions. The posting of the transactions, the building of the trial balance, and then the building of the balance sheet First will look at these components of the balance sheet. However, therefore, the balance sheet as of a point in time, December 31st 2000 x one in this case within have the assets that we put together, the current assets and property plant and equipment being the two sub categories of assets . We have the subcategory accounts on the inner column and the totals pulled out to the Outer column. We then have total assets on the bottom line of the assets section. We then have the liabilities where we have the current liabilities and the long term liabilities to have a total liability section. Total liabilities 70,100 within, have the equity section the amount, oh to the owner or the net assets of the business That can be calculated as total assets minus. What is owed to the third party 116,200 minus 70,100 gives us the 46,100. We can also see that we have to have this liabilities 70,000 plus the owner capital 46 100 equal the ND number total liabilities plus equity. Therefore, we are in balance by total assets, equaling a total liabilities plus equity note, that is the accounting equation. Assets equal liabilities plus equity. The balance sheet is the double entry accounting system. The balance sheet is the accounting equation. The components of the accounting equation are represented completely and entirely on the balance sheet. Next, at a later point, we'll talk about how the income statement and the statement of equity then relate to the balance sheet. Given the fact that the balance sheet is the whole double entry accounting system, in that it represents the entire accounting equation. So the question will have later is. Well, if that's the case, if the balance sheet represents the accounting equation, then how does the income statement fit into the picture of the double entry accounting system? How does the statement of equity fit into the picture when it seems like the picture is complete with just the balance sheet? So keep that in mind as we go forward and move to the other statements, including the income statement and the statement of equity objectives. We are now able to describe the balance sheet, list the components over the balance sheet, define and explain each component of the balance sheet 5. 130 Income Statement: Ho in its presentation. We will discuss the income statement objectives at the end of this presentation that we will be able Teoh describe what an income statement is. List the ports of the income statement and explain the reasons for an income statement. First, we'll start off with a question will, which will explain the timing of the income statement or introduces to an explanation of the timing of the income statement. And that is the question of asking somebody. How much do you make when we were, too, If we were to ask somebody how much they make, they would mentally make some type of assumption in order to answer that question. Or they would ask you the question if they chose to answer at all the question. What do you mean? Do you mean per month? Do you mean per year? Do you mean her weak? And this is gonna be it, something that needs to be answered in order to answer the question Now, Oftentimes, if we were to ask somebody how much they make, they would make an assumption. Generally, many times we're going to say, Well, this is how much someone makes a year if we're to ask him and how much they make, they might just say all this is how much we make per year or this. How much we make per month or per paycheck, but some type of assumption and needs to be made in order for this question to be answered . Unlike a balance sheet type question. For example, if we were to ask somebody, how much money do they have? How much cash do they have? We don't need to ask any other question. We don't need to say, What do you mean money per month? Now we just say, As of this point time, this is how much money we have as of now. So that's gonna be the primary difference between something that is an income statement to related account and a balance sheet related account. The income statement being as of a time frame, having a beginning and an end. Those accounts revenue and expense needing at beginning and an end. A timeframe such as a month, year or weak, as opposed to those balance sheet accounts, which are as of a point in time and don't need any beginning ended in. But only one date specifying a point in time. For example, the dates we are going to be looking at might be or will be at this point, December 1st through December 31st. That means that if we have revenue of 10,000 we're talking about revenue that started at zero and what's counted upwards and during the time period of December December 1st through December 31st and is ending then at 10,000 in a similar way to if we were to drive a car and try to count how many miles we drove in a particular timeframe, say a day, then we would say we started at zero and we drove and increased the amount of miles that we drove during that day to 10,000 miles. We need tohave that beginning point and that ending point in order for that type of measurement to make sense. The measurement that we are measuring in terms of revenue is that type of measurement meant meaning it's a measurement over, Ah, time. So this is gonna be the time frame that will be represented on the income statement, and the income statement will represent that timeframe, typically with wording such as for the month ended. So in this case, we're going to say for the month end to note that the balance sheet is only gonna have one date. It's just gonna say in December 31st 2000 x one, in this case, we don't need for the moment month ended. We don't need any other thing for that. To make sense, it could be It doesn't matter if if the rest of the financial statements were for the year over the lifetime or what not in terms of the balance sheet is as if a per point in time. But in terms of the income statement, we're talking about something that started and ending at a point in time. Now note that typically we will not see the starting point. I don't see it December 1st on the income statement. We just see the Indian date and we see some phrase in this case for the month ended. If it was for the year ended, it would say for the year ended, and that phrase will of course indicate the fact that the starting point then is December 1st. And of course, the ending point is defined here as December 31st. When considering the income statement, we can think of the Net income equation, that equation of revenue minus expenses equaling net income. So the components of the income statement will be revenue and expense. We may have some different types of income statements, some different sub categories, depending on the industry and the format of the income statement. However, the general, the general categories will be the same meaning We're gonna have revenue accounts. We might have some sub categories of revenue, and we're gonna have expense accounts. We might have some sub categories of expenses. Right now, we're gonna look at just a simplified income statement looking at those two components, not adding any sub categories at this point, looking at basically what would typically be used for many service companies when we moved Teoh merchandising companies and manufacturing companies, then we often add some sub categories that will sub categorized some of the manger most important expense and income relationships. So in this case, we're going to say we do services in terms of computer services. That's how we're gonna get revenue. That's what we do in in order to generate revenue. Note that most businesses will only gonna have, like, one or two main revenue accounts. Because when we think about specialization in terms of a business, we're going to do what we do. Well, concentrate on that in order to generate revenue resulting in a need for only one or two revenue accounts. And then we're gonna pay for everything else that we need to consume in order to help us to generate that revenue. Those being expenses. So in terms of amount of types of expenses like the phone bill, the auto expense, not the auto itself, but the auto expense wages we might have ah, supplies again. We're gonna expense the supplies as we use the supplies. Although it will be an asset and then expensed. And then we had might have meals and entertainment. We're gonna have all these different types of expenses and we'll have a bunch more expenses typically than we have accounts for revenue, However, with the hope is that the revenue account dollar amounts at up to more than the sum up of all the expense dollar amount accounts. So once again, in total, we will have more expense accounts typically and we almost always we only have often times one revenue main revenue account, but the revenue in dollar amount will be hopefully larger than the expense dollar amount. And therefore we should have net income and remember that net income is going to be part of the equity section. Therefore, we can kind of think of the net income as increasing the equity, increasing the amount that is going to go to the owner or owners or stockholders. In this case, we're talking about an owner. If we have a sole proprietor, it was a partnership. Then, of course, the net income would increase what would then be allocated to the partners. And if we have a corporation, the net income would increase what would then be allocated to the shareholders? Looking at the components of the income statement, we start off with income or revenue, and in this case, we're just going to say we do computer services. So we have a service company, we just do computer services, and that's gonna be the income were going to say in our example that we have 10,000 of computer revenue for our example, and we're just gonna need one line item in order to report that on the income statement note that if we had two or more revenue sources than we may put revenue as a subcategory and then list of those to revenue sources and then put the those amounts in the inner column to be summed up in the outer column. However, if we only have a one revenue source, then we may just put it in to the outer column here because we don't need any subcategory. So keep that in mind, as we as we look in, group things together on the expense side of things. Then we typically will have more than one expense almost always, and therefore we will need a subcategory that, subcategory, being expenses represented by a colon. Then we'll list the expenses, and we will typically indented fixed expenses and pull the amounts into an inner column not representing debits and credits these two columns, but representing the fact that we're gonna have a subcategory in the inter column that will then be summed up in the outer column. So here's wages expense. We have auto expense. We have supplies expense. We have a telephone expense and meals and entertainment. That's gonna be our last expense will typically gonna underline that member again that they are all indented here. Then we're going to sum up that subcategory, meaning we're gonna take the 2000 plus the 600 plus the 400 plus the 300 plus the 200 which will provide us with a 3500. We're going to indent once again total expenses and put that 3500 in this case in the Outer column, not representing again, debits or credits, but representing the subcategory of all the expenses then being summed up in the outer column. Also note that the order of the expenses is often a question as to what order should we put these expenses in now? It doesn't have to be any any particular order, but we do want to put it in an order that will be best useful to the end users. Often times that order will be something like putting the biggest or largest expenses first . In this case, wages, expenses, often one of the bigger expenses for a company and imported in descending order. Many textbooks will actually will include a miscellaneous expense. And even if that's a bigger amount will often put the miscellaneous expense on the bottom because it's kind of like our catch all category that doesn't fit anywhere else. Note that if we sell inventory, then we're clearly going to start generally with cost of goods sold, that being our most important and generally most large in the biggest expense as well. So then we're gonna have our title on the income statement, which will include the name, the income statement, the name of the company. If we're talking about an actual company and it's gonna have the for the month ended, so remember, you're always going to be asked that terminology. You always want to know what that terminology means in that it's going to differ from the balance sheet. The balance sheet is, as of a point time on Lee showing a date. The income statement will be for a timeframe, including a beginning date and unending date. So we're gonna start off on the income statement with revenue revenue. Then, as we said, as we saw in our prior slide, that we have the 10,000 in the outer column from the computer revenue. Then we have a subcategory of the expenses listing all the expenses and then the subcategory being totaled in the outer column. We didn't have within the outer column, just revenue and expenses. What we will then do is subtract that out. So we're going to subtract that out. How do we know it's a subtraction problem? We just know that it's so common. Well, that's the idea. Typically, if we're going to subtract something out, we won't often put brackets around this attraction problem. So I'm not gonna put a negative 3500 or a minus sign to indicate that we're subtracting it . Often times in many other areas will actually put in the text that we're gonna say less, for example, less total expenses. However, the income statement. Because it's such a common statement, it's assumed to be known that we're going to subtract revenue minus expenses. Also note that we don't typically jump around from column to column something that's obvious here. But more important, when we get to more complex financial statements, meaning when we calculate this 6500 we're not. We're only taking this outer calling this 10,000 minus 2 3005 We don't typically go from this 3005 for example, and jump into this column and then jump back to this column. We will typically only add or subtract or perform some kind of mathematical operation on one column at a time, this time being the Outer column. So the bottom line number, then of the income statement, is, of course, net income. Now, if the revenue was less than the expenses, then clearly we would have a net loss and this would be, ah, you know, we'd have a loss here and we'd be losing money for the time period. Remember that this bottom line number is going to be an increase in the equity section when we consider the income statement. It is a port of the equity section in that revenue is increasing. Equity expenses are decreasing. Equity equity will be going in the same direction as the net income is going. So whenever revenue goes up, equity goes up. Whenever expenses go up, equity goes down. When net income goes up, revenue then then equity goes up. When net income goes down, then equity goes down. Recall once again that these are going to be the timing statements, meaning this net income represents the net value of what we have earned over a certain period of time in this case and this being the month of December December 1st through December 31st. This is the bottom line number, of course, of the income statement. This is how we did over that time period. And it only makes sense if we have those two dates if we have to beginning date and the ending date objectives, we are now able to describe what an income statement is. List the parts of the income statement and explain reasons for an income statement. 6. 131 Statement of Owner's Equity: hello. In this presentation, we will describe the statement of equity objectives we will be able to at the end of this, described the statement of Owners Equity, list the components of the statement of Owners Equity and explain the reasons for a statement of owners equity. When we consider the statement of Owners Equity, we are like the income statement. And unlike of the balance sheet, talking about a timeframe, meaning we have a beginning and end point. Unlike the income statement, the beginning point is not zero meaning we are going to start at the beginning point of the net value or the equity section of the prior balance. So what we're looking at is where was the company on an equity basis? Where was the company in terms of net assets in terms of assets minus liabilities as of the beginning of the time period? So in this case, December 31st and then what happened in terms of the activity during that time period? And then where did we leave off at the end of the time period? So note that we have two distinct points here in time. That we are looking into one is a distinct point where we're showing the value of the company in terms of book value basis, assets minus liabilities at the beginning of the time period and the value of the company on a book bases as of the end of the time period. And, of course, we're going to reconcile the difference between those two by showing the activity during this time period. So that is going to be done with a statement of owners Equity. And we're gonna have the same kind of freezing we would have on the income statement. So of course, we're gonna have a for the month ended. We cannot just have the date of December 31st 2000 x one in this case, as we would have on the balance sheet we need for the month ended. We need that beginning timeframe and that Indian timeframe that beginning point in time and that ending point in time note that in this case the equity actually went down. So we had beginning equity of 54 600 we ended at off 46 100. So we need to basically see what happened in the interim in terms of ah decreasing the total equity. So it took a look at the calculation. That calculation will be beginning equity where we started at last year's ending equity. Then we're gonna have investments. So any investments from the owner will increase this calculation if we moved it. Corporations, Of course, we're talking about the selling off stock. In essence, that calculations gonna be much the same when we look at different types of entities in terms of a sole proprietor. Ah, partnership. We're gonna have just multiple partners. But the essence of the calculations in terms of equity as a total will be the same. And the names of a corporation in terms of how does a known er invest in the company when we are a corporation and how to draws happen in terms of dividends in a corporation will be a difference in terms of names. Then we're gonna have an increase in net income, so net income is going to increase the activity. That's gonna be the main factor typically, and then we're gonna In this case, we had service income, which is gonna be services minus the expenses, meaning we had revenue from service revenue minus the expenses this entire amount being reflected on the income statement. So we're not actually going to show the detail here of the revenue minus expenses that is shown on the income statement. What we will show as a reconcile ing item of the beginning balance to the ending balance is that net income that then can be expanded and explored more when going to an income statement. Then we're going to decrease this amount by draws draws representing the amount of that the owner has drawn out of the company taken out for personal use in a corporation. It would be similar to dividends, dividends being the amount of money being distributed to the owners, to the shareholders for their personal use, and that would then give us our Indian balance. So then we have our Indian balance, and we can think of it as what is owed or contributed to the owner, meaning kind of the book value of the company. You can think of it as if we were to sell all the assets and get the cash and then pay off all the liabilities that would then be what would be left over if we had sold all the assets for exactly what the asset's value were four and paid off all the liabilities for the value that they were. That would be the ending book value. So our calculation, once again, is always gonna be for the equity section going to start off a beginning equity like it's like the income statement. But we're not starting at zero. We're starting at the Indian point of where we were last time last time sending equity this times beginning equity, and then we're going to reconcile the activity that happened in order to get us to the ending point, the ending equity of the number that then is going to be reported on the balance sheet. Therefore, we're gonna take beginning of equity. We're gonna increase the amount that the owner put in Teoh their business. That's gonna increase the amount of equity increased the amount that's owed back to the owner. We're gonna increase it by net income revenue minus expenses. The earnings of the company. This should be the biggest factor typically, because this is what happened during a particular time period, usually a month or a year. Then we're going to subtract out any draws that happened in terms of money going out to the owner if the money went out to the owner than the total equity that is representing the amount due to the owner or assets minus liabilities has then decreased. That will then give us our Indian equity balance. So if we look at a statement of equity, every kind of simple statement of equity would start with the beginning balance. In this case, note the dates were have for the month ended December 31st. That, of course, means that the month is beginning at December 1st and ending at December 31st we're gonna take that last year's Indian equity. That's gonna be this number, starting with the owner capital account and taking the 54 600 gonna be last year's equity. Where would we get that number? You might ask. We could look at the last year or in this case, we have the last year, but this is for a month. So this would be the last month in our case. It would be November. We could be reporting, of course, a statement of equity for a year's time period or a month's time period. This will be for a month's time period so we could go back and look at November and say, Hey, where did November end? And that should be our beginning point. But typically we will look at our trial balance and the tribe balance. Oftentimes, the amount reported in the capital count is the beginning capital, and it's either just the beginning capital or it will include investments. And we'll have to go to the to the General Ledger and see if there's any activity during the time period. If there's no activity during the time period, then the amount reported on the trial balance will be basically the beginning balance. Even though the tribe bounced typically does not report the date on the trap out. So just keep that in mind. When you're putting these things together, you typically will be putting them together from a trial balanced, taking this number directly from the trial balance, even though there's no date next to it on the trial bounce and adding, you know, December 1st to it, then in this case, we're going to increase it by net income, so net income being a number that we are going to get from the income statement. This number here should be the bottom line last number on the income statement, and then we're going to decrease it by draws. So no tear that the draws are actually much larger than net income. So although net income is increasing, the 6500 net income minus the 15,000 draws actually results in that decrease in owner's equity. So we have a decrease in owner's equity because more was drawn out of the business, then was earned in net income for this time period, meaning earnings were 6500. The owner drew out for personal use 15,000. We might think that that would be a very big problem, and if it was the first year of operations, it could be a very big problem. But in this case, note that we had retained a nurse prior to this of 54,600. So even though we we pulled out a lot more 15,000 then earned 6500 there's still a lot of value within the company, meaning we still have the 54,600 beginning balance minus the net here of 8500 leaving us with a net balance of 46,100. So there's still value in the company here, even though more was pulled out then was earned in this current month. This 46,100 would then be what is reported on the balance sheet. Also note that this does represent this. 46,100 represents the book value of the company and you that would lead us to think that the owner could at any time pull out 46,100. But note that that's not necessarily the case. Typically not because the organization does not have the business does not have $46,100 in cash. What they do have is 46,100 of net assets, meaning we have total assets measured in dollars, including cash, but also including equipment and other things that are non cash minus liabilities of 46,100 . So note that although we have this much that we can say the owner has claimed to the owner would not to be able Teoh take that much money out of the organization unless unless they had basically liquidated the organization in terms of selling the assets, receiving the cash and then paying off the liability. So just keep in mind that this is the bottom line number, the kind of the the main number on the balance sheet and on the statement of equity representing the where a company stands as of a point in time. But that does not mean that the owner can walk away with that at any given point in time knowing that that, of course, is including assets minus liabilities, all assets, not just not just the cash assets objectives. We are now able to describe this statement of owners equity, list the components of the Statement of Owners Equity and explain the reasons for a statement of owners equity. 7. 132 Balance Sheet & Income Statement Relationship: hello. In this presentation, we will discuss the balance sheets and income statement relationship objectives. At the end of this, we will be able to define of the balance sheet and list its parts, define the income statement and list its parts and explain how the income statement relates to the balance sheet. When considering these concepts in terms off the balancing concept of the balance sheet in particular, we want to keep in mind the idea of the double entry accounting system, the double entry accounting system being the main system, the main internal control that we are always keeping in mind that internal control helping us to safeguard against making errors. That's our first line of defense against making errors is the double entry accounting system, which can be expressed in a few different ways. One. The accounting equation to in terms of the balance sheet being in balance and three in terms of total debits and credits. As we look at the financial statement, we are in essence, looking at that double entry accounting system in the format of the accounting equation, the accounting equation of assets, equal liabilities plus equity. Remember that this equity section could be named differently, depending on the type of entity we are talking about efforts to the sole proprietor, for example, we will have owner's Equity. If it is a partnership, we will then have a two partners at least or more, and we will have partners Equity. And if we have a corporation, then we will have shareholders as the owners, and therefore we will have shareholders equity. But the equity section as a whole in total will remain much the same in that it represents the book value or the value of the company on a book basis owed to the owners. Whoever those owners may be, whether it be an individual owner, sole proprietor, partners, partnership or shareholders in a corporation, the accounting equation will be assets equal liabilities, plus equity assets representing what is owned by the company. Not all the assets, of course, will be. Dollars will have a bunch of different type of asset accounts, but we will measure all those asset accounts in terms of total dollars, so we're going to say it's $70,000 worth of assets, although of course is not all cash is equal to who that $78,000 worth of stuff is owed to either 1/3 party vendor 10,000 in this case being owed to 1/3 party vendor. The rest the 70,000 minus the 10 68,000 being owed to the owner the own. So that remains that if we rewrite this accounting equation in another very useful format would be subtracting at the liabilities from both side to leave us with assets minus liabilities equals equity. If we look at this, it emphasizes the fact that the equity section represents the book value of the company. It represents total assets measured in terms of dollars, minus total liabilities measured in terms and dollars. This is the Net assets, another word for equity. The book value of the company can be thought that if we sold all the assets, we get $78,000. If we sold everything at the cost on the books, which is unlikely, but in theory that would be the case, and then we paid off the vendors. Then we would have in any other people that we owe in terms of third party liabilities, Then the rest would be what would be owed to the company this format up here, the accounting equation. That is what we will use in financial accountant. You want to keep this in mind because it really gives us that balance in concept of this is what the company has as a separately as a separate entity, not necessarily a separate legal entity as a corporation would be. But any type of business whether it be a sole proprietor, partnership or corporation, will be thought of from an accounting standpoint as a separate legal entity and therefore that separate legal entity would have this much assets. Oh, all those assets to someone either 1/3 party vendor or the owner from a financial statement standpoint and from like a finance standpoint, if you talk to someone like a banker, someone that's in finance, they will often consider this format of the accounting equation as the main one they will use because it really does emphasize the value of the company, meaning the assets minus liabilities really emphasizes that bottom line number of the 68,000. Now, the reason the accounting equation is so important when we're taking a look at the balance sheet and the income statement is of course, that the balance sheet is representative of the accounting equation or the accounting equation is represented within the balance sheet, the major components of the balance sheet being assets, then liabilities and equity. So, therefore, how do we know we are in balance? Win looking at a balance sheet? Because the assets equal liabilities plus equity, that is the accounting equation. And therefore, when we say the balance sheet is in balance, we are, in essence saying that the accounting equation is also in balance. It's the same thing. One key components to the balance sheet is it's going to be presented as of a point in time . Therefore, we're only gonna have one date on the balance sheet. It's presented as of that point time. We don't need a range. We don't need a beginning and an end. We just need one date and often times. It's easier to look at the most common balance sheet account when considering that concept , a concept that seems simple. But it's not as simple as it may seem. Therefore, it's it's no. It's useful to look at the main account of cash and think about the idea of if we were to ask somebody how much cash they have. Could they tell us how much cash they have as of this point in time, when they check their pockets and tell us they could, as opposed to If we were to ask somebody how much they earn, they would then have to make an assumption they would have to say. What do you mean? Do you mean a month? Do you mean a year? Do you mean a paycheck? They would need some type of time frame. So therefore, when we look at the main accounts, that can help us to determine what exactly is meant by just one date versus a date range. We look at cash, we can report cash. As of one date, we cannot report revenue as of one day. We can't report revenue as of December 31st. That has no meaning. You could say it's revenue for the day. That happened to be December 31st. But that's not a point in time. You can't say as of the end, this point time, the end of December 31st in terms of revenue. What what that would be you can say as of December 31st this exact point in time, you know, 12 0 clock Midnight. This is how much cash we have. So that's gonna be the major difference. When we consider the types of accounts in the balance sheet, we have assets. And when looking at what assets are what liabilities are and what equity is, it's important to keep the end goal in mind. And that is to generate revenue. So revenue is the goal of the business. Now I know that many businesses will have different goals in terms of their mission statement, but revenues the major major major meant used in order to see whether or not those goals are being achieved. So we want to consider, from a financial standpoint, revenue being the major objective. Therefore, when considering the definition of assets were really going to say assets air there, we have assets in order to help us generate revenue in the future. So these assets, all these assets are in essence, ah, kind of investment. You can think of it as a kind of investment. Why do we have the assets being owned by the company? Because they're going to be consumed in the future? At some point time in order to help us generate revenue, which is the goal of the company. It's often confused in that people think that the goal of the company is to is to just compile cash, to just get mountains of cash and have cash be as high as possible for a couple different reasons. One is that I think cash is often confused with revenue as if they're the same thing. But they're going to be different things. And the other is that cash is so is such a liquid assets. It's a highly value asset, and therefore it's often thought that just compiling cash is the main goal. But that's not really the case. Revenue generation is going to be the main goal, and we can consider what would happen if we had a lot of cash. Why is? And it's the main goal to just compile cash? Note that if cash is really high, if we have a lot of cash than the stuff we can consider, if were a corporation, the stockholders would then be asking, What are you going to do with that cash? Why do you have all this cash if we're just holding on to the cash. It's not helping us generate revenue. The company should have a plan, then to invest the cash at some point in the future in order to achieve the goal of revenue generation. If the company does not have a plan to invest that cash in order to achieve the goal of revenue generation, then the company should really give that cash to the owner so that the owner can use it for their personal resource is toe to achieve their personal goals, whatever those personal goals may be. Therefore, it should be distributed from a sole proprietor in the term of draws to the owner or partnership in the term of draws or in a corporation in the form of dividends. So that's gonna be the essence of cash. Then we have accounts receivable supplies, other common current assets, and those are gonna be things that again we are going to use or consume sometime in the future. In order to help generate revenue accounts receivable being what is owed to the company from customers, supplies being those types of assets that we expect to use soon through the consumption use in order to help generate revenue in the future. Also note that assets are typically going to be broken out between current assets and property, plant and equipment. Those current assets are going to be things that are gonna be more liquid, meaning assets that are kind of closer to cash and things that we're gonna use relatively soon. So we expect to use cash relatively soon. We expect accounts receivable to be converted to cash relatively soon. We expect for supplies to be consumed relatively soon. Note the format as well of the financial statement. Typically we have the assets main category. We have a subcategory represented by the name, then a colon, then the indentation. So it's important to note that type of formatting because it will really help when you look at longer statements, more complex balance sheets, other times of financial statements. If you understand how the formatting is gonna work, we can then see that the numbers have been pulled into the inside column and then are summed up in the Outer column. In terms of the sub total of total current assets. We then have property, plant and equipment, the next sub total Ah colon and we're then gonna in dent the two accounts there, Those being land and equipment 40,000 and 20,000 respectively. The reason these air going to be broken out separately is because these are going to be more long term assets. These are gonna be assets that we're not going to consume in the near future, that they're gonna be consumed for a long period of time to help us generate revenue for a long period of time into the future. We're then gonna add those up to the subcategory in the outer column. Total property, plant and equipment 60,000. Next, we will just add up those outer combs. We're gonna add up the total current assets and the total property, plant and equipment, and that will give us the total assets total assets in this case being 78,000. We didn't have the liabilities components. Those being something that's gonna be owed to 1/3 party liabilities are gonna be something that we owe due to a past transaction. So something happened in the past and that resulted in us owing something in the future, we will have a similar break out in terms of current liabilities and long term liabilities . this balance sheet on Lee has current liabilities. When that is the case, then we're still going to write the subcategory to show our reader it's It's a current liability, subcategory with the colon. We're then gonna indent the subcategory, bring those into the inner column and then and then total it in the outer column. Note that the total, however, doesn't say total current assets, but says Total, I mean, doesn't say total current liabilities. It says total liabilities. And that's telling the reader they're all current liability. So there, in the current liability section and because there are no long term liabilities, we're just going to credit total liabilities here and show our reader that they are both current and the total liabilities current liabilities mean that represents the fact that those liabilities will be due within a year's time period. So they're gonna be do relatively soon within a year's time period. Why is that important? Because we want to be able to make sure that we have current assets that are available in order to pay off those current liabilities. So it's important for us to be able to compare and contrast the current liabilities and the current assets and assess whether or not we are able to pay off those current obligations that will be soon to need paying off. We then have the owner's equity section again. This is a sole proprietor. Would be owners equity for the partnership. It would be Partnerships Equity, and if it was a corporation, it would be shareholders equity. But in total, the equity section is going to be much the same. We might have some different type of sub categories within the equity section, but the total equity section represents that book value of the company. You can think of the equity section as actually kind of like the bottom line, the main number of the balance sheet. If you want to pick one number to represent the balance sheet, where does somebody stand at a point in time? It's really the Equity section number, because that represents assets minus liabilities that represents that book value of the company that represents. If we sold the company and sold all of the assets and got the cash of 78,000 and then paid off the 10,000 liabilities, that represents how much cash would go to the owners, whoever those owners, maybe a Weatherby, sole proprietor or partners or shareholders. Then we can see that the liabilities plus the owner's capital, the owner's equity will be total liabilities and Owner's Equity. Therefore, the accounting equation is represented as assets equaling a total liabilities plus equity. Note that some balances, maybe in a vertical format here as showing here or some balance sheets may pull this information and represent that on the right hand side. So we have assets on the left hand side and liabilities and equity on the right hand side. Any format that will be used, however, will represent the accounting equation within the balance sheet as assets equaling liabilities plus equity. Next, we have the income statement the income statement being represented as of a time frame in this case for the month ended December 30 1st note that the income statement You do need to have a beginning and an ending date. Therefore, we don't just represent as we did on the balance sheet one point in time. We don't just say income statement. December 31st We say income statement for the month ended in this case, or the year ended. If it were representing a full year. The reason we need to do that is we can think about that in the terms of our questions as to the main income statement, accounts of revenue. If we were to say that someone earns $100,000 and ask the question, Is that a lot of money? It's probably the case that someone would say That's pretty good amount of money making the assumption that the 100,000 is represented as 100,000 earned over a year's time period. But note that we have to make that assumption. We got to make the assumption, What are we talking about? We're talking about 100,000 year, 100,000 week, 100,000 month, ah, 100,002 week pay period, and we need to answer that question before we can determine whether or not 100,000 is a lot of money. The idea of the income statement, then, is a timing statement. It's an action statement. Unlike the balance sheet, which is as of a point in time, you can think of it kind of like a balance sheet in terms of ah language for terminology. The balance sheets kind of like a now, and it's just it's just is what it is. It's the name of something. The income statement. It's more like a verb in that kind of context and that the income statement is action. You know, the revenue is something that's happening over a time period. Revenue represents action in this case over the month. How much has been generated or earned over the month, where, as the balance sheet just represents, what is their cash? For example, the main balance the account is just is what it is. As of the point in time, it's not like a dynamic thing. This is kind of something you can imagine moving from from January to December, up from 0 to 100,000 we have revenue gonna be our main generating revenue account. Note that revenue typically only goes up, and that means that we are going to get revenue from customers they pay us. We don't generally pay the customers. Now we may have a problem or something that it would happen, in which case we would incur an expense and have to pay the customers for some expense. That happened but normally the revenue is only going to go in one direction. It's going to go up. Then we have the expenses here. Those are things that are we corn to consume in order to help us to generate revenue within the same time period. So our examples in this case, they're going to be wages, expense, utility's expense. We are typically gonna have a lot of different types of expenses as well. We can imagine all the things that we are going to pay out are going to be the types of expenses and note that there's typically gonna b'more expenses than revenue type accounts. Reason for that is because of specialization, meaning When we're thinking about revenue generation, what is the company going to do? What is the business going to do in order to generate revenue? They are going to focus in on those things. They do well and that's the things that they are going to dio. Typically, those things are gonna be one or two things when considering the things that we need to spend money on in order to help us and generate revenue, we're going to spend money on everything else. Everything else that we need to help us generate. That's we're going to spend money on. Therefore, they're gonna b'more expense type accounts than there will. The revenue type accounts, however, of the hope is that the expense type accounts will be less in dollar amount, then the revenue type accounts. And therefore, in this format, we didn't need a subcategory for revenue note. We don't have ah subcategory revenue and then revenue because there's only one account. Therefore, we're just gonna put revenue on the books on the on the statement and represent the number on the right hand side and not have any subcategory pulled into the left hand side. The expenses then will have expenses. Colon. And then we're going to sub categorize those expenses and dent those expenses. Pull the numbers into the inner column, and then we're gonna pull the total out into the outer column. The 50 plus the 10 being the 60,000 of expenses. Bottom line on the income statement will, of course, be net income represented, calculated as revenue minus expenses. So 100,000 revenue minus the 60,000 expenses gives us in this case that net income of 40,000 note that when we look at the income statement, we don't see anything representing the accounting equation on the income statement meaning when we were looking at the balance sheet, we said the balance sheet was everything in terms of the accounting equation in terms of a double entry accounting system in that the balance sheet has all components of the accounting equation within the balance sheet of assets equaling liabilities plus equity. When considering the income statement, we don't see directly assets, liabilities or equity. So the question we need to understand we need to be able to explain, then, is how is the income statement related to the double entry accounting system if we don't see assets, liabilities or equity within the income statement, and how is it just gonna be attacked on? Is it another statement that's just kind of tacked on? Is Mawr added information to the balance sheet and the devil entry accounting system? Or is the income statement somehow part of both the accounting equation that balance sheet somehow and the double entry accounting system? That's the question we want to be able to understand. The answer is that we're going to say that the income statement is part of an essence. The equity section, meaning Remember that this equity section represents the book that or the bottom line. If you want one number to represent the balance sheet, it is the equity here. And that's because it represents the book value in essence, the value of the company. If we were to liquidate the company, we believe we would have at this point in time 68,000 assets minus liabilities of that 68,000. So if we were going to say What is the value of the company right now? The closest indication that we have in terms of the balance sheet is that 68,000. That's where the balance sheet really stands at this point time. That's what the value of the company is, as reported by the balance sheet as of December 31st. Now, if we want to know the history on how we got to that point in time, that just tells us where we stand. Typically, if we are making decisions on whether or not to invest in this company or whether or not to give a loan to this company, we're want to know where the company stands, and we also want to know how they have been performing over a certain time period, the performance being something that will given indication as to how they will perform in the future. Therefore, that's going to be the income statement, the income statement. It's gonna be telling the story. How did we get from Ah, you know, to this number going back certain point in time in history. In this case, one month, we're going to say, How do we get to that 68,000? Well, let's take a look at last month. Let's go back with Tell the story of last month. Last month we earned 100,000 of revenue minus the 60,000 of expenses, giving us net income of 40,000. That is what contributed import to the 68,000 equity section. Now, if we want to know more of the story, we would have to go back to month. We'd have to go back a year and tell more of the story. And of course we might have a corporation that's been in business for a long period of time , and we could go back all the way back in history to tell the full story. However, if we are making decisions from this point forward, we're really concerned. Normally with the last few years of performance, we're trying to see if a trend and trying to see whether or not that trend will continue into the future. So generally we're gonna say This is where we stand and we want to look back a month or a year or a few years to see what has happened. In order to contribute to this point in time that we are now standing, we are now able to to find the balance sheet and list its parts, define the income statement and list its parts and explain how the income statement relates to the balance sheet. 8. 134 Revenue Recognition Principle: hello. In this presentation, we will be discussing the revenue recognition principle. First idea will be that revenue is not the same thing as cash objectives. At the end of this presentation, we will be able Teoh, define the revenue recognition principle, explain the relevance of the revenue recognition that principle and provide examples of the revenue recognition principle the revenue recognition principal has to do with when we should record revenue when considering wind revenue should be recorded. It's often thought that we should record revenue when cash is received. Although revenue may be recorded when cash is received, it should not be the driving factor of the recording of revenue and other words. Revenue is not the same thing as cash. Revenue is not equivalent to cash. Because cash is such in the normal form of payment is the most common form of payment. It is often assumed that cash is the same thing as revenue. It's also the case that in many transactions we will receive cash at the same point in time that revenue will be received. But the driving factor for when revenue should be recognized is when the work is done, so the concept of the revenue recognition principle will be. We want to recognize revenue win work is done. This kind of leads to the idea of what is revenue versus cash and revenue represents the earning of revenue. We have to measure that earnings in terms of dollars. We're going to say we earned so many dollars worth of revenue, even though possibly we have not yet received the cash. The revenue will be measured in terms of units of dollars. However, the revenue is not gonna be recognized unnecessarily. At the point in time cash is received, it might be recognised before or after, depending on the circumstances. So our first example is on owner. We're gonna do computer services. We just do services we're not selling the computer were just doing computer services for the customer over here that being our normal service transaction. If cash is received at that same point in time, then it does just so happen that we will record revenue at the same time that cash is received. If we do the work and we received the cash at the same point time, however, it's important note that under a revenue recognition principle, the driving factor of recording revenue at this point in time is not because we received cash, but because it's the point time we did the work. So many types of industries are going to be industries in which we receive payment at the same point in time work is done. Merchandising payments often are that way restaurants are that way. We're gonna get received payment at the point time the work is done. And therefore, it might be thought then that cash is the driving factor or that cash and revenue are the same thing. They're not the same thing. They just so happen to be happening at the same point time. We could be using an accrual system and still basically being recognizing revenue at the same point in time. Cash is received just by the nature of the business in this case, the nature being one where we always receive cash at the same point in time that we do the work. But the driving factor under the cruel principle will be the work done, not the cash received as to when revenue should be recognized. Another type of transaction is we might be the same service company, but we might take the computer back to our shop, do the do the work and then build a client at a later time. Once the work is done, we might invoiced a client and expect to receive money in the mail again. This is really the type of AH format of payment, and win work is done is not so much up to the individual, just in terms of running the business as it is to the type of industry that they are in. If we're in a bookkeeping, if we do tax returns, if we all know Law Firm, it's often the case that we're going to do the work and then build a client because we have to add a par hours and see how long it took and see how much the bill actually is before we can build a client. So the nature of the work then requires that the word be done before we build a client and then the client be build. Then we receive payment in the future. In those types of circumstances, we're still going to record the revenue at the point in time the work is done, although in this case no cash has been received. So that's gonna be the difference. Will see the difference when we have types of transactions where the work has been completed and the cash being received happens at some other point in time. In this case, the cash being received at some point in the future, we hope to receive cash in the mail for the work we have done and then build the client four. So we're gonna record then the revenue at the point time the work was done, and we're also gonna have this basically an IOU. That's what the customer is giving to the owner of the business owner. In this case on IOU that I o. U is something to the owner. It's gonna be equivalent Teoh accounts receivable. We're gonna put it into account receivable on account tracking the i. O. U's for work that has been done but has not yet been received. The accounts receivable then is going to be hopefully collectible in some normal time period. Hopefully 30 to 30 to 60 days, possibly we expect those accounts receivables to be converted to cash. Because of this, the accounts receivables do have value. They're not the same as cash so that the IOU here is not equivalent to cash in that we would much rather have the cash. But the accounts receivable is still an asset because it represents what will be owed to the company. And if we think about that, sometimes people think that the account recording accounts receivable as an asset is not a good thing or could cause problems because we have not yet received the cash, and therefore we're recording something before it has been received, because cash is really the solid asset we're looking for at the end of the day. But it's helpful to think of it. If you were to give your financial statements to a bank, asking for a loan or or some other transaction or investments. The accounts receivable is an important thing to be reporting on the financial statements. If you were the bank giving it alone and we're talking about a business that has a lot in accounts receivable, accounts receivable that we believe are very reliable in terms of the customers being reliable and dependable in the format of payment based on past history, that would be something very relevant, Teoh, the financial statements. It is it is an asset, although there are, of course, times when accounts receivable may not be receivable. We're gonna talk about how to deal with that. How should we report that at a later time, but for now, just recognized that we're going to recognize the accounts receivable added as an asset at the point in time that we make the sale at the point time that the work have been completed . Therefore, if we take a look at our transaction, remember that the work has been done. We have done the work we invoice to the client. That's usually going to be the documentation that will tell the client and tell us Tell us to record this transaction. That work has been done and we expect to receive payment in the mail, and we're gonna record the related accounts receivable on the books that we got the revenues being recorded. The accounts receivable asset is being recorded on the books. No cash has yet been received. Then, of course, at a later point dime, we expect to receive cash, probably in the form of a check in the mail from the customer. It's important to note that at this point in time, we will not see we will not record revenue. Even though cash has been received at this point time because it has already been recorded , it's been recorded in the past. What we will do is decrease the receivable account. We're going to say Okay, we have this account saying that that this customer owed us money. They have now paid us that money. We're going to reduce this asset that we put on the books at the time that we earned the revenue and we're gonna increase the better asset. The cash that we have now received no effect on income, no effect on net income, no effect on the income statement at this point in time, even though cash is received, it already having been recorded in the past at the point time that the work was done, we are now able to define the revenue recognition principle, explain the relevance over the revenue recognition principle and provide examples of the revenue recognition principle 9. 135 Cash Method vs Accrual Method: hello. In this presentation, we will be discussing a cash method versus and a cruel method objectives. We will be able to at the end of this define and explain a cash method, define and explain an accrual method and explain the difference between the cash and accrual methods. When considering the cash method and the accrual method, they're not necessarily completely different or diametrically opposed. But when presented, they are often presented in this format, partially because in order to explain one, it's often useful to know the other. It's it's useful to be able to compare the differences between the two methods, but it's also useful to understand where they are similar and where the two methods have similarities and things in common, such as win with the two methods result in revenue and expense recognition. That would happen at the same point in time and look at why that would be the case when considering a cash versus a cool methods. We're talking about two timing differences when considering timing, differences were so we're talking about the timing financial statement, which is the income statement. So remember that the balance sheet represents the point in time where the company stands as of a point in time, and the income statement is going to represent the time frame meaning. How did the company do overtime? The cash method versus the accrual method has completely to do with the timing statements, meaning When should we recognize revenue? At what point in time should revenue be recognized and when should expenses be recognized? At what point in time should expenses be recognized? We can think about this kind of idea in terms of what should be the factor that we are looking for for us to know when to recognize revenue when considering that or when asked that question most the time. Many of us would say that revenue should be recognized when cash is received, but that's not necessarily the case. And because revenue and cash are often happening at the same point in time as well is because of the fact that cash is the most common form of payment. We tend to equivalent the two things, meaning that we tend to think that revenue is cash and that's not the same thing. Cash is not revenue revenue is not cash. Revenue represents what has been earned cash represents one form of payment. Couple ways to think about that we could. We could recognize the fact that we can get paid in some other way while still earning revenue. If we did work, earn revenue and received a barter system, some other sort form of compensation in terms of services or a car or something like that, health insurance benefits those are other forms of payment that we can receive while earning revenue. Note that when we record revenue, just like when we record anything on the financial statements, whether they be assets, liabilities, equity, income or expense, we're gonna measure those things in terms of dollars dollars being like a measuring tool. But that doesn't mean that the revenue equals the dollars. The dollars represent how we're measuring how much revenue has been earned. A unit, a unit of measured wind considering In that case, it's also true that expenses are not equivalent to cash. This is not as common to be seen that expenses are equivalent to cash or for people to think that expenses are equivalent to cash as they think revenue as we tend to think revenue is equivalent to cash, but it does happen that we start to equivocate. What expenses are and cash are meaning. If we were to ask the question, when should we recognize the expense? We often think when cash is paid. For example, when she we recognize the phone bill of the phone expense? How about when cash is paid? And often times those two things happened at the same point in time. But cast really shouldn't be the driving factor. Cash is going to be the indication of when the expense happened. So then you What's the question then is when should we be recognizing revenue? When should be we be recognizing and expense? And the answer is when they have been incurred. So when they have been incurred when we earned the revenue meaning when the job has been done and when we incurred the expense meaning when we consumed an asset or incurred a liability in order to help us to generate revenue in the same time period. The reason those two things are a little bit different than expenses sounding a bit more complicated is that our goal, of course, in the business is revenue generation. So when we think about revenue, when when do we recognize revenue when we do what the business does in order to generate revenue? That's what the business is in business. To dio, the expenses are things that we had to expend in order to achieve the goal. So when are we going to recognize an expense? When we had consumed something an asset, we had to use it up or incur a liability. We're gonna use a resource in the future that we had to consume at this point in time in order to help us achieve the goal of revenue generation. We could think about this in terms of a couple transactions, and it's useful to think of a transaction and know that the transaction has two sides to it . Meaning we've got owner A here who is, is going to sell pizza and receive cash, and we could think about the second transaction. Being the purchase of the pizza is also an owner that's purchasing the pizza, possibly for a meeting or something like that. In pain, cash, every transaction, every every revenue to one side is gonna be an expense to somebody else. All expenses to one person or business is revenue to another person, person or business. It's often useful to think about these concepts in relation to both sides of the transaction. If we think about the cash versus a cruel method, we can think of this transaction happening for person A, the company that is selling the pizza and receiving the cash. Under a cash method, we would have cash increasing because cash has been received and we would have income increasing because cash has been received. And that means that we're recognizing revenue or income at the point in time. Cash is received cash being an indication of when the revenue should be recognized, meaning were using cash as kind of the flag to tell us win revenue should be recognized because the work had been earned. So because cash is being received, close enough were saying cash method cash is being received close enough to the point in time that we do the work, that we're just gonna use this as the triggering factor to record revenue on the a cruel sign on the accrual side, we would have the same transaction. We would still the increase in cash because we had received cash and we would still be increasing revenue. However, the reason have been different here. We have a different reason for why income is going up. We have the exact same transaction, the exact same two accounts happening under both Akash Method and in a cruel method. So the two methods resulting in the same transaction but for different reasons the cash method. We're recording the revenue because we received cash and that is the triggering factor. Under the accrual method. We're recording revenue because we did the work. So under the accrual method, the fact that we delivered the pizza in this case of that is the thing that is driving us to record revenue under the accrual method. If we're the owner, be here and we're the person person purchasing the pizza and paying cash, then under a cash method, cash would go down, cash is being paid and expenses would go up. So now we're gonna increase the expenses and decrease the cash under a cash method. Under an accrual method, we would still be decreasing cash because cash is still going down and we would still be increasing the expense. But for different reasons, remember that the cashier is an indication in this case of when the expense has been incurred, meaning we have a cash system saying we are going to recognize an expense when cash is leaving the company, not necessarily because cash is equivalent to an expense, but because it's usually close enough in time for us. Teoh use that method. It's an easy method for us to use. It's kind of a shortcut method for us to use. If we want to be more accurate, we would use the accrual method and say that this cash is not the thing that's gonna trigger or drive the transaction. But it's gonna be the receipt of the service in this case to receipt. The consumption of the pizza in this case would be the expense for meals and entertainment that drives the transaction. So this case is the case where both methods results in the same transaction. And when we see a method like this, when we see a company that sells pizza, for example, if they were to receive cash on Lee at the point of sale, they may consider themselves on on a cash method simply because they have a policy of Onley recording services for the receipt of cash, but note that that's not necessarily what a cash method is. That's just a policy that they that the owner has made. It may be a good policy to have has nothing to do with the cash versus a cruel method. We could still be in a cruel method and use that policy this this method right here, even though it uses the same transaction could be on and a cruel or cash method. It just so happens that the format of the transactions result in the same outcome the same journal entries under the revenue recognition principles. If we look at a different transaction, Biltmore interest in transaction In terms of analyzing the differences between a cash method, the cruel method we're gonna take and and differentiate win cash is received two when the service is done. In this case, we have a law firm doing services, and they have not yet done the services they're going. They're going to get a retainer or a deposit. So they're gonna get money before they do the work in order to ensure that payment will be received So money is being received by the law firm and work will then be done in the future for company be. Of course, money is being paid and work has not yet been received. It will be received in the future. So in this case, in terms of owner, a money has been received before work is done, let's take a look at the transactions under a cash method. We're going to say that of course, cash is going up. Cash has been received and we're going to say that income is going up because we're using that cash as an indication of when revenues should be recognized. It's close enough to cash. We're gonna say cash have been received. We're going to recognize revenue at that same point in time. In terms of an accrual method, However, we're still going to say cash went up. But we're not going to recognize the income because we have not yet done. They work. So on the accrual method, we're going to say that this is not close enough. Receiving cash is not close enough to the work down. It might take us a month or a couple months. We might be working a few, you know, months into the future, possibly a year on this case, Teoh, earn this revenue that we've received today and therefore we can't recognize the the revenue. At the point time we got the cash, We owe something in the future. We owe something. Therefore we're gonna recognize a liability. So now that we have the cash and the work being done at separate point, in times we see the difference in these in these two types of methods, If we're on the other side were saying that we're going to receive the legal service in the future and we paid cash today, we're gonna record cash going down and we're gonna record the expense, the cash being under a cash method, The thing that is saying that's driving the transaction of when we record the expense. So it's close enough to win. We actually going to consume the legal service that we're just going to record it at this point in time. Although we have not yet received the legal service from the law firm under an accrual method, however, we would say that cash is still going down, but we have not yet received services, so we're not gonna record the expenses were going to record a pre payment. We may be getting these these services for a long time in the future, so we're not gonna expense them. At this point in time, it's gonna be a pre payment of on asset type account pre payment being an asset type account so that we can record the fact that we have something that's gonna benefit us in the future. We might be We're gonna get some benefit in the future and will then consume that benefit in the future and record it in the format of an expense at the point in time that it has been consumed. If we consider another type of transaction, we have the same law firm and we said the same owner. However, this time we're not gonna get the retainer. We're going to say we're gonna do legal services and we're gonna vent, See how much services we did build the client and expect to receive payment in the mail in the future. In that case, we've done the work. If we're owner A, we've done the work before. We have received payment. No payment being received at the point in time work has been done. Owner be then is receiving the work that the lawyer, the law firms going to do the work and they have not yet paid. They're gonna pay sometime in the future. So considering the transaction from owner A on a cash method, we would then say no transactions happening here. And that's because way have we haven't received any cash. No cash has changed hands and therefore the cash being the trigger factor in terms of when we're gonna record the revenue recognition not having taken place means that there's no transaction. Even though work has been done under an accrual method, then we would have UN accounts receivable account. So we're introducing a new account, an IOU, this IOU being represented in the form of an asset, that asset called accounts receivable and increasing, and we would record the income at the point in time that the work was done. So although cash has not happened, we do have the income going up because we're recording income. When the work was done, this type of transaction, this type of entity that is going to do work and then build a client and that type of entity generally being driven by just what type of company we are, We're law firm. That typically is the way things have to be for a C p a firm. Typically, we have to do work. Then we have to count the hours and then we got to get paid in the future. If that is the case, we almost have to use in a cruel method, because we need to track the accounts receivable. So in this case, it would be difficult to use a cash method because we wouldn't even have the accounts receivable account in which to track the amount of money owed to us from clients. If we're on the owner be side than under a cash method, we would say that again. No journal entry has taken place. Why? Because no cash has as changed and we're receiving the legal services. But the cash hasn't gone out of the business yet and therefore has not triggered the expense recognition under the cash method. Under an accrual method, however, we would say that there's an increase in a liability account accounts payable, representing the fact that we owe money for work that has been done at the point in time that it has been incurred and we would record the related expense. So in this case, we're going to record the expense at the point in time that we incurred the services that we got the work done. So notice when we record the expense, the expense typically will happen when we consume on asset, often cash, or we incur a liability in this case, accounts payable in order to acquire something in this case legal services. To help us achieve the goal of generating revenue, we are now able to define and explain a cash method, define and explain and a cruel method, and explain the difference between the cash and accrual methods. 10. 150 Ethic & Profession: hello and this presentation. We will discuss ethics and profession objectives. We will be able to at the end of this define profession, defined ethics as it relates to accounting, explain the factors that increase the likelihood of fraud. Describe internal controls. Profession. The definition of a profession. A profession is a calling, requiring specialized, acknowledged and often long and intensive, aka nitpick preparation. When thinking about profession, we often think about a doctor or a lawyer being two of the primary professions that we first think of. And when we consider those professions, we note that the major component of those professions are that they're providing a service and a service which most people do not have intimate knowledge about. In other words, if we were to go to the doctor, for example, if and had a problem and the doctor was to give us some information, some advice, we would not have the information ourselves to be able to verify that advice very readily. It would take a lot of research in order for us to really understand the prescriptions that are given to us now in today's society with Google and all these other resource is out there, it is possible for an individual more often to check in on the information. But to really understand a profession, we would really have to do a lot more research than any normal individual could do in order to really verify the advice being given to them by the professional in this case of the doctor. Therefore, the doctor really has an uneven amount of knowledge when considering a transaction when we consider transactions. From an economic standpoint, we typically think of a free market being I deal situation when the individuals involved in the market in this case the doctor selling their services and the individual consuming the services are having equal amount of knowledge. We're assuming many times within a transaction that there's some equality in terms of the knowledge and therefore the price can be getting Teoh ideally through the market, through negotiation within the market. When we're dealing with professions, however, we have this this UN equality in terms of the knowledge and therefore there's more responsibility many times in terms of the profession to to be honest within the profession and there's more likelihood or more ability for a fraud, fraudulent type of transactions to take place when there's unequal knowledge, and therefore the profession needs some type, often times of regulation in order to really keep the profession in a position where the people acting within the profession can have the trust from the society in order to do the work that they do. Because if they don't have the trust from people within the society, they could be the best doctor, the best lawyer out there. But they won't be able to practice and do what they could do for their individuals for their clients unless the clients are willing. Teoh trust What what the doctor and lawyers have to say. Therefore, the idea of the profession, because of this uneven knowledge, really comes down to the concept of trust. We need these dressed within the profession in a way that we don't need them in many other types of profession. For example, if we went to the grocery store and where to buy groceries, we can quickly assess fairly readily whether or not they're still in fresh fruit or something like that and weaken weaken. The transactions are usually not large enough in that we're gonna have many different transactions that we convince which stores after first go into a store and we can shop around when considering a profession, however, were typically dealing with things that might be fewer transactions. And we might have more on the line when we're considering something in terms of a doctor's decision or in terms of, AH, legal decision and therefore we don't have that the same kind of opportunity and we don't that we would have in some other kind of transactions. Therefore, the concept of trust is going to be a lot more important in the profession. Trust is going to be important in any business, of course, but within a profession it's going to be really important because that people that are dealing with the professional need to basically be able to trust of the professional and the professional. The profession itself then benefits from trust, not just the individuals within the profession. But the whole profession will benefit from ah greater trust, and we can see that from examples. We've seen this in past history. Movies are always playing types of examples where a lawyer or a doctor are basically scamming individuals. In that case, you can imagine a situation where someone claiming to have medical knowledge goes to a small town and cells cells tonics that air, claiming Teoh cure everything that they can be out there with with the tonic and whatnot and then moving to another town before anybody knows that the tonic doesn't doesn't do anything without weeks. Those type of ideas are things that have happened in the past and things that are often portrayed in movies now. When that happens, however note, what's really going on is that the person claiming to have medical knowledge is, in essence, claiming to be a professional in the medical field, and therefore they're making money off of the brand name of a profession. They're basically saying, I'm this kind of kind of doctor on this kind of professional, and therefore you should trust what I am saying and purchased this thing from in which will cure your problems and if that if that does not happen, then that person may profit and may leave. But the next person that goes into town that may really actually have some understanding has a lot less likelihood and less ability to help the people with actual knowledge and actual cures. after that type of situation has happened, so they level of trust will go down if certain individuals that claim to be within a in a profession are making money off of bringing down the brand name of the profession. In essence, they're making off of money off of selling the goodwill of the brand name of the profession . Therefore, the profession itself typically has. Incentive has a lot of incentive in order to self regulate, so these types of areas, we can see it happening. Of course, in the medical profession, we see it happening in the legal profession that those two professions are going to get together and start to to format institutions that will help to self regulate the profession in the hopes that more people can be helped by the profession by including or increasing the brand of the profession, increasing the trust then of the people that are involved in that profession. Now, of course, the legal profession came came about a bit later on from the law, and the now, of course, the legal profession came about a bit later on from the lead. Now, of course, the accounting profession came a bit later on from the legal profession and the medical profession because there became a much more need for accountants. Toe have much more specialized knowledge as business became more complex as businesses grow as businesses get larger as specialization and more regulations are involved in different areas of the business in terms of payroll areas and other regulations in terms of, you know, audits and all this kind of stuff that are increasing the complication within the accounting field that leads toe more specialization that will be needed within the accounting field. And this a lot of this happened when the concept of incorporating took place, when the idea of having a separate legal entity in terms of a corporation, ah, was put into place. Then, of course, a lot of things got more complicated in terms of how are we going to regulate that separate corporations and on a lot of different information is needed from those financial standpoints and therefore the concept of the need for within a society the accountants to self regulate, to have some form of regulation in order to build trust within a new area so that people can then take the use services in terms of accounting in order to help generate value within a community. And of course, that happens in terms of the normal accounting profession and now, of course, sub categories within the accounting profession. So we have people working specifically an audit. We have people working specifically in payroll in many different other areas, which in essence, are gonna be area specific or branches off of accounting the accounting profession as a whole. Ethics definition. Merrian Webster Exit ethics. Plural in form but singular or a plural and construction the discipline dealing with what is good and bad and with moral duty and obligation or ethics definition, there's gonna be a ton of definitions to ethics. I'm just gonna pull a few of them just to give an example of the definitions of ethics and then discuss a bit about these definitions and how they relate to ethics as they are related. Teoh the profession of ethics, ethics, plural in form, but singular or plural in construction, the discipline dealing with what is good and bad, and with moral duty and obligation, a set of moral principles, a theory or system of moral values that present day materialistic ethic on old fashioned work ethic, often used in plural but singular or plural in construction on elaborate ethics, Christian ethics, ethics, plural and form, but singular and plural and construction. The principles of conduct governing an individual or a group of professional ethics, a guiding philosophy, a consensus of moral importance forge a conservative ethic, so notice that ethics is gonna have a lot of different. Um, things are a lot of different definitions that can be applied to ethics. Exit ethics, of course, is something that has been studied for a very long time, and it's still going to be studied for basically, ever in terms of what is ethics and what types of of ethics, what things are ethical or not. And ah, in terms of the profession, then what we need to do is narrow down this discussion. We need to narrow down the discussion of total ethics and at least apply it to or specify it in the form of ethics as it relates to profession and more specifically as it relates to the accounting profession. When considering ethics as it relates to the accounting profession, we can't think of narrowing it down and some kind of a utilitarian type of concept in that when we're dealing with ethics of a profession, we typically want people to act within the profession in a way that would be beneficial for the profession as a whole. So if we take our example that we were looking at in terms of somebody selling, I'm medical some type of medicine that doesn't work in order to basically scam individuals claiming to be a professional within the medical profession, that then may benefit that individual. And in terms of profits, however, it would be harmful to, of course, the profession as a whole. That profession as a whole would have problems and therefore one way to consider this and 11 idea of ethics and generals this utilitarian kind of concept. What would be good for the for the group as a whole? What would be good if all people within the group, in this case, that group being the professionals, which would lead to something that would be good for basically everybody within the group, meaning things that would be beneficial to the brand name of ah, the people within the group? Those would typically be one kind of way that we may consider how ethics might be considered within the profession within a profession or basically any type of profession. Another idea that will be within the profession is how are we gonna basically regulate how should professions be regulated? We know that the accounting profession we generally have these Joan Accepted accounting principles gap. We know that there's gonna be federal regulations in many different areas in terms of the Securities and Exchange Commission often has regulations over the financial activities. Note that, however, the securities and exchange often delegates a lot of that authority from the federal standpoint in terms of the securities and exchange to private to the private sector in terms of the people within the profession, meaning people within the profession have that incentive to self regulate and it's often beneficial to allow that to happen. So although we have the Securities and Exchange Commission here, which is going to be ah, federal regulation, we also have the the Financial Accounting Standards Board, the fast D, which is often representing or responsible for issuing the actual regulatory fast, the regulations and the fast be then is actually ah, not a government agency, but a private organization. And that's this idea that the private organization has that incentive to self regulate. And it's usually a good idea to incentivize or put in place that structure for the self regulation because the people within the profession having that that incentive to self regulate generally are better at putting together the policies in order to set up that that self regulation within ah profession fraud is going to be another component of ethics within an accounting profession, something that we're always going to be concerned about. Within the accounting profession, fraud has to do with intention. So when we're thinking about something that happened, were usually saying, Well, something something happened, Was it fraudulent? That usually means that something happened with intent for it to happen. And so this happens all the all through the legal code, and it seems obvious. But when you consider the outcomes, it may not seem as obvious as it looks in first class, meaning, for example, if somebody hit somebody, somebody got hit by a car, Then if someone died from being hit by a car, then we would ask the question if the driver of the car accidentally ran into somebody Or did they do it on purpose? And the interesting thing here is, of course, the outcome is the same. Someone had died from being hit by a car, and someone, of course, was driving the car. And therefore you would think that the consequences would then be the same. But they're typically not were typically going to say, If it was an intentional thing, then that's premeditated kind of murder, possibly. And if it was unintentional, maybe it would be like manslaughter. Two things that have vastly different outcomes in terms of what the code is going to say. So intention is different from outcome in terms of the legal code, and so fraud will have that intention. Of course, from a financial standpoint, in terms of accounting, we're talking about things. Typically, that would have would be theft within within an organization or fraudulently reporting the financial statements. In order Teoh make them look better for the stockholders, for the for the stockholders or in order to get bonuses or what not in terms of management , those would be the type of things that could take place in terms of fraud. Internally and again, the question is well, did this happen? I mean, was there an air in the financial statements intentionally, or was there was it just an air? Was it an intentional misrepresentation of the financial statements or intentional, or was it just an air? Not always an easy thing to to prove intention, of course, but something that that is going to be the component of fraud. Now, when we're considering the organization, there are what we call the fraud factors. And these are gonna be components. There are what we call fraud factors, and these are gonna be those components that are going to contribute to fraud When we ask somebody. If we were to ask how how can a company prevent fraud from happening winning within the organization first, they might say, Hey, fraud typically happens from employees is the most common fraudulent cases in theft and whatnot that will take place is actually the employees, and therefore we would want to hire, make sure we hire ethical employees, employees that want to commit fraud. And while that is one component that is very important, Teoh reducing fraud, it's really not the only component to reducing the fraud because even ethical people that are in an environment that is not ethical will still have from the likelihood of fraud happening is still going to be high for one, and for two, it's it's difficult to know exactly the you know in an interview process exactly what type of individuals we are. We're putting in place, and therefore, although we wanna have a good interview process, we also want to have the environment in such a way that it reduces what we would call the fraud factors and fraud factors include opportunity, pressure and rationalization. So these are the kind of the components that have been studied, as in terms of what is there when fraud happens, one of the components that are usually present in terms of those cases where fraud has taken place, one is gonna be, of course, opportunity meaning. If somebody thinks that they can commit fraud such as financial fraud such as theft then and they don't think they're going to be caught for that theft, then the likelihood of it happening would go up. The second would be pressure, and that would seem obvious if there's financial pressure in particular. When we're talking about financial fraud, then if there's if there's a financial problem, then the likelihood of fraud goes up and the third is an interesting one. And that's kind of the rationalization and rationalization is important because we typically think that we actually think about what we're going to do and then we do it, and that's using. That might be the case when we making big decisions, but most of the decisions we make, we actually tend to make the decision kind of intuitively. And then our brains are really good at rationalizing what we actually did. What, that what the actions that were taken and therefore that rationalization process well, actually lied to often times, Ah, fraud that will at least continue once it starts or and or increase after after it has started. And therefore, um when considering that we want to make sure that the fraud then is stopped early, ah, and and or caught before before it happens, because otherwise that rationalization process may lead Thio more fraudulent behavior and more fraudulent behavior that goes on to an extended period of time. So then the question then, of course, for the company is how can we reduce these types of things How can we reduce the opportunity, the pressure and the rationalization? And part of that would be the internal controls that we would want to put in place so clearly things like if there was an opportunity out there, if we just had our money, that we just happened to store all of our all of our money in the middle of a lunch room and we have no cameras in there anything and everybody eats in there, then that one that wouldn't be that would would lead people to possibly think that they could steal the money and not be caught. And although that doesn't justify doing it, it is. It is going to increase the likelihood, of course fraud happening. And it will also increase the likelihood of rationalization happening. The rationalization often taking the place in something like this, they would say, Well, if the company is that, um the rationalization, what often sounds something like this, they would say, Well, if the company is that unconcerned, that they're gonna put the money in the middle of a lunch room, then they deserve, you know, basically for to be stolen. And so it's OK for me to steal it or something like that. And and of course, that's wrong. That that that's not correct. Way of thinking. But you can see how that rationalization would happen. Another common rationalization is like saying that the company is has a lot of money and they do well and I'm poor. I you know, I don't have as much money I have. I have need for money, and the company is just, ah, you know, a cold entity. Whereas I'm a person that could use the money. And therefore it's like taking from the from the rich and giving to the poor, that company being the rich and me being the poor is another kind of rationalization that could take place again. Not correct. Kind of rationalization doesn't justify, you know, taking the money from the corporation. But you could see how that those they're kind of rationalization processes that could happen. Internal controls. Then what? Of course, one. Try to safeguard that safeguard The assets would be one of the first internal controls that we would put in place, and we want to put in some other eternal controls, often the separation of duties, so that would take more than one person in order to commit theft would be some of the other tax of internal controls. The main internal control that we look at in terms of financial accounting is, of course, the double entry accounting system itself. Things like bank reconciliations, air another key component in terms of the internal controls we are now able to define profession, define ethics as it relates to accounting, explain the factors that increase the likelihood of fraud, describe internal controls. 11. 155 Financial Transaction Rules: hello. In this presentation, we will be discussing transaction rules financial transaction rules as they relate to recording financial transactions with regard to the accounting equation. At the end of this, we will be able to list transaction rules, explain the reasons before the transaction rules and applied transaction rules to recording financial transactions. First rule. At least two accounts will be affected. It's gonna be that whenever record any transaction and whether we're talking about a transaction for recording payroll recording accounts receivable recording accounts payable all those normal things that the accounting department does on a day to day basis, those are gonna be the normal types of transactions that will happen when considering transactions. We often think of transactions in the accounting department as related to documentation such as invoices and bills and what not? And those invoices and bills win input into the system would then record a transaction that would then be used to generate the financial statements. We here are gonna be recording those transactions. Those transactions that a system a computerized system would generate in relation to certain type of documentations, often time every financial transaction can be represented in terms of the accounting equation, and we're gonna list the rules for understanding what those transactions would be when listing them in terms of the accounting equation. And, of course, that first rule is at least two accounts are affected. Now, remember, when we're looking at the accounting equation, we are looking at assets, liabilities and equity assets, equaling liabilities and equity. However, these are accounted types, and they're not the actual accounts. When considering assets accounts. We have accounts such as cash accounts receivable equipment. These are the actual accounts, which are under the account type of assets for liabilities. We're gonna have typically accounts payable notes, payable the primary accounts We will be starting with when we first start recording transactions. And under equity, we have the capital and the draws and the entire income statement, including income or revenue and expenses. Equity. Remember, could be represented as owners equity for a sole proprietor partnerships equity for a partnership or a, um, stockholders equity for a corporation. However, the total equity section is the equity section, and it represents the book value or net value of the company. Also, remember that the capital account with regard to a corporation we're gonna have different types of accounts within a corporation, which would be retained earnings in common stock, and the draws would then be something similar to the dividends. And remember that the entire income statement it's gonna be port of the equity section as we go through these transaction rules. Now. The first rule is that at least two accounts are affected, meaning we cannot just have one account affected within any of these categories, because then the accounting equation would be out of balance. We need at least two. There may be more than two, but there will never be a less than two. So whenever recording any transaction, whether with the accounting equation, as we will do here or with debits and credits, remember that there will never be one account only There will often majority of the time being two accounts, and it's possible to have more than two accounts as long as we remain in balance. Rule number two The accounting equation must remain in balance, so the accounting equation is assets, equal liabilities plus equity, and we need to record the journal entry in such a way that they can equation will remain in balance that means that we have to have at least two accounts affected. In order for that to happen. If something happens to one account something, then it must happen to another account. For example, if assets go up, then liabilities could go up, equity could go up, or assets could also go down. And that would mean that two accounts would have to be affected on one side of the equal sign or one account going up on this side and one account going up on this side, whether that account be liability or equity related. If we take a look at some examples, we're gonna go through the examples related to cash and look at the scenarios of what if cash went up? What are the other things that could happen? Well, liabilities could go up. As we said, equity couldn't go up or assets could could go up. Let's take a look at a scenario of each of those types of transactions were gonna imagine here. One scenario in vet cash is increasing, so there's an increase in cash, meaning, of course, that assets are increasing cash being and assets, and we're gonna imagine that the second piece of this transaction is that the liabilities air going up due to a bank loan. So that's one type of transaction that could happen. Cash would increase and the liability would increase equity remaining the same. And we remain balance in this case as it's going up. The amount owed to the bank for money received on and then do, of course in the future would be the example of this transaction. Another example of a transaction we're going to start off with once again, cash increasing that stained starting point. Say what else could have happened in order for cash to increase? What if it was the equity side? We could say that equity is increasing and that could be because income goes up. That's probably the most common format of equity. Increasing hopefully is. We are receiving income and therefore assets would go up and equity would go up in this example. Next example. Last example. We see our same starting point where cash is going up, cash being an asset. What else could happen in order for our accounting equation to remain in balance, The, uh, assets side could also go down with another asset. This is often the most confusing port of the journalists. Often the most confusing example Win considering assets going up because in this case, both size, both accounts are on one side of the equal sign this account being cash this account being the IOU account, that account called accounts receivable. So we have cash going up and we're reducing the account, representing what people owe to us. We call that accounts receivable. We're getting one asset. We're losing another. Assets were getting kind of a better acid. In this case, we're getting cash and losing an IOU to us. This is one reason the fact that we have to accounts on the same side of the accounting equation that we will move to debits and credits at a later time. Because it it's a bit deceiving to record transactions in this format because there's no net effect on any of the accounts in the accounting equation. Although a transaction took place, meaning the net effect on assets is an increase and a decrease no net effect, no net effect on liabilities, no net effect on equity, although a transaction took place when we consider this later in terms of debits and credits will see that there will be a debit and credit for each transaction. And that's one reason why the debits and credits is gonna be a more useful tool when constructing, recording and posting transactions. Objectives we are now able to list of the transaction rules, explain reasons for the transaction rules and apply transaction rules to recording transactions. 12. 160 Financial Transaction Thought Process: Hello. In this presentation, we will be discussing the transaction thought process a thought process used to record transactions in a systematic way. Objectives. At the end of this, we will be able to list steps. Four recording transactions Explain the reasons for using a process when recording transaction and apply a thought process to recording transactions. First, we're going to recap those rules we talked about in the prior presentation. If you have not seen the rules for the prior presentation, we recommend it taking a look at that. These rules are the rules we are going to use in order to construct a thought process. The rules being something that are just part of the process, things that have to happen, the thought process being a system that we are going to use in order to learn this information as quickly and efficiently as possible and be able to record transactions as quickly and efficiently as possible. So remember the rules for any transaction we're gonna be recording transactions as they relate to the accounting equation later will be recording transactions with debits and credits. These rules will remain the same. Those are every transaction has at least two accounts affected. Remember that the accounting equation to account types or not, the actual accounts meaning assets, liabilities and equity are not the actual accounts. The actual accounts are the sub accounts. For example, cash assets have cash, accounts receivable and equipment as the actual accounts, which are accounts type asset accounts. Rule number two. The accounting equation must remain in balance after every transaction. So here is our accounting the Trent equation assets equal liabilities plus equity. And we need to record transactions in such a way that this accounting equation remains in balance. That is one of the reasons, of course, that we need at least to transact to accounts that will be affected. So that one, if one account was only affected in other words, we would have only one thing happening and we would be out of balance. We need at least two things happening in order for a transaction to do something and also remain in balance thought process. Now that we know those transaction rules, we're gonna think of a thought process. And the reasons for the thought process are one that it's gonna help to get us moving many times in the accounting process. Yeah, account is one of those situations where if we don't know what's happening, we cannot move forward. It's either we know what's going on and we can move forward or we hit a wall. Ah, transaction process can help us to start moving forward. We start thinking through the steps that will get us going forward. Another reason for a transaction process, even if we are good at recording financial transactions, is that it's going to make it easier. It's gonna be a faster process. The point of the process is to make something more efficient. A process can make things more efficient. Also, as people first learned accounting transactions, they often tend to memorize entire transactions that are pretty simple transactions. But if we have a process, we can then apply the same process too much more complex transactions as we get to more complex journal entries later on. If we when we get to journal entries that have a lot more accounts involved, it's much more difficult to just memorize the entire transaction, which accounts are gonna be deputy credit? It's a lot easier for us to go through a thought process and construct the journal entry in a methodical way and and think through it in this system. Therefore, this is going to be the thought process. We're gonna apply this thought process to the accounting equation when recording transactions, A similar to same thought process will be applied when working transactions related to debits and credits we're gonna start with the question of is cash affected cash is going to be involved in many of the transactions were using. It's gonna be involved in pretty much all the cycles, including accounts receivable cycle, the revenue cycle, accounts payable cycle, the purchasing cycle and the payroll cycle. So not every transaction will have cash involved, however, but pretty much every cycle will have cash involved, and cash will be involved farm or times in journal entries than any other accounts. Therefore, we're going to use that to first think of cash in order to start constructing the journal entry. It's also easy to know whether cash is going up or down when considering other accounts. It's more difficult for us to know whether the account is going up or down and later on more difficult to know whether or not we should debit or credit it cash. We will pretty much get that pretty soon automatically, especially since we are dealing with cash so much. If cash is affected, then we want to see. Is cash going up or down? Is it increasing or decreasing? Once we know that we can record cash, we can record that part of the transaction and then focus on the other account that is affected. Typically, in the beginning here, there's only gonna be one other account is affected. So once we know what's happening with cash, we can say what other account is being affected in the accounting equation and use what happened in cash in cash, going up or down to assess whether or not the other account is going up or down. What if cash is not affected? What if we have one of those transactions one of those, like 25% of normal transactions where cash is not affected? Then I would think in our process, we want think about what did we get? What did we get, often being something like a supplies or an expense. Often, if we're getting something like an asset, it's closer to its an asset. It acts the same as cash. Therefore, it's gonna be easier for us to know whether it's going up or down later on. It will be easier for us to know whether we should be debuting or crediting it. Once we have that, then we can use that knowledge, debit and credit an increase in decreasing Teoh whatever account we received to help understand what we should do to the other account that will be affected. Step one is cash affected. If we take a look at our transaction, were going to say go through our thought process, we will now just apply this thought process to a few transactions. The first transaction, we're gonna ask our first question is cash affected and we're gonna say within this transaction were going to say that cash is affected and we're going to say that cash is increasing. Then we're going to say Question number two. What other accounts is affected in this case? We got the cash for a loan that was taken out. We're going to say that liabilities is the other account that is affected. Now, if we knew liabilities is affected and we know cash went up, If that's all we know we still know from that that the liabilities needs to go up. Why? Because cash went up and therefore this side of the equal sign. If liabilities is an account, that is a fact has affected also needs to go up so we can determine what happens to the other account. Of course, by using the accounting equation and the effect on the cash, this is the reason that we want to see what happened to cash first. So Step Three, of course, is to determine if the non cash count is going up or down. It's also useful to be able to look at this and then consider the other side of the transaction this side. As if we didn't really know what happened to cash in order to double check our work. Therefore, we knew the liabilities went up because the asset went up. Where else? I can think about the liabilities and think about what happened here. In this case, we got a loan for the business, so the loan is a liability account. The bad thing went up, meaning the amount of money we owe back for the loan is increasing. So typically we want to go through these steps. We first want to look at cash. We would then want to see what the other account is doing by relation in in a relation to cash and then double check what the other account is doing by thinking about the other account. That's being a liability account. Does it make sense that it's going up? It does, because it's a liability count. It's increasing because we owe more money. Once we have the two accounts, we may want to think. Is there another account that's affected? This is the whole transaction, but we may say, Is there any other asset affected? Is there any other liability or any other equity? If there's not, then these are the only two accounts. If we have dollar amounts, then these $2 amounts for cash increasing liabilities increasing would then be the same. Now if we go back to Step one and we say, Well, what if cash is not affected? If cash is not affected, then I would think about what are we getting? For example, if we did work on account meaning we did work and have not yet received cash, we still got something in that transaction, we got something that's intangible, Something that's not physical. We got in. I owe you. And we typically call that a accounts receivable account. So I would still record right? What? We received an increase in an asset An increase in the IOU account. Azzawi as we get that because it's gonna be easier for us to think about that often times meaning the accounts receivable account is similar. Teoh the asset account. It is another asset accounts. What similar to cash. Therefore, we got more of it and that asset is going up. So cash is our favorite asset. We would rather have the cash, but accounts receivable someone owing us money going up is also a good thing. Then we need to think about Step two. What other accounts is affected and this case were saying equity is affected in that income is being earned. Now note that it's a little bit more difficult for us to know whether income is increasing or decreasing equity as it is to know whether the acid is going up often times if we know that the asset went up. However, if we thought about this first, that's easier for us to say that the equity then must be going up. So when we determine if the second account is going up or town, it's easier for us to say equity must be going up because it's on this side of the equal sign and we already know that the assets went up then, of course, we wanted to double check our work. We want to say, Well, does that make sense that equities going up it does because we earned revenue income is going up income then is increasing net income and therefore is increasing total equity as well. We could then go through and check and just see if there's any other account effected, meaning no other asset affected. No other liabilities affected. Therefore, we've got the assets increasing equity increasing. We remain in balance. If there were a dollar amount, these $2 amounts would be the same back to our thought process. Remember, the thought process, then, is first question. Is cash affected? Second question if cash is affected is it's going up or down. We will then record the cash side of the transaction. We will build what we know as we know it. Then we're gonna see what happens to the other account that's affected. Usually just one. There could be more than one, but usually just one other accounts using the fact that the cash account has going up or down. In order to answer this second question, if cash is not affected, then we're gonna ask, What have we received? What is the thing that we have a received, often being something easier to understand than then another type of account? And then we're going to use that in order to determine what happens to the other account that is affected using the accounting equation and using the fact that this account went up or down. Objective. We are now able to list steps. Four recording transactions, explain the reasons for using a process, win recording transactions and apply a thought process to recording transactions. 13. 165 Cash Transaction Accounting Equation: blue. In this presentation, we will be taking a look at business transactions involving cash. We will be a recording these normal business transactions in the format of the accounting equation and later be using the same or similar transactions to record with regard to debits and credits objectives. At the end of this, we will be able to list transactions involve in cash record transactions involving cash using the accounting equation. First transaction we're gonna list through these transactions and we're gonna record these transactions with the accounting equation, learning these accounting questions and these transactions using our normal rules and thought process. So remember that this is our accounting equation. We're gonna have assets, liabilities and equity when we record transactions using the accounting equation, we often used the accounts involved. And this is sometimes called an extended accounting equation Ah, format that can be used to record transactions. It's useful to start recording transactions in this format and then later on, moved to debits and credits this format being useful because it is and equation and therefore it's gonna be a good place to start because everybody has some experience with equations. However, as you can see, just from this example. It does get a bit complex or a bit messy, and it's much easier with debits and credits, and that's the reason we will move to debits and credits. But the normal rules that will be the same when recording transactions or some rules will be the same. Those rules will include that every transaction will have at least two accounts involved, and every transaction will have an equal will remain in balance. Remaining assets equal liabilities plus equity will always remain in balance. In this case, in the asset accounts, we have cash receivables and supplies under the liabilities accounts. We just have the accounts payable. And in the owner capital, we have the capital and the entire income statements of revenue and expenses will then have the total assets equaling total liabilities and equity and see the impact on net income. First transaction owner deposits, cash 70,000. First question. I'm gonna go through the stop process here and will continue with this stock process all the way through. Recording journal entries is cash affected, and in this case we're gonna say, of course it is were dealing with the cash accounts and therefore we're gonna be dealing with cash and cash is going to be increasing. So we're gonna increase cash. And of course, cash is within the assets section. Then we need to know what the other side of the transaction is. Now when we're dealing with the owner depositing money, it would make sense for us to think of the owner's equity of the owners capital account. If we're talking about a corporation, it would be the selling of stock. And so and that I would be stockholders are capital that would increase in this case is going to be the capital account. So we have the 70,000 within the capital count. We know that it's increasing a couple different ways. One we know that cash went up and win. Cash goes up. If the other accounts is on the other side of the equal, sign it too, then must be going up. We also want to double check ourselves no, and see if it makes sense that capital would be going up bringing up the equity section. And we know that capital represents what is owed to the owner in a sense, meaning the company has assets at this point of 70,000. And the company owes that either to 1/3 party a liability or to the owner. In this case, it clearly shows that who has claimed to that 70,000 the owner, not 1/3 party. The owners, the one that put the money in the business, therefore are debits equal are credits we at the total debits here. Well, what am I talking The the assets that are accounting equation are in balance in terms of assets equaling liabilities plus equity meaning total assets equal total liabilities plus equity, new effect on net income. Next transaction. We're gonna start with this beginning balance. So this is gonna be where we are starting at. Then we're gonna add the new activity, the new activity being reflected here, and then we'll get to the new balance. So note that as we record of these transactions, we're always going to start where we started. In balance. We're gonna record something that will be in balance, and we will end with something that will remain in balance. So next transaction were to say we received cash from client for work done 7000 so we received cash. That's gonna be. Our first question is cash affected keyword is received. Therefore, we know that cash is increasing, so we know that cash has affected it is increasing. If cash goes up, then we need to know what other account is being affected here. Why are people paying us cash? Because we did work. So when we do work, we earn revenue. So here's revenue revenue is part of the equity section and we can think of it in terms of If this side is going up, assets going up, then the side must be going up. Equity must be going up and therefore revenue must be going up. Now when we consider the equity section, it can be a little bit confusing that because of the entire income statement, including revenue and expenses are included in the equity section. So remember that net income is calculated as a revenue minus expenses. If revenue goes up, net income goes up. Whatever happens to net income will also be what is happening to total equity. When expenses go up, they bring net income down, which brings down equity. Therefore, if we take a look at our equation, we see that the cash is going up by the 7000 and the revenue is going up by the 7000 note that revenue also only goes in one direction. It only goes up, as do all income statement accounts, meaning revenue and expense accounts. Revenue expense accounts only go in one direction. We can see now that our total assets equal our total liabilities plus equity as shown here , and that our net income has increased net income calculated as revenue of 7000 minus the expenses which of as of this point, of course, there are none. We then need the ending balance. So note that it's not good enough to stop there. We need to say this beginning balances in balance. This is what happened at this time. Where are we at? Where are we Indian at? In this case, of course, Cashes at 70,000. We got 7000 more. We are now at 77,000 in cash. Over here we had a capital account of 70,000. Nothing happened. So we're just basically bringing that 70,000 down 70,000 plus zero. Here we have zero and then we have 7000 increase and there's are 7000 here. It's useful to bring all the other zeros down. So these other accounts? Of course, nothing has happened. We're just bringing those zeros down. And as we do that, then the total should remain in balance. Meaning assets of 77,000 equal liabilities of 70,000 plus seven or 154,000 assets equals 77,000 liabilities and equity and the total net income at 7000 at this time, next transaction. Once again, we're gonna look at this beginning balance and note that we're not looking at the beginning balance. Ah, the first beginning balance here. So our prior slide, we're eliminating this now. Now we're really once we move on, we're really just concerned with this part here. So that's where we're going to start with, and then we're gonna do the same process. This is where we were before this transaction. This is gonna be the transaction we record, and then we'll show where we are at after this transaction. So we have paid cash to employees. Same questions we're going to say is cash affected? Key word here is paid. Therefore, cash is going down, so we're gonna decrease cash this time, and then we just need to know what other account is affected. Of course, cash is an asset, the other account that affected when we pay employees. Remember, we are not to the employees here where the owner. So we are always recording these transactions in the as if in the perspective of the business owner, and therefore we would have an expense of wages expense over here. Now we know it's going down for a couple different reasons. Once we know what the wages expense, it might be a little bit more difficult for us to say whom his wages expense going up or down. That's why we focus on cash first, because if cash went down and it's on this side of the equal sign, then if this is the other side that's something is happening to it, then must be going down, meaning it's bringing down total equity. Now note that as we think about the expenses, if we double check it, we might think that expenses only go one way expenses. Typically, we typically think of expenses only going up, but when considering expenses and as the relation to equity, they bring equity down so keep that distinction in mind. As we move Teoh the next type of transactions have as we move to debits and credits, we're gonna basically be saying that expenses go up and that brings net income down and that brings down equity. So here we're saying it goes down and that doesn't necessarily mean that expenses go down. Expenses just go one way, bringing down the equity second section, bringing down net income. So if we were to record that, then we're gonna say cash is decreasing by the 420,000. And then that's gonna decrease the total assets, of course. And then the equity is decreasing over here with the expense pulling down total equity. And then we see that our total assets equal our total liabilities for this transaction. The 4 20 decrease in cash matching the 4 20 decrease in the equity due to expenses going up , we see that net income is affected by a net loss in this case, meaning revenue minus expenses are going down. For this transaction, we have a loss of 420. Then we're going to see our total here. So we have cash beginning balance of 77,000. This is what happened. This time. We reduced cash by 420 leaving us with cash of 76 580 that if we see what happened over here in the last other side of the transaction we worked on, we had expenses of zero. We had more expenses, which means it's gonna bring down equity by 4 20 And we brought down that number. Then we just need to bring down the numbers from the prior beginning balance before this transaction, including the capital of 70,000 Plus nothing happened. This time means we have 70,000 revenue of 7000. Plus, what happened this time gives us revenue of 7000 and we bring those down. The others are just bringing down the zeros, as you can see. So we have the zeros being brought down here, here, here and here. And then if we were to add up the total assets 76 5 80 cash being the only asset at this time would equal then the liabilities and equity of 70,000 plus 7000 minus 420,076 5 80 total assets equal in 76 5 80 total liabilities and equity net income at this time is now 6580 calculated as 7000 minus the 420 next to transaction paid cash for supplies. So we'll go through our normal thought process again. Remember that I'm going to go back to the prior slide. This is the ending balance for this slide, which will then be the beginning balance for the next line. We're not worried about anything prior to that wind, considering the new transaction. We're just concerned with this balance, the new activity that will then happen and then the new balance. So we've got paid cash for supplies. 240 Is cash affected? Yes, it is. And then, is it going up or down? Keyword paid. Therefore, cash is going down, so we're gonna decrease cash. Gonna write that with a rose first, decrease cash, then we need to see the other side of the transaction. Now, you might be thinking if we bought supplies, it should be some type of supplies expense. However, in the case of supplies, we typically are going to use supplies as our introduction to inventory, meaning we're gonna put it on the books as an asset and then decrease it as we use it, and therefore we're gonna put it on the books as supplies and asset, so we're gonna increase supplies the assets as it is consumed, we will decrease the access asset and record the expense. So we got one asset going up and one asset going down. In this case, if we get a look at this example here, then we see that cash is going down. We see that supplies is going up, and this is gonna be on unusual transaction in that we have one side of the equal sign both going down and going up. So that's one an example of one of those just kind of unusual transactions that often throw people off because when asked, what is the effect on the accounting equation? We're typically wanting to say that cash is decreasing assets and we have to remember that the others are is increasing assets, and therefore there's no net effect on assets. And even though a transaction is happening, there's no net effect on either assets, liabilities or equity because the assets are going up and down. Nothing happened. Liabilities and nothing happened to equity. Therefore, there's no impact on total assets or total liabilities and equity from this transaction and no impact on net income. This once again, one reason that debits and credits are often a better tool than then using the accounting equation. Because we will see a debit in the credit for each transaction. Then we want to bring down the total. So here's our beginning balance. Here's the transaction. Here's the total and note that as we look at this beginning balance, we do have ah, utility's expense that was recorded after the wages expense here. So if you're looking at these numbers and you're saying it's a bit difference because we got the utility's expense 525 that was actually added another transaction added in between here. So then we've got this number we've got the 86 5 55 minus the 245 gives us to 86 310 in the cash, and then the supplies zero plus 2 45 gives us the 2 45 and then we need to bring down the rest of the numbers 70 plus zero is 70,000 17,500 plus zero is 17,500 negative, 420 at plus zero is negative, 425 125 negative plus zero is 525 negative. We know that the 86 3 10 plus the 2 45 4 total assets equals the 86 5 55 and the total liabilities and equity of 70,000 plus 17,500 minus 420 minus 525 also equals 86,555. Net income is at 16,000 555 calculated as revenue of 17,500 minus wages, expenses of 420 minus utility expenses of 525. And again note that this last slide we're focusing in on the cash. So there are some transactions that happened after in between slides here. Ah, in that we have the revenue and the and the utilities and we're focusing in here on ah, the cash transaction related to the supplies objectives. We are now able to list transaction transactions involving cash recorded transactions involving cash using the accounting equation 14. 170 Accounts Receivable Transactions Accounting Equation: hello and its presentation. We will look at transactions related to the accounts payable cycle accounts payable transactions. We will record of these transactions in accordance with the accounting equation that being assets equal liabilities plus equity. At the end of this, we will be able to list transactions involving accounts payable and record transactions involving accounts payable using the accounting equation we're gonna go through and list through the transactions were going to look at our accounting equation. We're gonna have a beginning balance list the transactions affected during one particular draft action and then we'll have an ending balance. In order to do this, we want to remember our accounting equation that being assets equal liabilities plus equity , we're going to have our list of accounts within that area in that assets, including cash accounts receivable, supplies the liabilities, deals with accounts payable. That is where we will be focusing most at this time. Then the equity section is going to include the capital and the entire income statement that, being revenue and expenses, note that the entire income statement is in this equity section. We currently have owner's equity, but if it was a partnership, it would be partnerships Equity and if it was a corporation, it would be stockholders Equity. The essence of equity as a total will be the same in that the entire income statement is going to be represented within equity when considering it through of the accounting equation. We currently have total assets of 50,000 Equalling total liabilities of 50,000 of that being cash as the assets and capital as the liability on the equity and liability side, there is no net income at this time net income calculated as revenue minus expenses. Remember that we will be concentrated on the payable cycles. So this is gonna be s cycle. We're not looking at the transactions just by date here, but by cycle, which is often very practical. But because one that's often the way we do it in practice meaning, you know, work might work in a particular cycle like the accounts payable cycle and deal with the same types of transactions in order to specialize in some ways. And two, it's just easier to learn in cycles because of those processes being part of of a set linked group of transactions. So you get to know the transactions that go together by doing this, and by doing that you can. You can work through problems where you kind of have to assume what happened before. So there's gonna be problems later on where they'll basically say, You know, you gotta pay off something on account and you have to assume that the prior transaction took place. You've got to kind of know in your mind how these things are related. So if we go through by cycle, that will help to achieve that goal. First transaction were going to say purchase supplies on account. If we go through our list of questions, we're going to say, Is cash affected in this case? No, because we purchased it on account. Then we're gonna ask what we've received in this case supplies. So we got supplies that is here. It's gonna be an asset. Therefore, the asset is going to go up because we got more of them. Then the only question is, what is the other account? It's not a decrease to cash because we didn't pay cash, and therefore we must be doing something somewhere else. That will be accounts payable, so accounts payable is going to increase by the same amount. How do we know that two ways. One we know that supplies went up And if supplies went up on this side of the equal sign, then accounts payable must be going up on that side of the equal sign. That's one way we know that the 30 50 is increasing. We also know that the accounts payable. It's kind of like something we don't like. So the bad thing is going up, we owe more money after this transaction. Therefore, accounts payable is increasing. Here. Is that transaction where we have this in balance, beginning balance and what we actually did meeting, we increased the supplies and we are increasing the liabilities. That's an increased to total assets and an increased to total liability. And that means that the equity then is going to remain the same. So within this transaction, then we see that assets are going to go up by that 3 15 liabilities going up by that 3 15 Therefore, the assets equal the liabilities and equity for that particular transaction. No impact on net income. We then need the total row, meaning we're gonna add up what happened last time or what with the beginning. Balances were plus, the current transaction will give us the total. For example, we had cash before plus zero is still the 50,000 the accounts receivable there was none. There are still none the supplies where. Zero We're adding the 3 15 to get to 3 15 accounts payable with zero were adding the 3 15 to get to 3 15 capital was 50,000 were adding zero to get to 50,000 revenue auto meals All zero before nothing happened. All still zero after then if we were to add up. The assets, liabilities and equity assets have cash of 50,000 and supplies of 3 15 for a total of this 5 50,003 15 and the liabilities had 315 for accounts payable and capital 50,000 for a total of 50,003. 15 No effect on net income. Why, because we purchased an acid. If we had purchased a an expense or if we had consumed in expense, then it would be a decrease to net income. But when we just purchased the supplies, we have not yet consume them in order to help us generate revenue and therefore it's gonna be an asset note that it has nothing to do with the fact that we bought it on account rather than paying cash as to why we are not expensing it. We're not expensing it because we bought supplies an asset that has not yet been consumed. And we will, uh, expensive at the point in time it is consumed. Not the point in time that we pay cash. Necessarily. Next transaction, we're gonna say, paid four purchase purchases in the past on account 3 15 So here are our beginning balance now. So are beginning balances of the same as we had in the prior slide. And now we're going to say that we paying for something that we purchased in the past. So first question is cash affected? We're gonna say, Yeah, we paid keyword being paid any time it says paid, we can assume that cash is going down, and then we can just think about what the other account is now. Many times, a problem will actually say, you know, we paid for supplies in the past or something like that, or we pay for supplies on account in the past and they will actually give you the supplies . And then we might think that we should be doing something to supplies. But of course, if it says on account, or if it says anything that we says we did it on in the past on account. Being a key term on account means either accounts receivable or accounts payable in this case, accounts payable. If it is accounts payable in this case, which it is, then we know it must be going down for at least two reasons. One cash went down and cash is on this side or the left side of the equal sign. And if this is the other account affected on the right side of the equal sign, then it to must be going down. We also know that the receivable the payable must be going down because the payable represents what we owe. What the business owes to 1/3 party to a vendor and this number represents. We owe money. And we're saying within this transaction that we pay paid money, we paid it off and therefore the amount that we owe. It needs to be going down so we can kind of double check ourselves, and we should double check ourselves to see that this number is going down and kind of double check our entire transaction in that way, we see what happens then We're going to say that cash is going down and we see that the liabilities are going down, so cash is decreasing. Here. We got the liabilities of decreasing on of that side. We see that the total assets are going to equal total liabilities for this particular transaction. Then we're going to see the total here. Total balance. Just bringing the balances down. Now, Cash having 50,000 before we're subtracting the 3315 to bring us to 6 49,085 accounts receivable was zero before Still zero after supplies was 3 15 before 3 15 plus zero is 3 15 We have accounts payable was 3 15 before. Now we're subtracting 3 15 to bring that balance down to zero. This is the typical kind of pattern we will see in accounts payable. It may not be just right next to each other where we buy something on account and then pay it off. We might, by multiple things on on account and paid off in some kind of installments. But we will typically see purchases and then payments, and we should be able to match them up through the history of the account. We then have capital 50,000 plus 0 50,000 and revenue expense and expense all zero before all zero after then if we were to add up, our assets are liabilities and equity. Total assets are cash 49 6 85 and 3 15 totaling 50,000 and the liabilities and the equity now just being zero in the payable and 50,000 in capital to be a total of 50,000. No effect on net income. No effect so far on revenue or expenses. Next transaction purchased auto service on account for 16. So we're gonna purchase auto service first question is cash affected were going to say no because we purchased it on account. Therefore, it's gonna be accounts payable that will be affected. I often think about what we receive is it is the second question in our thought process. What did we get? And that might not be as useful when we're looking at the accounting equation, but it's often more useful when we get to debits and credits, I would get in the practice of saying, What did we get? And in this case, we got auto service. Now, auto service isn't buying the car, not an asset. Therefore, it's gonna be an expense over here in the equity section now expenses. We're gonna think they only go one way now. Typically, when we think about debits and credits, they only go up. We can think they only go up here, but we're looking at this in relation to the equity section. So expenses air kind of like something we don't like. It's bringing down total equity. You can think of total equity in terms of the income statement going the same way as a net income will go. So net income is calculated as revenue minus expenses. Therefore, expenses on Lee go up as expenses go up, they bring down that income and they bring down total equity. So when we're considering an expense in terms of the equity section, we're gonna say it's gonna decrease the equity. Now I get I know that's a little bit confusing when we're thinking of expenses in terms of the accounting equation in terms of the equity section. But when we get to debits and credits, there always just gonna be going in the debit direction and you'll hopefully get to know expenses pretty well because we will be working with expenses a lot. There are typically more expenses, then any other type of account, so we'll get a good feeling of what the expenses are doing. Therefore, the auto expense will be going down, and we've got to do something to some other account. We did not pay cash. It's not gonna be cash that is going down. It's going to be the liability. Now we know the liability is going to be I'm sorry. The liability is gonna be affected and it will be going up. Now we know that this accounts payable this liability will be going up for a couple different reasons. One, if this side of the equal sign in auto expenses bringing down equity, equity and liabilities are on the same side of the equal sign than this account. If it's the account that is affected, which it is needs to be going up in order for the accounting equation to remain in balance , we can also think through it in terms of the accounts payable. That's something we don't really like. The bad thing is going up. We bought something, have not yet paid for it. We owe something in the future. That's what the accounts payable represents. And that's what's happening here, that the amount we owe is going up. If we look at the transaction, then we've got 416 increase in the payable and we have the auto expense again. It's going up. You can think of expense going up, but it's bringing down the equity section, so it's bringing down net income. It's bringing down equity. When you see a problem like this in a book problem, it may sometimes put minus signs here, so it will have it in the formula. Or they may ask you to put a minus sign when you enter the data and this, that's just one of the problems again, with this accounting equation type of problem. When you move the debits and credits, it's pretty. It's all straight forward. That's the point of debits and credits, but we're trying to work with this accounting equation at first just to get the idea of something that has pluses and minuses. Ah, and it's not a perfect system because it does get confusing as we looked through the areas over here with the plus and minus, so we're subtracting the expense from total equity. In this case, we see that there's no effect on the accounting equation because, well, there's no effect on the total assets and the total liabilities and equity meaning assets are going to stay the same. Liabilities are increasing and capitals decreasing, so this side of the equal sign is remaining the same, meaning liabilities and equity went up and down, meaning accounts payable liability went up and expense brings equity down. So liabilities and expenses are equal to total assets. In terms of what happened within this particular transaction, the liability increasing and the equity then decreasing, there is an effect on net income that being the expense net income calculated has revenue minus expenses. So it's the revenue is going to net income is going down. Note that the total equity will go in the same direction as net income so many times net income goes down. That's gonna bring total equity down as well. Assets then remain the same, liabilities increase and equity decreases. If we look at the balance side, then we're going to say that cash started at 49 6 85 Nothing happened during this transaction. Indian Balance 49 6 85 Accounts receivable. Nothing before nothing after supplies started at 3 15 plus zero 3 15 Is the ending balance accounts payable? Was that zero before this were increasing it for 16 to 4 16 Capital. 50,000 Before this, nothing happened. Still, 50,000 nothing in revenue Auto expense. Zero minus 24 16 Teoh for 16. Therefore, if we add up the total assets, we have a 49 6 85 plus the 3 15 giving us 50,000. If we add up the liabilities and equity for 16 plus the 50 minus in the 4 16 will give us the 50,000 eso. We are in balance then and net income is going down by the 4 16 in the total as well. No revenue and only one expense of the 4 16 Next transaction purchase meals on account of 9 1050 once again is cash affected were going to say no, we didn't we didn't pay cash, We purchased it on account. Therefore, accounts payables affected. I would typically get in the practice of working with meals and entertainment or the expense or what we got first, because this will be easier once we get to debits and credits. And that means we got meals and entertainment. Meals and entertainment is an expense. It's in the equity section and it's gonna bring down total equity. So it's gonna be just like all other expenses. All expenses bring down equity. So we're gonna decrease the the meals and entertainment. And that means we must be doing something to some other account. It's not gonna be cash. We didn't pay cash that we're not decreasing cash were increasing the bad thing. Rather than decreasing the good thing, cash were increasing the bad thing accounts payable. So accounts payable will be the other side of this transaction. We know it's going to increase for at least two reasons. One, we know that meals and entertainment is decreasing. It's on the right hand side of this equal sign and therefore this must be going up if it's the other accounts affected, which it is in order to remain in balance. We also know that the bad thing is increasing in that accounts. Payable means we owe money and it then is going up because we owe more money buying something on account that we have not yet paid for. If we look at that transaction, here it is. We have the accounts payable, increasing. We have the meals and entertainment decreasing total equity again. It doesn't mean that meals entertainment is going down. It means that meals and entertainment is decreasing Total equity. If we look at our equation of in, we see that nothing happened. T two assets liabilities are increasing and equity is decreasing from this transaction. We know that total assets then will be zero liabilities going up and liabilities and equity going down remains the total liabilities and equity will be zero. Net income is affected here and that it is going down revenue minus expenses. We don't have any revenue. We only have expenses for this time period. So far. So we have ah net loss. In this case of 1950 we're then gonna bring down the balance. So here is the balance. We had 49 6 85 plus zero keeps us at 49 6 85 We had zero receivables and we end with zero in the receivables. Supplies 3 15 plus zero three 15 is what we in debt there for 16 accounts payable plus 1000 and 9 50 gives us 3 2066 we had capital. 50,000 plus zero keeps us at 50,000. We have auto expense for 16 plus zero. Gives US 4 16 decrease in equity and meals Entertainment zero plus or minus. The 1000 9 50 keeps us at the 9 1050 If we are to add up, then the total assets of 49 6 85 cash and 3 15 supplies we get to that 50,000 total assets to add up liabilities and equity. We get 3 2066 for liabilities plus 50,000 capital minus 4 16 in the auto expense minus meals and entertainment. 9 1050 Bringing us to 50,000 net income total of effect. As of the end of all the transactions we have done thus far, 63 2066 that's a loss. No income, no revenue yet just expenses of 4 16 auto and meals and entertainment of 9 1050 Next transaction paid for purchase made in the past is cash affected Were going to say yes. Cash has been going down. Key term here paid. Anytime we see paid, we're gonna decrease cash. Other side of the transaction. We bought something, but we don't know exactly what it is. So you might think it should be some type of expense or something. But we bought something that we purchased in the past. Often it will say on account. And that means accounts payable in this case, meaning were paying off the liability. Now we know it's going down for at least a couple reasons. One, we know that if this side of the equal sign is going down, then if this is the other account affected which it is, it must to be going down in order for the accounting equation to remain in balance. We also know it's going down because accounts payable is a liability account. It represents us owing people money or the company offering people money. And we have now paid that money and therefore the amount owed should then go down. So here is gonna be the transaction. We're gonna decrease cash by the 4 16 We're gonna decrease accounts payable by 4 16 That means that total assets are decreasing by for 16 with the cash and the accounts payable decreasing by 4 16 outside the total liabilities. And equity is also decreasing by 4 16 due to the liabilities. No effect on net income here. No effect on revenue and expenses. In other words, if we bring down the balance, we're going to say, Well, let's go through this. We're going to say that the assets air going down liabilities air going down and the equity is remaining the same from this row from this transaction. Then we have the balances were going to say that the 49 6 85 minus the 4 16 brings us to 49 sick 49 to 69 count receivable. Zero plus zero a zero supplies 3 15 plus zero is 3 15 accounts payable. 3 2066 minus 4 16 brings us to 9 1050 Capital 50,000 plus zero is 50,000 revenue. Zero plus zero is zero AAA auto expense for 16 negative and zero is 4 16 kneels and entertainment. 9 1050 0 brings us to 9 1050 If we then add these up, we have the cash 49 to 69 plus zero plus 3 15 gives us 49 5 40 eight, 49 5 84 and then the liabilities 9 1050 plus 2 50,000 capital plus zero minus 4 16 minus 9 1050 brings us to a balance of liabilities and equity of 5 49,084 net income. That means we're in balance here. Of course, net income then, is actually a loss, meaning revenue minus expenses of 4 16 expense plus the 9 1050 expense bringing us to the loss of 3 2066 If we look at the total transactions, then we could see the beginning balance. The transaction brings us another balance. Plus the transaction brings us to another balance. So this is what the entire worksheet would kind of look like in a problem such as this notice. It's a kind of a messy worksheet. When we see it laid out like this when we work at it, one thing at a time, it's not too bad, but it's a pretty messy worksheet. When you see it all at one point in time, it's actually less messy when we moved to debits and credits. So that's why we moved to debits and credits note here that we're focusing in on the payables here. So the liabilities and the payables we should see a pattern in that. We see that the we have the 3 15 happening here and then 3 15 went out, increase in the balance, then decrease in the balance back to zero. We have the 4 16 here than the 4 16 went out. So we increased the Force 16 and then decreased the 4 16 and then we had the 9 1050 which never paid off. We're still owe the 9 1050 at the end. That's why that's the ending balance here. That will be the typical pattern in a payable account. We're gonna increase it with a bill, something that we incurred. We have not yet paid something that we incurred on account, and then at some point in the future, we will pay it and decrease that amount, and we should then be able to match those two amounts. Outmatch the increases match of the decreases as we go. That should be the pattern that we will see back to the objectives we are now able to list . Transactions involving accounts payable and record transactions involved record transactions involving accounts payable using the accounting equation. 15. 205 Debits & Credits: hello. In this presentation, we will discuss debits and credits objectives. At the end of this, we will be able to define debits and credits list, account normal balances and explain how it debits and credits work. First, we want to take a look at the double entry accounting system and recognize that the double entry accounting system can be represented in multiple different ways, including, as we have seen before the accounting equation, meaning that assets equal liabilities plus equity. We can record transactions using this accounting equation, as we have done in the past. That accounting equation is the basis behind the balance sheet, where we have the assets, liabilities and equity representing the fact that the balance sheet then would be in balance. Therefore, if the accounting equation is in balance, then the balance sheet would be in balance, the balance sheet being in balance. Another way of saying that the accounting equation is in balance. We're now going to move to the third way of looking at the double entry accounting system to see that it is working, and that same balancing concept will be represented with the idea of debits and credits. When we moved debits and credits. Oftentimes, when learning accounting, we often learn the accounting equation first because it's a nice, simple equation and equations or something we have all seen before. Then we typically take a look at the financial statements before we start to creating the financial statements with deputies and credits. After having looked at the double entry accounting system in terms of the accounting equation, it's very natural to then ask, Why are we moving to debits and credits when I completely understand this accounting equation over here and how to record transactions within the accounting equation and plus the balance sheet and all the financial statements do not have debits and credits in them? What, then, is the point of learning debits and credits? To answer that question, I would compare debits credits to something like building a house with a screwdriver versus on electric screwdriver in that the debits and credits. When we build the financial statements, we could actually build the entire financial statements using the accounting equation, but it's a lot more bulky. If if you've looked at some of those extended formats of the accounting equation, it's a lot more bulky to use. Then debits and credits, debits and credits are going to streamline the process. They're going to make it easier for us to compile data and put that data into a format that can more easily be converted into financial statements. So if we're working on any substantial level with financial statement creation and the accumulation of data and trying to set up how that data should be accumulated, it's a lot more efficient to use debits and credits than the accounting equation. So any any type of accounting beyond a certain point, you have to learn debits and credits. It's just something you have to dio. And in order to learn debits and credits, we just have to memorize them in order to use that tool. Just the basis of losing this tool means that we have to learn, debits and credits a new concept, a concept that is not just a an equation, an equation being math that we've seen before, but new terms with new definitions that we just have to memorize, just as we would memorize a game. So whenever we learn something new, even if it could be an enjoyable thing and accounting can be an enjoyable thing just to move these numbers around in a similar way as playing checkers. But in order to play the game of checkers, we have to move with nowhere to pieces go on the board. The same is going to be true for the debits and credits. When we need to know where the pieces go, there's no way to get around the fact that you just have to memorize that. It's the same for something like music. We have to learn scales, or we have to learn just how to memorize a few songs at first in order to play them or how those notes get together, put together in some way in order to play music. You just got to memorize that before he could move on to actually working with those those tools. So in order to do that, what we're gonna do is just like the checkerboard here we're gonna put our pieces on the board are pieces are gonna be the account types. Now, these are not the actual accounts because, for example, within cat within assets, we have, like cash accounts receivable supplies. But these are the account types, and within those account types we can see what's where they're gonna line up in terms of the board in terms of the Board of debits on the left, credits on the right. So remember that terminology? All we're talking about in terms of debits and credits mean that this is our playing board and the debits will be on the left of that plane board. The credits are on the right of that plane board. Any other definition, any other preconceived notions you have of debits and credits. We need to get that out of your mind. And just think about the idea that debits on the left credits on the right credits do not mean increase or decrease. Debits and credits are not inherently good or bad. And many of us have preconceived notions in terms of what debits and credits are because of terms like credit cards or talking to our bank. When they're going to credit our account or something like that, debit cards get you, you want to remove all those kind of things from your mind. We can talk about later how those terms derived from the original term, which is basically just nothing more than just just like the pieces on a checkerboard debits going on the left, credits on the right and look at the origins of those terms and how we can better think about them in our minds, and we deal with them in real life. But for now, we've gotta put those ideas of what debits and credits are separate. Used them in the in our day to day life as we need Teoh and keep the this definition as we work with financial statements as debits air just on the left, credits are on the right. Then we just need to line up our pieces on the board in accordance with the set of rules. These are just the rules. Just like the rules to set up a checkerboard. Meaning assets are gonna be debit normal balance accounts. Liabilities are gonna be credit normal balance accounts. Equity is going to be a credit. Normal balance accounts in terms of the accounting equation. That's all there is to it. You just got to memorize that you gotta have the cheat sheet in front of you as you work through transactions. As you work through transactions with a cheat sheet, you'll start to memorize this if you're applying the proper kind of thought process, which will talk about later. So that, of course, is the accounting equation here. Assets equal liabilities plus equity can be represented basically as assets beyond the left side of the T account or debits and liabilities and equity being on the right side of the tea accounts or credits. It is also are gonna be our balance sheet notice the entire balance sheet is this assets equal liabilities plus equity. So we can't think of the balance sheet and the accounting equation and the devotee credits all in the same way. In some cases in this format, then we're gonna have the income statement, which throws a little bit of a twist into our accounting equation here the income statement , including revenue, which has a normal credit balance and expenses which have a normal debit balance. These are gonna be the income statement accounts. Note that revenue and expenses on Lee go up, meaning clients Onley pay us so it's only going to increase or customers only pay us and we only pay expenses like the utility bill or wages and whatnot. The utility company doesn't pay us the employees don't may, as it only goes one way, the transactions only go one way. Now the tricky thing here is the fact that revenue and expenses note are not part of the accounting equation assets equal liabilities plus equity. And you might to remember from working with the accounting equation that every time we were doing something with revenue and expenses, we included that in the equity section. And the reason is that there the entire income statement is, in a way, part of equity. It's gonna be one component of the equity section is kind of like the timing that's happening within the equity section. So over a certain time period, unlike when we just record things, too, said on asset account like cash, where we just put everything to the cash accounts, the equity account. We break a things out between, for example, the owner's equity that draws revenue and expenses. So when we think of equity as one account, then as one lump sum kind of number one hole, we have to take into account the entire revenue and expenses. This is one of the most confusing things. When we think about this this part here, um when we think about the normal debits and credits is this relationship between the income statement accounts, revenue and expenses and the equity accounts? Another thing people typically get confused on is the difference between revenue and assets , particularly cash in revenue. Those are two different things. Noticed that cash assets have a normal debit balance. Revenue has a normal credit balance. You can think of that kind of as an idea that most of journal entries are, you know, good or bad meaning. If we did work and we earned revenue, then we're gonna We're gonna debit, cash and credit revenue. There's nothing bad about that journal entry. Everything's good. If we did work and we got money, everything's good. But we still need a debit and credit that's gonna be a debit to the asset in a credit to the revenue. So there's nothing inherently good or bad, therefore, about debits and credits. Another Pete piece that people get confused on is the relationship between expenses and liabilities. Because of these are the two things that we don't typically like. And again, liabilities are credit up here and there, expenses are gonna be debits, and we can. We can think about something we don't really like to do, possibly paying the utility bill with cash or paying the utility or incurring a bill and currently utility bill and not paying it. So we have accrued the bill that we own the future. We would credit the liability a payable, and we would debit the expense. There's nothing good about that. Journal entry is nothing good about us getting a bill and owing it. Although we obviously we consume the utilities to help make money, that's good. But the fact that we incurred the liability and our recording an expense, none of those air good. And we need a debit and credit in order for the debits and credits to be equal. And so that's one way we can kind of think through this. Let's just go through these normal balances first again. So the normal balances you just gotta memorize or have this cheap, cheap. We've got the assets on the Left liabilities with Rights Equity on the right of our board of rt account. Just have to memorize that that is the accounting equation that is the balance sheet. Then we add to it the income statement that being revenue On the credit side, debit, I mean expenses on the debit side, that is the income statement. And then you want to keep an idea of what this equity section really is. It's really all of this. When we think about Indian equity, the equity at the end of the timing period, we're gonna have to add the equity here. Plus the revenue minus the expenses will end up normally with a net credit, meaning the credits of all these accounts. All these equity accounts well, typically win. So when we consider this, all is one lump sum number. We're thinking about a credit balance account, which has debit components, including the debit component of expenses. So if we think about the types of debits them, we know that we have things like cash with got things like land. We've got things like the auto supplies. We've got the phone with a computer. We've got building and equipment. These are things that we are owning as of now, which we hoped to help generate revenue in the future of the gold being revenue generation . Then we've got liabilities that's going to be things like notes to the bank. Let's get things like vendors. Accounts payable are typical couple liabilities. Remember that the equity is what is owed to the owner or, in other words, can be thought about as net assets, meaning assets minus liabilities is equity. If it's a sole proprietor of the owner's Equity Partnership Partnership Equity. If it's a corporation stockholders equity. When we think about the equity section, then this is usually the most confusing piece, whether it be a sole proprietor, whether it be a partnership. But whether it be a corporation because of that relationship, because note here that we have the assets, liabilities and equity, we don't see the income statement win. Considering the accounting equation in terms of debits and credits. Now, if we were to add the break out the equity section into its components, in particular into the income statement components, then we would see the income statement components of the equity section. That would include revenue, which is a credit, and expenses which are debit now. Revenue. There's typically only one or two things we do remember. Like if we do computer service, all we do is computer service will have one revenue account expenses. We're gonna have things like not think, not the auto itself, but the gas and the maintenance on the auto expenses. We've got the wages, expenses we've got meals and entertainment expense, not the telephone or computer itself. But they used the telephone bill expense Those they're gonna be the type of expenses and note that revenue minus expenses means that we're gonna have credits minus debits or net income on the credit side. So when we think about the equity part of the income statement, the income statement is part of equity. We note that the credits should win, which makes sense, because remember that equity itself is a credit balance account. So typically, we would think that the income statement equation of net income would increase total equity , and the way it would do that is it would take the credit balance of revenue minus the debit balance of expenses, meaning the credits will typically win on the income statement, resulting in total equity increasing. This will make more and more sense as we as we go through the accounting process and record journal entries and see the effect in terms on net income in terms of equity. But just note that whenever the net income here goes up, that means that total equity is going up whenever net income goes down. That means that the total equity is going down. We saw that in terms of the accounting equation, just keep that in mind. Same relationship will be there when we think about the debits and credits. Now we just need to add the fact that the net income is a net credit balance on the income statement, meaning the credits of revenue are beating the debits of expenses. And therefore, when revenue goes up or when that income goes up, it's going to increase the credit balance of total equity. And when expenses go up, bringing net income down, that it's gonna decrease the net credit balance in total equity. So one more review of this account that would just need to memorize. I would have this cheat sheet available for you. We would have the debits on the left credits on the right assets, debit balance accounts, liabilities, credit balance accounts, equity credit balance accounts, that is the accounting equation that is the balance sheet assets, equal liabilities plus equity. We then have the income statement accounts of revenue. That's a credit balance account and expenses of That's a debit balance account. Those are the income statement accounts, revenue minus expenses that is net income. And then remember that the entire equity section is the equity plus these temporary accounts of revenue and expenses. Object is we are now able to define debits and credits list, account normal balances and explain how debits and credits work. 16. 210 Rules for Using Debits & Credits: Hello. In this presentation, we're gonna discuss rules, four debits and credits. How to make accounts go up and down using debits and credits objectives that we will be able to at the end of this defined rules to make accounts go up and down, apply rules to make accounts, go up and down and explain how rules are used to construct journal entries. When considering these rules that will be applied, the rule will be very simple to apply. Once we understand that normal balances or have memorized or are using a cheat sheet in order to know what those normal balances are, there's no getting around, just memorizing the normal balances. That's where most of the time will take place. Once we know what those normal balances are, we're gonna want to do things to those normal balances. We're gonna want to be increasing or decreasing those normal balances in some way. We do that with the tools of debits and credits with the tools of journal entries, and once we know the normal balance, then it's really easy to apply the rule after that. Therefore, have this cheat sheet in front of you and or have the normal balances. Memorize. Go back to the prior presentation and make sure that we get an idea of the normal balances . Quick recap. We have the debits and credits here. This is our board. We just need to memorize that assets have normal debit balances. Liabilities have normal credit balances, equity has normal credit balance or revenue has a normal credit balance and expenses have normal deputy balances. Once we know that, or once we have this cheat sheet in front of us, we can apply the rule, which is very simple. If we want to make an accounts go up. For example, if we wanted cash and assets to go up, we would do the same thing to it as it's normal balance. If we want to make it, accounts go down. For example, if we had a cash and we wanted to make it to go down, we will do the opposite thing to it as it's normal balance. So that's easy. That's a simple as it gets right. There were just once we know the normal balance. If we want to make something go up, we do the same if we want to do the opposite. If we want to make something go down, we do the opposite thing to it. So in order to apply that rule, however, we first need to know those normal balances. So, for example, if we're talking about something that has a normal balance of a debit, such as assets such as cash and I want to make it go up, I apply this rule, do the same thing to it as it's normal balance assets having a normal debit balance. A debit is the same thing as a debit. A debit will make assets go up. If I want to make something with a normal debit balance go down, such as cash, I will apply this one rule doing the opposite thing to it as it's normal balance to make it go down. Cash being an asset assets have normal debit balance. The opposite, then, would be a credit. If, on the other hand, we were talking about an account that has a normal credit balance like accounts payable a liability account, we still apply the same rule. The only thing changing here is that the normal balance for a liabilities such as accounts payable is a credit. Therefore, if I want to make a liability. Accounts go up. It has a normal credit balance. When I apply the one rule to do the same thing to it, then the same thing as a normal credit is another credit. We would credit a liability account in order to make it go up. If I want to make a credit balance account such as liability, go down, then we will apply the one rule doing the opposite thing to it as it's normal. Balance liabilities normally have any credit balance the opposite, then being a debit to make it go down. So remember, this is our cheat cheat. We need to understand in order to apply this rule of that being. Assets are debit balances, liabilities, credit balances, equity, credit balance, revenue, credit balance expenses, debit balance. We will start with an example for assets. Are most common assets being subplot? Our cash cash being are most common acid. Now we know that cash has a normal debit balance. We're going to start with an arbitrary debit number, so we're going to say, Hey, we've already got 1000 as a debit in the debit balance four cash and then think about what ? If we got more money, we got more money. It doesn't matter how at this point we might have gotten more money for my clients. We may have put money into our business, our cells, But when considering just the cash account and no other account, we're not considering the entire journal entry. But just what's happening to one side of the journal entry? What's happening to cash within a financial transaction? If cash is going up, then we're going to say we're gonna do the same thing to it. If we got more cash, we're going to the same thing. This has a debit balance in the cash account. We're gonna make it go up by doing the same thing, which is another debit. So we got $200 increasing the balance, then the ending balance being 1200. If we take that same scenario, starting with that same beginning balance, we have 100. We have 1000 in the bank now and we're saying that we have cash going down. We paid 200 for something. We will then do the opposite thing as it's normal balance of a debit and credit it, and then we see that the balance will be $800. All we're doing is saying the debits will always win. So the debits minus the credits leaves us with a debit balance winning of $800. If we're talking about a debit balance account, the reason debits will always increase it is because the debits always have to win. So if we were to debit a debit balance account, were just saying, there's gonna be more debits than credits by a greater margin. If we credit a debit balance account, we're just going to say they're still going to be more debits than credits, but by a lesser margin. Therefore, the debit balances going down. When we think about assets, we can apply the same rule to all assets. Remember that the rule applies to assets themselves, the same up opposite down. That applies to all accounts. But all assets will have normal balances and then therefore act the same as cash, meaning debits will increase him because their debit balance accounts and credits will then decrease them. So we have land, we have supplies, we have computers, not not the expense of the use of the computer of the phone, but the computer or phone themselves, the building and equipment such as a forklift, all types of things that will be asked. It's all having normal debit balances and therefore acting the same in that when we apply the rule to the normal balance, that means that debits will increase assets and credits will decrease assets. But you don't really want to memorize that debits. Increase in credits decrease assets. What you want to do is memorize the rule that the same thing will always increase. And the opposite will always decrease, no matter whether on account has a normal debit or credit, and then just be able to memorize the one concept of which accounts have normal debit and credit balances. That's less memorization than trying to memorise how to increase or decrease any account type. Whether you debit or credit, any accounts type note also that we will have some exceptions in terms of a Contra asset, most notably the accumulated depreciation which has a ah credit balance even though it's an asset. But we will talk about that at a later time. We will now focus in on a liabilities which has a credit balance. So all liabilities have a normal credit balance. We will focus here on accounts payable accounts payable, representing us, purchasing something and paying for it on accounts. Meaning we didn't pay cash. We have an IOU. We therefore. Oh, something in the future. Accounts payable always had starts with a credit. So what, We're going to say that once game we got this arbitrary 1000 meaning we owe some. We owe accounts payable. We owe somebody 1000 for a transaction that happened in the past. If we purchased something on the account, then we need accounts payable to go up because we owe more money. And the way to make something go up is to do the same thing. This being a credit balance account the same thing, then, ah, credit will increase the accounts payable. In this case, 1000 plus 200 gives us, of course, the 1200 credit. So in this case, the same thing was a credit to increase the credit balance account of the liability of accounts payable. If, on the other hand, we had that same 1000 beginning balance and we want to make it to go down, for example, we paid off the liability and therefore we have to reduce the amount that we Oh, we're gonna apply the rule. We're going to do the opposite. It has a credit normal balanced, the opposite being a debit. Therefore, the credits are still winning by the difference of 1000 minus 200 or 800 is still ah, credit balance. So note that if we're talking about a credit balance account like any liability, the credits will always win. And therefore, if we do the same thing to it as the normal balance, the credits will then win by more and increase the balance. If we do the opposite thing to it, as it's normal balance in this case, the normal bounds being the credit, the credits will still win, but by less and therefore the credit balance will go down whenever we do the opposite, as it's normal credit balance. So that's going to be the case for all liabilities, my abilities, like a bank loan or if we had a vendor, those being the most common types of liabilities we're gonna have later we're gonna have, like, payables and things like that Ah is, and so anything that has a payable on it will typically be a liability type account, having a normal credit balance as well. There's payables. Then we're now going to focus on the equity section. Now the equity sections a bit confusing because note that all of these accounts can be is considered as equity as we've seen in the accounting equation. When Onley representing the accounting equation when we only represent the double entry accounting system in terms of assets, equal liability plus equity, we typically break equity out, then into a capital account or common stock and retained earnings, a draws account and then the income statement, revenue and expenses. So when we consider equity here, we're really gonna first start looking at just the equity in relation to the capital account. And then we'll consider the revenue and expenses which are kind of components of equity, and explain that a bit more as we go. But applying just this one rule, all we need to know is what account we're dealing with and whether or not it's a debit or credit balance. Here we're dealing with capital. It has a normal credit balance, so same will be applied as basically with liabilities. If we had a beginning balance in capital of 1000 arbitrary number representing what is owed to the owner at the beginning of this scenario, if we want to make it to go up, then we're gonna do the same thing to it as it's normal balance. Applying our rule, it's going up by 200. Why would it go up? Possibly the owner put more money into the into the business deputy in cash, crediting the capital account. Or we could think about the closing journal entries. But in any case, if it's a credit balance account and it's a capital account and capital counts are credit balances and we want to make it go up, we do the same thing to it. Another credit bringing the balance up to 1200. If, on the other hand, we have that same credit balance in the same capital account, the equity account and we want to make it go down for whatever reason, we would do the opposite thing to it, which in this case would bring it down by 200 to 800. When would we do the opposite thing, possibly if we had a draws account, which we typically have a different account called Draws that we then close out to the capital account. But that would be one item that would decrease eventually the capital account. So the point here being that if we have a credit balance and we want to make it go down, we apply the rule of do the opposite thing to it as it's normal balance bringing that balanced down in this case by 200 to 800. Now we're gonna focus in on revenue once again remember that revenue is kind of a component of equity, But when we consider revenue by itself, it will always be a credit balance. So revenue is always a credit balance. Revenue and expenses have another kind of special component, and that is that they typically only go up. So when we consider our one rule, we'll talk about how to make it go up or down. But remember that revenue typically only goes up, meaning customers only pay us. We don't typically pay the customers. It doesn't go that way. That income goes down when expenses go up, but revenue itself typically only goes up considering our one rule. We know that revenue always has a credit balance. If we look at that arbitrary number that credit here, starting point with revenue and we want to make a revenue go up, for example, we made a sale. Then we're gonna do the same thing as it's normal balance. Increasing it in this case by 200 that bringing the Indian balance too. The 1200 if we were to do the opposite meaning we want to make revenue go down. We start with that same arbitrary number. That's where the revenue was at before the current transaction. And if we want to make it go down, we would do the opposite thing to it. A debit bringing that revenue account down to in this case, 800. Note that this doesn't typically happen, however, and it is the case that revenue will typically always go up. Now you might be thinking of different scenarios, and you're going to say, Well, what if someone returns the merchandise or something like that? You'd have to reverse revenue, and there might be there gonna be some cases later on. But even then we typically make another account called returns and allowances, and usually use that rather than decreasing the revenue account. So especially when you're starting out and when at least 95 to like 99% of the time, revenue is only going to go up. And it's it's really useful to know that to memorize that you think that is the case eso that really help you to kind of build journal inches, especially when you're first starting out to build journal entries. Then we're gonna look at the expense is once again remember that expenses are a component of the equity and once again, remember that expenses like revenue, have that special component in that they typically only go up men in free pay something like utilities expense or wages expense. The utility company does not pay us, and we pay the utility company. The employees don't pay us. We pay. The employees typically only goes up, bringing net income down, bringing total equity down. As expenses go up, total net income goes down, equity typically goes down, applying our rule toe how to make something go up or down. We typically are gonna make the debit balance go up. So if we have a $1000 debit balance for, like, a phone bill and we wanted to increase it for the use of the phone, then we would do that one rule saying and we're gonna increase it in this case by doing the same thing to it, which, of course, in old cases, by doing the same thing to it, which in this case would be another debit increasing the balance up to 1200. If, on the other hand, we wanted to make the expense go down, we'd start with that same beginning balance in the phone bill 1000. We would then do the opposite thing to it, which in this case would be a credit bringing the debit balance down to 1000. I'm sorry, down to $800. But again, this is something that doesn't typically happen. There will be exceptions to expenses going down, especially to expense like cost of goods sold, but typically like we say, 95 to 99% of time. The expenses are always going to go up, and if you kind of understand that you can apply that to all expenses, there's gonna be a lot of expenses. We will be dealing with typically mawr expenses than any other accounts type and by understanding that expenses are debit balance accounts, and they only go up. That really reduces the amount of memorization you need to understand when constructing these journal entries. Then you just need to understand the exceptions to the rules, which will, you know, those will come around later, especially when we start dealing with the cost of goods sold and returns. So that means that expenses that can include, like the auto auto expense again not the car itself but like gas and maintenance, wages, meals and entertainment, telephone expense notes that we're gonna have mawr expenses than any other type of account . So although we have all these different type of expenses, some companies will have way more expenses than others. But typically there will always be more expenses than any other account. And if you just understand that the expenses will always basically go up and they all have normal debit balances and therefore go up in the depth direction that will simplify the whole process in terms of, you know, how do we record journal entries remember that in order to apply these rules, we first need to know what those normal balances are. So if you if you have a cheat sheet like this, if you have a trial balance, that will really help you out once you understand what the normal balances, then you could just apply this one rule. Meaning you need to know that all asset accounts are gonna have a debit balance. Normal balance. All liabilities, equity and revenue will have normal credit balances. Expenses will have normal debit balances. Therefore, once you know that, then if you want to make something go up and down, you just say, Well, I'm gonna do the same thing as it's normal balance to make it go up and the opposite as it's normal bounds to make it go down. So if you want to make the assets go up, you're gonna do the same thing as it's normal balance of debit. If you want to make the assets go down, you're going to do the opposite thing as it's normal balance credit. If you want to make the liabilities, the equity or the revenue go up, you're gonna do the same thing as it's normal balance. Our credit. If you want to make a liabilities, equity or revenue go down, you're gonna do the opposite thing. As it's normal balance a debit, we are now able to define rules to make accounts, go up and down, apply rules to make accounts, go up and down and explain how rules are used to construct journal entries. 17. 215 Journal Entry Thought Process: Hello. In this presentation, we will discuss a thought process for recording financial transactions using debits and credits objectives. At the end of this, we will be able Teoh List Thought process for recording journal entries. Explain the reasons for using a defined a thought process and apply thought process to recording journal entries. When we think about a thought process, we're gonna start with cash as the first part of the thought process is cash affected. We've discussed a thought process. When we have considered the double entry accounting system in the format of the accounting equation, the thought process will be much the same. Here we now applying that thought process to the function of debits and credits recording the journal entries with regard to debits and credits. Remember, the objectives of the thought process is going to be that we want to get moving win recording journal entries. We want to make sure that we don't hit a wall and that we can't move forward. We want some kind of system to help us to make the steps forward, so a thought process will tell us where to begin. Oftentimes, there's a lot of different areas where we can start recording a transaction. There's no necessarily correct or incorrect way to start recording a transaction. But if we have a system that will help us to just leap right into what we want to dio, help us avoid errors when we make that system and help us to move forward, the second reason we're going to use the thought process is that it does eliminate many errors that people start to think about when they think about debits and credits. Just like in math, it's possible to have one set of problems. Apply a rule to that set of problems that works on Lee for that set of problems and is not a universal rule doesn't work in all sets of problems there. That would not be too bad of a problem if we were to recognize that that rule only applies in this particular area and know the reason why. But typically we don't do that. We tend to apply the rule universally and then basically have to unlearn it at a later time . A systematic thought process will eliminate that so that we could just learn the correct way of doing things from the start and that will make things a lot easier. Ah, thought process will also help us. Teoh have a very efficient way of approaching the creation of journal entries. So we're going to start off with fairly biggest and journal entries journal entries that many people could just memorize. Once they see it, we can memorize the debit and credit. But if we have a thought process and we get to a more complex journal entry, we then have a format for starting to construct the journal entry. That will be a lot easier for us to construct. That is more difficult journal entries, and it will be a lot easier for us to just construct the normal journal entries that we deal with. So those are some of the reasons that we want to learn this thought process. First thing we're going to start off with is cash affected. So any time we're gonna record a transaction transactions being like we're gonna pay a bill , we're gonna invoice someone. We're gonna enter a bill, we're gonna do payroll. All those normal kind of things. We're gonna have normal transactions, will have a debit and a credit question is what do we debit first, Where do we start? In terms of interpreting this, we're gonna have at least two accounts affected all the time. Which accounts should we start with? I would I would suggest that we always want to start with cash First, cash will be affected in, like, 75% of transactions. Cash is involved in just about every cycle at some point within the cycle, meaning it's gonna be involved in the receivable cycle or the sale cycle. At some point, it's gonna be involved in the purchasing cycle at some point gonna be involved in the payroll cycle at some point. And therefore, if we can understand what's happening to cash, we will be able to deal with at least half of many many of the journal entries that we will be dealing with. The other reason to start with cash is that it's very easy for us to quickly start to understand what is going on with cash, meaning it's very easy for us to know if cash is going up or down. Either way paid cash or we received cash. So when we are asking the question, should cash go up or down? Ah, That's very easy for us to tell. Given the context of a problem unlike another account, like if we're talking about unearned revenue or something like that are many liability accounts or a lot of different accounts are accumulated depreciation. It can be difficult for us to understand whether it goes up or down. Once we know if it goes up or down, it can be difficult for us to know. Should we debit or credit that account, we will start to learn the debits and credits related to cash much faster because one, it's an easier account to deal with. And two, we will be dealing with it a lot. Him. Therefore, we'll start to memorized. How do you make cash go up or down? Debit or credit? Once we know that, then we can move to the second account. Therefore, if cash is affected, we're going to record the transaction for cash. Whether it goes up or down, we're gonna ask ourselves the question. Does cash go up or down? Keywords will be received cash and paid cash. Most books will use those terms, and obviously, if we received cash, cash is going up. If we paid cash cash is going down, then we can record the part of the journal entry related to cash, and we're gonna have to apply a rule in order to see how things go up and down. So we're gonna do the same thing to it as it's normal bounce to go up so cash it would go up with a debit and down with a credit. We'll talk more about that later, but once we record cash, then we can think about what happens to the other transaction. Note that once we have half the journal entry in there, if there's only two accounts affected, say cash went up, say we debited cash, then the other side must be a credit because we need an equal number of debits and credits within every journal entry and therefore, whatever other account we need to be dealing with, we know which way it will go in that we know whether to debit or credit it after we have thought about what happens to cash. So that's gonna be the thought process we want to give. Get going now if we go back to Step one and we ask, is cash effected and we say no, it's not affected. Then I would think about what we received. What did we oftentimes what did we get? Oftentimes it's going to get an expense or we purchased an asset. And by and by doing that, we can think about it on account, often times closer to cash, meaning If we purchased an asset, for example, it's gonna be something that we received. It's gonna be an asset. It's gonna act similar in nature to cash, and therefore, it might be easier for us to interpret whether it is going up or down and therefore whether to debit or credit it. Once we know that, then we can use that information to apply to the next half of the transaction and see whatever other accounts is affected which way the other account is going. So let's take a look at an example. We're going to say, paid cash for utilities of 750. That's gonna be the transaction. We're gonna ask. Our first question is cash affected? Key term here is paid, so we're gonna say yes, cash is affecting. We paid cash. Therefore we can start to think cash is going. Something's gonna happen with cash. We're gonna keep that in her mind. And we're gonna always try to write down whatever we can as soon as we can so that we can start building on that. Then we're going to say, Is cash going up or down? And the key word here paid would indicate the cash is going down, and therefore we're going to write that down. We will cover the one rule on how to make accounts go up and down later. But for now notes that, uh, we're going to the same thing to increase it in the opposite to decrease. So cash has a debit normal balance. Therefore, we're gonna make it go down by doing the opposite thing to it. A credit. We'll cover that more later. But just note that once we know what's happening with cash weaken, Look, we're gonna credit cash then, according to our rules, we need to debit something, and so we can actually write that down. We're gonna say cash is gonna go down. We were to post that it would decrease cash in this case from 1 24 400 down by 750. Credit to 1 23 650 We also know that we will debit something, So I'm just gonna write down the debit. If I was doing this by hand out to write down the credit right down the debit, then we just need to know what this account is. I know already know we're gonna debit it. In other words, that's that's the point of this of this process or one of the points of the process. Then we're going to say what other accounts is affected. So we paid cash for utilities. Now, if we go through this and take a look at the trial balance, we could go through the list of accounts, and I always recommend having a trial bounce in front of you if possible, even if it's not related to the problem. You are working with weaken. See down here that we have utility's expense. That's probably gonna be the account related to utilities. We can then say utility's expense will then be debited. Note. We already knew that we were gonna debit utility's expense because we credited cash. That's one of the reasons to use a process such as this note, however, that we do want to double check the utility's expense and analyze why we're debuting the utility's expense so that we can get a better understanding of what this account does, how it functions rather than just doing whatever we need to do to it. Because we did a credit to cash in this case, we want to understand it. So you want to double check after you apply this system after it works after we get the completed journal entry, we then want to say who and utilities expense. What type of account is that on the trial balances down here in the expense section. Note that we always have the order of assets, liabilities, equity revenue and then expenses. We're down here within the expenses. All expenses have debit balances and they typically only go up. And therefore we're gonna increase it by doing the same thing to it, which in this case, is another debit. We'll talk more about that rule later, but just keep in mind that we do as we apply this system, want to double check this other account that we came up with just by knowing what we did to cash first so that we better understand it. Then we're gonna go back to step one, and we're gonna have another example where you say, purchase supplies on account we're gonna apply. Our first question is cash affected, and the key term here is on account. Whenever you see that in a text, it might say on credit. But many texts avoided the term credit in that context because they don't want to confuse the term credit with the debits and credits in terms of recording debits and credits. Therefore, if you see that term in terms of purchasing something, it typically means either accounts receivable or accounts payable. When purchasing it means accounts payable. It means we have not paid cash in essence. So cash affected? No, in this case, because we bought something and we didn't pay cash. Kind of like we bought it on a credit card. And therefore we got to go to the second question say, what have we received now? You might be saying, Hey, why don't I just think about the fact that we paid for not with cash, but, like, kind of like a credit card, which in this case would be are payable account, and we could start with that. But it's a little bit more difficult to know whether the payable is going up or down, and whether or not we should debit or credit a liability. Accounts such is payable. If we think about what we received supplies in this case, it's a little bit easier. Supplies weaken See up here isn't is close to the ass. It is an asset, its in the acid section. So it's gonna behave in a similar way as cash. And it's pretty easy for us to say We got supplies, we received supplies, supplies then is going up. Therefore, we can answer the question as to whether it be going up or down a bit more easily. Maybe then we would be able to answer the question with payable. And then we can say, Well, how do we make something go up? We're gonna apply our one rule that we'll talk more about later, which is we're going to the same thing to it as it's normal balance, so normal bounce of assets or debits. We then will increase it with a Devon. Then we know that we're going Teoh have to credit something we're going to say What are we gonna do with the credit? We're gonna credit something. So no, I don't Even I don't know what this other account is, per se, but I know that we were going to credit it. And therefore, once I determine what this other account is, we don't have to basically go through the question of Is it going up or down? And should we debit or credit it, we will, just to double check it. But no, this system will tell us what we're gonna do here first. So what other accounts is affected? Note? We didn't pay cash, so cash isn't decreasing. As we purchased these supplies, we bought it on a count on account means kind like a credit card account on account. We owe vendors for that being the accounts payable accounts. So accounts payable, then is the credit note once again that we knew that we were gonna credit this account because we debited the supplies and therefore didn't really need to analyze Why were crediting this account. But if we were to analyze and we should analyze it and we will analyze it as we go so that we can get a better sense of what accounts payable is and how it how it behaves in terms of debuting and crediting how to make it go up and down. We know that accounts payable is a liability. Accounts liabilities have a normal credit balance and to, and we need to make it go up because we ome or money we ome or the bad thing. Therefore, we're gonna do the same thing to it, which in this case, is a credit again. We'll go through that one rule mawr in terms of how to increase or decrease accounts in a later lecture and later discussion. But just note that we do want to double check on those and see why the credit is going to accounts payable. So we better understand that process objectives were now able. Teoh List Thought Process four. Recording Journal entries explain reasons for using a defined thought process and apply thought process to recording journal entries 18. 220 Trial Balance: hello. In this presentation, we will be discussing a trial balance objectives. At the end of this, we will be able Teoh, define a trial balance, list components of a trial balance and explain how a trial balance is used when considering the trial balance that we first want to think about where the trial balance falls within the construction of the financial statements. In other words, what processes go before the trial balance? What goes after the trial balance? Where's try bounce fit into our process? Remember the Indian goal, the ending process of the accountant being to compile the data in such a way to create the finance, financial statements, those financial statements of being the end product? Typically, if we're thinking about a linear process, then we're thinking about all the transactions that would happen during the month. Those being recorded in terms of journal entries in the general journal. So we would be recording a bunch of journal entries one looking like this. This is recording draws and checking account for a shareholder who are a drawing from a sole proprietor being pulled out of the company. Then we would post all of those to the General Ledger. So posting the general journal entries from the journal entries from the General journal to the General Ledger. The General Ledger being a list of all the accounts. So we're gonna have a list of all accounts in order by assets, liabilities, equity income and then expense accounts. And we're showing all the activity for whatever period that we are now covering. Typically, we're looking at a month by month period or possibly a year's period. Whichever the case may be, we're gonna see all this activity when considering the general ledger of this particular account of being a debit to drawings. Here's the debit to drawings and a credit to cash. Here is the credit to cash that shows all the activity now the problems that we will be working. And also when you're thinking about a computer system, note that this tends to happen mawr all at the same time, meaning if we're working this by hand with paper and pencil, we would record all the journal entries and then record the posting of all those journal entries to the General Ledger and then take those General Ledger balanced is to create the trial balance. That's a useful way to think about it when considering how the process works in reality, in a computer system and as much as possible in any system that we can put together. We would like to do more of this at the same time, meaning I would like Teoh construct the journal entry and then post it and then record the posting or the trial balance as we go. We're rather than waiting till the end in practice. That's how we will look at it. But it's useful to think of this process as a linear process, as we're just gonna do all the one all of the journal entries and then all of the G l and then all of the trial balance when considering where the trial balance falls. Once we have these balances, then we're gonna take these. Ending balance is here. These Indian balances in all these accounts the ending balance for cash 1 6160 for accounts receivable. 800 for the supplies. We got 3 25 We skip over here, Teoh to accounts payable. We have a credit balance represented here by the brackets. Credits beating the debits of 1890 notes payable Credit balance of 8000. We're just gonna take those Indian balances, then to create the trial balance. The trial balance, then, is something that can really be a lot easier for us to look at and get a quick glance at just those any balances eliminating all the detail. For example, in the cash account, we will see on the trial balance 6160 eliminating all of this detail within the trial balance and thereby being ableto work with something that's a bit more manageable and can tell us some different types of data. So when we look at the trial balance, then it could be formatted in a couple different forms, but were typically always gonna have the accounts listed in the same order as we find them on the general ledger. That's going to be the assets in green in this case on top, then the liabilities, then the equity, then the revenue, then the expenses. Remember, if you remember that if you are talking about a sole proprietor, your equity will be capital and the drawings will typically be in the equity type area as Well, if you're talking about a corporation, you're gonna have common stock and you're gonna have retained earnings, so you'll know, Tear that up here in cash. We've got that 6160 again. We eliminated the detail here. Now, the reason we're going to do that, of course, is that now we can manipulate this data and do more things with it. At the end of the day, we're gonna use this trial balance in order to construct the trout, the financial statements, the end product. But the tribe pounds also helps us to kind of see what is going on as we go. Meaning we can easily add up these assets and see what our total assets are. See what our total liabilities are and make some quick it comparisons, as we would do with the financial statements with just this trial balance. Note that most textbooks were actually going to introduce the trial balance before we introduce the General Ledger. Why? Because the trial balance is a lot easier to look at right. It's a lot easier to look at the trial balance even though if we think about the normal, systematic format, we look, we do the tribe bounce after we do the general ledger, the trap bounce being constructed from the Indian balances of here, The General Ledger. But it's gonna be easier to look at, so we want to look at that first in practice. Note that travels will typically be constructed by a computer system as we enter data into the computer system and a lot of times. Then in that format we're looking at the end result to try balance or even the financial statements. And we typically want to go back in time. For example, if I want to know how we got to this 6160 in in the cash account from San, whom that looks too high or that looks too low, then we oftentimes in that situation, say we've already constructed the trial bounce and then go back to the detail and say, Let's see the detail and to the General Ledger, How is this any number created where my where is my thinking going wrong and may thinking that this balance is too high or too low and we go back and find that detail. That's another way we can we can kind of consider where the trial balance lies. It's it's used in order to construct the data. It's done from the general ledger when considering it from, ah, practice practice standpoint in terms of how is the company doing? Oftentimes we start from the end trial balance. The ending balance is, and then we can think about looking backwards to that. General Ledger notes that the trial bounce is a great cheat sheet, meaning if you can have a cheat sheet for any kind of exams or anything like that, or when you're just practicing with problems, you want to start off with a trial balance as a good cheat sheet. Because even if it's not related to the problem that you are on, it will give you a lot of information, meaning it lists all the accounts. So if you're picking some of these accounts that you may not really know such as Under and revenue, it's kind of account that takes a little while for most people that get and not only get in terms of now, I know what 100 revenue is. I've heard it a few times, but then is it a debit or credit balance often a question we don't really know until. But we confined it by looking at the trial bounce that we can see here. That's in the credit side. It's gonna be a credit balance and and the trial bounds, therefore, is a great cheat sheet to half. So I highly highly recommend getting used to a trial bounce and having in front of you. Whenever working any problems, it will tell you what the normal balances are For many accounts when working with smaller problems, especially like multiple choice questions, they're not going to give you enough information as you would have in real life, meaning in real life you would have access to a trial balance. Typically in a book problem, you will not. And so therefore, if you can get one in front of you, I highly highly recommend doing that note the key component of the trial balance being that the total assets equal the total I mean total debits equal the total expenses, which is the tribe bounce format that deben credit format of the accounting equation with a double entry accounting system of assets, equal liabilities plus equity. So if assets equal liabilities plus equity, then it must be that total debits and total credits will be equal for all accounts involved . So we broke this out in terms of debits and credits. We can also do very quick calculations, meaning if I would, especially if I'm in Excel, I could just highlight these numbers and excel and add them up. Give me total assets. I can highlight these numbers, add them up, give me total liabilities. I can subtract the revenue minus the expenses and get the net income very quickly. I can just add up the total equity and get those numbers very quickly. We can actually maneuver around the trial balance a lot quicker than even the financial statements if it's formatted well. And if it's an excel even even faster, the reason we're gonna convert these two financial statements is because we're trying to convert it to something where people don't know debits and credits. But if you know debits and credits, this is actually a lot more versatile in many ways, then actually the financial statements you can basically pull a lot more information a bit quicker in this format, sometimes than the financial statements Note that I have represented the credits with brackets. That is not always the case depends on the textbook or the software you will see. Most textbooks will not represent credits with brackets, but many software programs will. And if you work with excel, I highly, highly recommend, you know, considering this kind of formatting, because it will make your life much, much easier. And so I'm gonna I'm gonna try Teoh to show that and try to convince people to convince you of that. If you're gonna be working with debits or credits a lot, you're gonna wanna work with excel you're gonna wanna learn Excel. You're gonna want to make sure that you make excel part of your learning process and win learning Excel. It will make your life much, much, much, much easier if you start using formulas and putting credit brackets around the credits will help to do that. The first example of that is to if we were trying to convince the trap, condense a trial balance down. We can do so in this format and note what this does for us. It's going to convert the trial balance from just at two columns to one column that seems like not a big deal right now, But when we get to later worksheets where we're gonna basically be looking at the activity that happens and then an ending trial balance, that would be six columns here. And if we can convince condense those down. We're getting down to three columns. So the fact that this will increase by two columns each time we add something and this will increase by only one column each time we had something is really gonna save time down the road as you'll see when we when we start making worksheets, you'll see worksheets in the book and in textbooks that will, you know, have, like 10. You know, 10 columns, and that's a little unnecessary. We'll also see some complexity and formulas where if we were doing it by hand, it might be useful to do if we had a calculator. But if we're doing it in Excel, something I highly highly, highly recommend, we get used. Teoh. Then, uh, then the former's will be a lot more simple if we don't have the two columns and instead use this format here. So I'm gonna try to convince us of this and show us and in the problems how this will work and how to convince how to convert this back to this and back and forth as needed. And that's a typical kind of thing that we will be using in practice to and we're gonna have. In this case, the debits are gonna be just the positive numbers that credits we're gonna represent with brackets Excel seen those as negative numbers. And therefore we know that, of course, if the debits equal the credits, then if I subtracted debits and credits, that would equal zero. So if we then make the credit's ear the negative numbers, we can check our balance simply by summing up this Rohan Excel meaning summing up would take all the positive numbers minus all the negative numbers, and that will show us we are in balance by it being zero. The pros of that is it's going to give us a really quick indication if that's any other number than zero were out of balance, as opposed to us having to kind of look at these two where we could kind of miss where were out of balance. That Colin of that is, of course, that we can't define exactly how Maney debits or credits we have, but typically that's not the important information we're looking at here. The total debits and credits don't give us any information about how the company is doing. It just tells us whether we're in balance or not. The number that we want to know. Here's net income at the bottom, a number much easier to calculate right here. We can just add it to the trial balance if we want to. If we use this format because it'll just calculate that's the calculation of this credit minus these dep its meaning, that is income. Now that is not a loss. Now that's gonna be what we have to do whenever we learn. Debits and credits is to understand the difference between what a debit and a credit is, as opposed. Teoh the functions of plus and minus. And there's no way to get around that whether we use formulas with it with brackets and negative numbers, as credits or not, you're gonna have to add and subtract debits and credits. So the idea of not having negative numbers are not having bracketed numbers, you know, reducing the problem of having to distinguish between debits and credits and plus and minus , I don't think is gonna work, Really. We're gonna have to, No matter what we dio, we're gonna have debits and credits were gonna be adding and subtracting debits and credits , and we're gonna have to keep straight in our mind. What does a debit and credit mean? Am I looking at something in terms of debits and credits, or am I looking at something in terms of a plus and minus operation format? And so we're gonna have to keep keep that straight as we go, and we'll do that by just having a bunch of problems that we're gonna work through. In order to get that information, we are now able to define a trial balance, list components of a trial balance and explain how a trial balance is used 19. 225 Cash Journal Entries with Cash: Hello. In this presentation, we're going to record business transactions involving cash using debits and credits. At the end of this, we will be able to list transactions, involve in cash record transactions involved in cash using debits and credits, and explain the effect of transactions on assets, liabilities, equity revenue expenses and net income. We're gonna record these transactions on the left hand side in accordance with our thought process. We're then gonna post them to a worksheet format, not necessarily or in this case, not a General Ledger. But in a similar way. We will post it to this worksheet in order to see what is happening to each of these accounts individually as well as the groups of accounts in terms of assets, liabilities, equity revenue and expenses. Notes the order of the trial balance always in the order of assets, in this case in green liabilities and orange. And then we have the equity and revenue and expenses, the income statement accounts and net income at the bottom calculated as revenue minus expenses. We're going to start with transactions that will include cash because cash is gonna be that account will get most familiar with. It's our first question in our thought process. Once we understand what is going on with cash, then we can understand what is going on with the 2nd 2 component of the transactions first , a transaction that says owner deposits cash into a business. This is typically going to be one of the first transactions that will happen within a business and within a many types of book problems that we're having a longer, comprehensive book problem. First question is cash affected were going to say yes, the owner deposits cash into the business. Cash is affected. Cash is going up because there is a deposit into the business. Cash has a normal debit balance. In order to make any account to go up, we do the same thing to it as it's normal balance, which in this case would be another debit. So we're gonna think about cash first, and we're gonna think about the idea that we need to debit the cash account, and that's we're gonna write that down as we go. So whether we're doing this in excel or by hand, even if it's ah, problem where they don't give us the numbers, I would write down the fact that we're gonna debit to cash first and then think about the second component. If we were to post this out, then we're starting at zero. We're going in the debit direction 100,000 to 100,000. We then need a credit of something, and we just need to know what that credit account will be. The person who put the money in in this case is the owner. Therefore, we're not crediting revenue because it wasn't a customer that gave us the money. It's going into the owner capital account. In this case. If it was a corporation, note that this would be the type of transaction would be the purchase or selling off stock investors purchasing stock within the corporation. The common stock would be the credit. There's going to be the credit credit increasing note that we knew that we were gonna have the credit because we debited cash and therefore must have credit some other account if there's only one other accounts affected as there is in this case. But we want to double check ourselves so that we better understand this second account here in order to double check ourselves. We're going to say? Is the capital account a debit or credit normal balance? It's a credit normal balance. Should it be going up or down a bit more difficult to know than the cash account? That's why we focused on cash first as to whether the capital count should be going up or down. But it should be going up because the company owes the owner more money in this case, or the net value of the company has increased. How do we make something go up? We do the same thing to it as it's normal balance, which in this case would be a credit note that here I have the debits and credits in terms of the debit and credit column and credits in brackets. Over here we just have the credits representative in brackets. So we have a adjusting entry, a debit and credit, and then we have the ending balance, a debit and credit. This is very useful when we work with a worksheet like this, and that's why I want to get used to this kind of work sheet. It will very much simplify the worksheet, and if you use formulas within Excel, which I highly recommend doing, then it will simplify those formulas as well. Assets are increasing. Nothing's happened into the liabilities and equity is increasing. Net income, however, is staying the same note that nothing is happening to the revenue or expense accounts. Therefore, nothing's happening to net income. Although equity and the whole income statements kind of part of equity, remember is going up due to the capital going up next transaction, we're gonna say, receive cash for work completed. So first question we will have here is cash affected. And of course, the key word is received. So we're gonna say yes, received cash. Cash is going. Is it going up or down? Of course it's going up because we received cash. How do we make something go up? We do the same thing to it as it's normal balance. Cash has a debit normal bounce represented by the fact that it does not have brackets in this case. Therefore, in order to make it go up, we will do the same thing. Another debit. So we're gonna debit cash. If we were to post that out, then we have the 10,000 increasing the debit balance by another deputy to a debit of 110,000. We now know that we're going to credit something for that 10,000 and just need to know what that credit should go to. And we have done work meaning we have earned in this case revenues that we earn revenue when we do the work. People paid as cash at the same point in time that the work was completed in this case. Therefore, we have cash and revenue happening at the same time revenue being recognized under the revenue recognition principle because we had completed the work at this point in time. If we were to post that out 10,000 increasing in the credit direction, we knew that we were gonna credit revenue over here because we debited cash. But we also want to think through that and see if it makes sense. We know that revenue has a credit balance. We also know that revenue on Lee goes up, meaning customers I don't pay us. We only pay customers. Net income will go down, but net income goes down when expenses go up. Net income doesn't go down cause generally revenue goes down because revenue typically doesn't go down. So note that the entire income statement revenue and expenses typically only go up. Ah, and the net income is calculated as revenue minus expenses. Therefore, how do we make revenue go up? We do the same thing as it's normal balance, which in this case would be a credit once again note the credits represented by brackets here. This not being a negative number for our purposes in terms of debits and credits but representing an increase in the credit direction. Accounting equation Assets are going up because the cash went up liabilities remaining the same equity increasing because equities gonna do the same thing as net income. Net income is calculated as revenue minus expenses and net income went up because revenue went up. Therefore, total equity is going up. Note that, of course, net income is going up, as we just said here, because the revenue is increasing and net income calculated as revenue minus expenses, next transaction paid employee wages of 30,000 1st question is cash affected were going to say that cash is affected and is it going up or down? In this case, we're gonna say it's going down. Keyword paid When we say paid, we usually mean paid with cash. And of course, the cash would be decreasing if something were then paid. How do we make cash go down? We do the opposite thing to it as it's normal balance. It's normal balance. Being a debit means that we will do the opposite of a credit to make it go down. Note here that we're gonna put the credit on the bottom. I'm leaving a space to put something on top. Credits typically go on the bottom. It is a convention that the debits go on. Top credits go on the bottom. Because of that convention, however, it's not required that we work from top to bottom. Left to right, I would recommend working in any way that's easiest for us to work. It's easiest to think about cash first and therefore think about cash first and put that transaction on the bottom. Also note that this idea of having debits on the top and credits on the bottom is really only a convention. If you had him in the right column and formatted in whatever way is the correct way in accordance to what you're working with, then it wouldn't really matter that the debit strong top or that or the credits are on top . But it's a convention that we do want to follow as much as possible. And it is a convention for computer programming. I think that's that's part of a convention in part of the reasoning for it. If we were toe program a computer code, the computer would need to know what it wants to put on top typically, and typically the debits will go on top. If, however, were constructing a more difficult journal entry of longer journal entry, as we will do later, we might deviate from this convention. If we're doing something like an audit and we wanted to be able to go back to that journal entry and read it and figure out exactly what we did, then it would be better for us to construct that transaction in a way that we can then interpret it in which we, as human beings, could read it and interpret it and understand what we did and why we did it. But we're going to stick with the convention as much as possible. Just note that we're gonna work with what we think is best to do are easiest to dio credit in cash that in this case, and that will mean that we're going to debit something and we just need to know what that debit will be. Posting out the cash transaction. We have a debit balance. Normal balance of 110 were doing the opposite thing to it, crediting it, bringing the balance down to 109 400. We're then going to debit wages expense. So wages expense will be debited down here. It's an expense account. They always go up in the deputy direction. Note that we knew we were going to debit wages, expense because we credited cash. That's why we always start with cash. But we want to think through it now. We're gonna say wages, expense, wages Expense is an expense. All expenses have normal debit balances. All expenses typically only go up. For example, the employees don't typically pay us. We pay the employees. The utility bill doesn't usually pay us. We pay the utility bill, so we're always gonna increase expenses in the debit direction. And that's always gonna decrease net income. That's always gonna decrease the owner capital or the total equity I should say So in this case we're saying that assets went down and liabilities remain the same. And we're saying that the equity section is going down because expenses went up, bringing net income down. Net income calculated as revenue minus expenses. So here we see that net income is decreasing and that's represented by the 600. So we were at 10,000 minus the 600. Bring us to 9400. The 10,000 minus the 600 received next to transaction received cash for work that will be done in the future. 15,000 in this case, we're going to say is Well, now all cases were first question. Is cash affected? Yes. Is it going up or down? Up keyword received cash. How do we make cash go up? How do we make anything go up? We do the same thing to it as it's normal balance. Normal bounce for cash. Being a debit means we will debit cash. So we're going to say cash is going up. Then we know we're going to credit something. We just then need to know what we're going to credit in this case, the work is done in the future. So whenever we get cash, it's typically gonna be from the customer. But we can't always credit revenue. We need to know when the work was done, that being the driving factor win on an accrual basis, the cruel base is driven by the revenue recognition principle, saying that we reckon has revenue when earned. So it's not when we receive the cash. In this case, we're saying we got that we're gonna do the work in the future. So we haven't done the work yet, So even though we got cash, I cannot credit revenue and therefore must credit something else. That's something else. In this case is unearned revenue. It's a liability account, so cash is gonna increase with the debit, So doing the same thing to it. Increasing in the liability count is gonna be unearned revenue. Now again, if we could figure out that it's under in revenue, we already know that we're gonna credit it. But we do want to think about that and say, Why would that be the case? And in this case, we owe something in the future. We owe work in the future or we owe that money back. And therefore that's gonna be the definition of an ally ability, something that we owe in the future because of a transaction that happened in the past. Therefore were increase in a liability. Liabilities typically have credit balances or always have credit balances. We need to make it go up. The bad thing is increasing by doing the same thing to it as it's normal balance, which in this case, is a credit. So that's the justification there. We see now that assets air going down liabilities are going up equity remaining the same. No effect on net income, no effect on revenue and expenses, even though we got the cash because we have not yet earned that cash we have received not yet earned the revenue. Next transaction paid cash for utilities. $750 1st question. Is cash affected? We're going to say cash is affected. Is it going up or down? It's going down. Keywords paid cash. Therefore, cash has a debit balance. How do we make any accounts go down? We do the opposite thing to it as it's normal balance. Cash has a debit normal balance that opposite, then our credit. We'll start off with the credit to cash. Remember that we're gonna leave a space and put the credits on the bottom. We're gonna start with the credit, even though it's not the first thing in the rose from left right top bottom, because it's the easiest thing to think about posting that out. Then we'll bring the balance in cash from a debit of 1 24 400 minus the credit of 7 50 to 1 23 6 50 We then need to debit something, and in this case that something would be utility's expense. So utility's expense. We already knew that we were going to debit it because we credited cash. That's the point of crediting cash, but we also want to think through it. We know that utilities isn't expense. All expenses have debit balances, and they only go up in the deputy direction. Therefore, we're gonna increase you to his expense by doing the same thing to it in this case, another debit. So we increased the utility's expense assets, then going down from this transaction, the liabilities remaining the same and the equity decreasing because net income is going down. Net income calculated as revenue minus expenses. Ah, and therefore going down bringing total equity down. Net income here going down. It was at 9400. We, deke. We increased the expense decreasing net income to 8006. 50. Net income calculated as 10,000. Minus 600 minus 7 50 Total equity being the 100,000 plus the 10,000 minus the 600 minus the 7 50 Next transaction paid cash for supplies. First question is cash affected. We're going to say yes. Caches affected. Cash is going down. Keywords paid. Therefore, we're going to the opposite thing to it as it's normal balance. This case, that being a credit, we're gonna put the credit on the bottom. We then? No. We're going to debit something. That debit being what we purchased will be supplies. So supplies in this case is we had to debit it because we credited cash, but we want to think through it. Supplies is an asset account. It's going to be increasing. We got more of it. Assets like cash have debit balances. We need to make it go up and therefore are doing the same thing to it as it's normal balance, which is another debit. So we're kind of justifying or double checking that amount. There's the increased their bringing the balance up the effect on the accounting equation. Assets are going up, but also going down. No net effect on the accounting equation. One asset increasing one. Decreasing liabilities. Remaining the same equity remaining the same once again. Net income also remaining the same. The supplies going on the books as an asset because it has not yet been used, Not consumed In order to help generate revenue and therefore not yet expense, we are now able to list transactions, involve in cash record transactions involving cash using debits and credits, and explain the effect of transactions on assets, liabilities, equity revenue expenses and net income. 20. 230 Accounts Receivable Journal Entries: Hello. In this presentation, we will be recording that journal entries for business transactions related to accounts receivable. Otherwise no one as the revenue cycle. We will be recording these using debits and credits. At the end of this, we will be able Teoh list transactions involving accounts receivable, record transactions involving accounts receivable, using debits and credits, and explain the effect of transactions on assets, liabilities, equity revenue expenses and net income. We're gonna be recording these transactions up here on the left hand side, constructing those journal entries in accordance with our thought process, our list of questions to most efficiently construct the journal entries. We will then be posting them not to the General Ledger, but to this worksheet here so that we can see the quick calculation of the beginning balance and what is happening to the individual accounts as well as account types in that we have the accounts categorized, as is the case for all trial balances accounts being in order that order being assets in this case in green that liabilities in orange of the equity light blue and the income statement accounts of revenue and expense type accounts. First transaction performed work on account for $10,000 1st question, we will always ask. Is cash effected in this case? No, we didn't get cash. And the key term here is on account. Be aware of that key term in real life. We would know what would be happening here. Meaning we did work for a bookkeeper. We did the bookkeeping, and then we sent out the bill. Have not yet received the cash in a problem that's in a book. They have to indicate that in some way often a very generic type of thing here, where we're just a service company and we did work. And the key term being on account on account will mean either accounts receivable or accounts payable when working with the accounts receivable or sale cycle. As we are here, the account, when you see on account, will be accounts receivable. Some books might use the term on credit, and in practice you might hear the same term credit. The reason many books avoid that term is because we don't want to confuse it, or the book doesn't want to compute it. Confuse it with the idea of debits and credits, mixing up the meaning of what a debit and a credit is. But when you hear that term in real life, you gotta know what the distinction is when someone says they're gonna have something on credit versus Debuting or in crediting the account within a journal entry. If cash is not affected, then we're gonna ask, What did we received? And what we got in this case is an IOU. We got people owing us money. We got a promise to pay at some point in the future. That's gonna be our accounts. Receivable accounts are second favorite asset account, not as good as cash, but we like people owing us money. Eight therefore, because it's an asset has a debit balance. We need to make it to go up because people always more money. So how do we make an account to go up? We do the same thing to it as it's normal balance it being an asset. Having a normal debit balance means we will do the same thing of another debit. So we're gonna debit the accounts receivable, and that means we're going to have to credit something for the same amount. Why're people gonna pay us 10,000 in the future because we did the work today. We performed the work today in their four earned revenue or income, the credit going to revenue or income. We already know that if we know that it's gonna be revenue or income, that we will be crediting it because we debited the accounts receivable. But we want to think through that. Remember that revenue is an income statement. Account revenue and expenses being the income statement accounts and income statement accounts on Lee go in one direction. Revenue accounts going up in the credit, the direction. Therefore, we're going to do the same thing to it, which in this case, is another credit. Also note that according to the revenue recognition principle, we're recording revenue here when the work was done. Although we have not yet received the cash and typically this would be like an invoice transaction. The transaction would be recorded wind invoicing the client, as is shown here. So if we post this out, we're going to say that the Accounts table goes from zero up in the debit direction by 10,000 to 10,000. The revenue starts at zero, goes up in the credit direction by 10,000 to 10,000. Remember here that we are representing debits and credits in two columns and the credits with brackets on the journal entry. But when posting, we're showing the credits as bracket numbers on Lee, not in a separate column and debited numbers without brackets. This will save a lot of room when we post to a worksheet like this, and that's why we will be working with this in practice. It will save a lot of time. If you're working with Excel, which I highly recommend doing, then it will save a lot of functionality in the formulas as well. The effect on the accounting equation. Assets increasing as cash goes up, liabilities remaining the same and equity going up because net income is going up. Net income going up because revenues going up. Net income calculated as revenue minus expenses. Net income Increasing equity. Here we see that that net income is increasing due to revenue increase in net income, starting at zero going up by that 10,000 calculated as the 10,000 minus zero minus zero. Remember that that brackets does not mean negative number for us when considering this in the format of debits and credits. It represents a credit. It represents revenue over the debits, the credit of revenue over the debits of expenses by net income of 10,000. Next transaction received cash on account 10,000. First question we're gonna ask Is cash affected? We're gonna say yes. We're gonna say received cash. Is it going up or down? Up keyword received. How do we make something go up? We do the same thing to it as it's normal balance, which in this case would be a debit to an asset account which has a debit normal balance, increasing cash. Now, when first seen this many times when we start working with journal entries, we started to think, Wait a sec. Is cash really affected in this? Because I also see the key term on account. And I start to think that when I see on account and that means cash isn't affected, it means that some other accounts receivable or payable thing is happening here. And when we are purchasing something on account, that will be the case because we purchased in the last example we purchase something on account or in this. In that case, we did work on account, and therefore the on account was affected rather than cash. But in the second half of that transaction, what's happening is we're gonna receive cash for the the amount that was over to us in this case, what was in the on account account of accounts receivable? So bottom line, don't let that throw you off. If it says received cash, then we received cash. Think about that first, and then we'll think about why did we get cash? We got a credit. Something. What are we gonna credit? We can't credit revenue because it says on account. And that indicates that we didn't do the work at this point in time. That indicates that we did the work sometime in the past. And if we see this this transaction without having first seen the prior transaction, we've got to be able to look at this and say what? What? What must have happened in the past? What must have happened in the past is that Trump prior transaction. That's how the accounts receivable works. We do work on account. We invoice the client. We put that money into this account called or that receivable that I owe you into this account called accounts receivable. It represented here with this 10,000. Now, once we get paid, that 10,000 needs to decrease. So the credit is going to go to that accounts receivable. It's going to reduce that 10,000 back down to zero. So if we post this out, we see the 10,000 debit to cash increasing cash from zero up by 10,000 to a 10,000 accounts receivable. Then going down were they credit it being a debit account? We do in the opposite thing, crediting it, bringing that balance down 20 The effect on the accounting equation. Assets going up, however, as it's also going down one asset increasing one asset decreasing. In essence, we're getting a better asset and losing the worst. Harass it. We're losing the fact that people owe us money and getting the fact that we have now got the money. There's no effect on the liabilities and no effect on equity for look at the net income, no effect on net income. Note that although we got the cash now, we already recorded the net income in the past and therefore in the current transaction in the middle column. Nothing's happening to net income, and we are remaining at 10,000 representing net income calculated as revenue minus expenses . We are now able to list transactions involving accounts receivable, record transactions involving accounts receivable, using debits and credits, and explain the effect of transactions on assets, liabilities, equity revenue expenses and net income. 21. 240 Accounts Payable Journal Entries: hello. In this presentation, we will be recording a business transactions related to accounts payable or the purchases cycle recording these transactions with debits and credits. At the end of this, we will be able to list transactions involving accounts payable, record transactions involving accounts, payable using debits and credits, and explain the effect of transactions on assets, liabilities, equity revenue expenses and net income. We're gonna be recording these transactions up here in the left hand side in accordance with our thought process. We will then be posting these not to the general Ledger, but to a worksheet format so that we can see a quick calculation as to what is the impact or effect on the individual accounts, as well as the effect on the account groups as a whole. Remember that all the groups for the accounts will always be listed in order when you're looking at a trial balance, which is why I recommend looking at a trial balance whenever working through problems such as these, for example, we have the assets in green. Here we have the liabilities an orange, we have the equity in light blue and then the dark blue revenue and expense accounts. Those being the income statement accounts and these will be are beginning balances. Note that over here, when we record the journal entries, we are going to have debits and credits in separate columns and represent the credits with the brackets over here. On the trial balance, however, we're gonna combine the debits and credits into one column and represented the credits with brackets and note that the debits rep are the same as credits by a subtraction problem of debits minus credits being zero. The reason for that is that it's really going to simplify the process. It's really useful to know when working with Excel, it will help simplify the process and help to simplify formulas. And therefore it's worth. It's worth using. And so that's why we will use it so we can see that we have cashier at 50,000. We've got the That's the debit. Then we got the owner capital at 40,000 and we're starting out with revenue at 10,000. We are then going to record this first transaction, saying purchased supplies on account for 450 first question is cash affected and we're going to say no because the purchase happened on account. Therefore, cash is not happening. We know that on account is going to mean typically either accounts receivable or accounts payable in the context of purchasing, we mean accounts payable. So we might think that we should start with accounts payable, but I'm gonna Ah, and I'm going to say that we should start with what we receive. First reason being is because it can be more easier to know whether to increase or decrease what we have received because we received it. Therefore, it will be increasing and what the debit and credit will be related to it. So although we know we're probably know at this point, we do know at this point we're gonna be dealing with accounts payable. Let's think about what we got in this case. We got supplies, supplies. If we look at our trial balance is right here. It's in the asset section, therefore it is. And as it and we know that we got more of it, so it needs to go up. How do we make something go up? We do the same thing to it as it's normal balance. Like all the assets here, the normal balance will be a debit and therefore, to increase it, the same thing would be another debit so we can increase the supplies. And if we do that, then we know that the other account must be credited. And we know that other account is not a decreased to cash. We didn't pay cash if we had the credit would go to cash and decrease the asset. But instead we bought it on account here, supplies going up, by the way, supplies increasing from zero by 4 52 4 50 and then the other accounts being accounts payable. So we're increasing liability were increasing the bad thing. Now we already knew we were going to credit the liability that credit accounts payable because we debited supplies. That's why we worked it in this format. But we wanted just analyze that and double check that four hour cells. We know that the accounts payable is a credit bounce account. It being a liability account. The bad thing is going up in that we owe more money. We bought something on accounts, kind of like a credit card bill in that we owe money for the purchase that we have and that credit card tab then increases with a credit liabilities. Having a credit balance the same thing to it will increase it. That then being another credit the liabilities going up from zero by 4 50 in the credit direction to a credit balance of 4 50 Effect on the accounting equation. Would be assets are increasing because supplies are going up. Liabilities also in greasing because the accounts payable is going up and equity no impact . Nothing in either the capital account is happening here or the income statement accounts of revenue and expenses. Therefore, the net income as well is staying the same in that we had revenue before of 10,000 minus expenses of zero, giving us a net income calculated as revenue minus expenses of 10,000. Remember that this 10,000 here is a net income revenue of credits beating the debates of expenses. This is not a loss or negative number represents credits for us when we are considering the trial balance. And of course, new activity happened and we are remaining at the 10,000 net income revenue minus expenses . Next transaction paid cash for supplies purchased on account 450 first question is cash affected? We're gonna say yes. Cash is affected here. Key term paid. And that, of course, means cash is going down. So we're gonna decrease cash. Cash has a debit balance. We're gonna make it go down by doing the opposite thing to it, as it's normal balance, which in this case, would be a credit. We're gonna put the credits on the bottom because credits typically go on the bottom. Let's clean up a couple terms. That may be confusing when considering a book problem such as this note that we have paid here. And we also have another key term on account that may confuse us when we are first were working with these types of transactions because in the prior transaction, we said on account means that accounts payable or accounts receivable will be impacted in this case, accounts payable, and therefore we might think, Well, then, cash shouldn't be affected because we're dealing with on account transaction, something dealing with accounts payable. Note, however, that when we're purchasing something that would be correct if we purchased something on account, we didn't pay cash, but paid on account paid with something like a credit card paid on a tab. However, the second transaction will be us paying off the tab. And therefore we're gonna have to pay off the tab with cash. So that means that we're gonna have both an on account and paid in the wording in real life . Of course, we would have an idea of what we are doing. We'd be writing a check to possibly the credit card company or some vendor, and it would be very clear that we are degrees in cash with a check and writing that to a vendor to reduce the amount that we owe to those individuals. The IOU being the accounts payable account in a book problem. It's gonna be very generic. And we're just gonna have to know what those terminology terms mean. Obviously paid means we paid with cash. Note that if its had paid for supplies and it eliminated the cash altogether, paid means paid with cash in real life. Clearly we be paying with a check, but that means cash for a book problem on account Might. It might also say on credit. Many books will not include the term on credits because they're trying to separate the concept of credit from what is meant when we are debuting and crediting in terms of journal entries from other contexts, such as a tab increasing in decreasing, which could imply slightly different things. But note. If you see on credit, you're going to have to distinguish that from something like running a tab up or paying a tab off, as opposed to debit and credit in in terms of a normal journal entry type process. Also note. When we thought about cash first, we're gonna credit cash because we're decreasing cash and therefore we're putting it on the bottom. We have to put the credits on the bottom. Remember, we are not going to start by by forcing ourselves to do the debit first just because the debit goes on top and then format the journal entry from left to right. We are gonna think about the journal entry in a format that makes the most sense in a format that is easiest for us to construct. And it is easiest for us to construct cash first, so we will put that on the bottom. Remember that it's just really a convention to put the debit on top and the credits on the bottom. However, it's a convention we want to follow as much as possible. Book problems will, of course, mark you off if you do not. In in real life, there are situations when we would deviate from that convention. For example, if we're if we're auditing and we're performing longer, come more complicated journal entries. We may. And we do want to make the journal entry not in a format that applies Teoh just a convention like this, or to some kind of computer programming that convention, but in a format that someone human can go back and read and try to interpret as best they can. But so whatever the best way Teoh format in a journal entry in that context, that's what we would use. But we're gonna follow this convention, and we're gonna put the credits on the bottom, but still think about cash first. Then we just need to know that what we're going to debit here. And of course, we are going to debit. By the way, cash is going down from the 50,000 minus the 4 50 debit, minus a credit to 49 5 50 the debit being, As we stated, the other account of accounts payable, we know that we're going to deputy accounts payable because we credited cash. That's why we're gonna credit cash First, however, we do want to double check our cells, remember that the accounts payable represents money that is owed from the company to a vendor and there, and it liabilities have credit balances. We paid off the vendor, and therefore, this liability needs to go down. So we're gonna do the opposite thing to it, as it's normal balance, which in this case, is a debit. So that'll kind of double check ourselves. Here's the credit. There's the debit. It's gonna bring the balance back down to zero. Remember that in many book problems, they're not going to give us this journal. Entry in Sync wins after the prior journal entry. This one obviously follows the prior journal entry, meaning we bought supplies, hunting cabins, and now we're paying off on account. That will not be the case. Typically in a book problem. They're just gonna give you this journal entry, and they're going to say, Hey, you're gonna have to know that if you paid supplies on account that implies that in the past there must have been, at some point in time, a purchase of supplies on account, and therefore there must be something owed in accounts payable. They may not even give you the trial balance or tell you that there's something in accounts payable on. Just give you this phrasing, and we'd have to say whom. Well, if that's the case, we must have bought something on account in the past and therefore have a balance in accounts payable showing that we owe something and need to decrease that amount after we then pay off the amount we owe. If we look at the accounting equation, the assets, they're going down with the cash decreasing, the liabilities to are going down, with the accounts payable decreasing and the equity remains the same. Equity remaining the same would imply that net income to remains the same, meaning we had net income of 10,000 calculated as revenue minus expenses before the transaction. Nothing happened in this blue area. Neither of these two accounts being an expense or income account, and therefore we end with net income at that same 10,000 next transaction purchased auto service on account. $320. So we're gonna purchase auto service. First question is cash affected and the answer? No, because we purchased it on account on account typically means either accounts receivable or accounts payable. When considering something purchased, it means accounts payable. So we know accounts payable will be one accounts. But once again, it would be different. Little more difficult to know whether accounts PayPal is increasing or decreasing and whether to debit or credit it. And it might be easier for us to consider what we received in this case, that being auto service now we're not talking, although the asset in this case we're talking auto the expense because it's a service. So it's gonna be auto expensive down here. Expenses might be a little bit more strange for us to memorize which way they're going, but expenses are the most common type of accounts. Remember that all the expenses we will be working with meaning there b'more expenses than pretty much any other type of account. They all have debit balances, and they all only go up. So whenever you see an expense, typically you're just going to debit it because it's a debit balance account. They only go up and therefore they will increase in the deputy direction. So it's really good to get an idea that get a feel for that. Get used to that being the case. After working with the cash transactions, we may not. We may not may have kind of skipped what the expenses are actually doing when we record them, because we know that we have to debit them because we credited Cash but get used to know in what the expenses air doing. There's more expense accounts than any other type of account that they all basically do the same thing. They all go up and Onley up in the debit direction of, Therefore, the auto expense will go up in the debit direction if we increase the auto expense, we need to credit something that's something not to be in cash in this case, because we bought it on account and therefore did not to pay cash. And we know that we bought on account and that means accounts payable auto expense going up 3 22 3 20 then we've got the accounts table at the credit of 320. Now we knew that the credit was going to go to accounts payable because we debated the auto expense. Now let's think through it. Does it make sense that we are crediting accounts payable? Remember that accounts payable is a liability account. It is going up. The bad thing is increasing. The bill we owe to the accounts payable is increasing. Kind of like our credit card bill going up, having purchasing something on account, and therefore we will do the same thing to it as it's normal balance, which is a credit. Here's the increased from zero up in the credit direction by 3 22 3 20 Credit impact on the accounting equation. Assets remaining the same. The liabilities increasing, the equity decreasing. Why? Because net income is going down. Net income calculated as revenue minus expenses. Expenses increasing. Bringing that equation that net income down net income VIN will decrease total equity. As we just stated, net income is decreasing and we see here we have the 10,000 credit before that, calculated as revenue minus expenses. 10,000 credit revenue minus zero debit expenses. We then have a debit of 3 20 bringing that calculation to 9006. 80 10,000 revenue minus 3 20 Expenses 6 9080 Credit balance. Winning these brackets. Remember representing credit, not representing a negative number in this case. Next transaction purchased meals and entertainment on account. First question is cash affected in this case? No. We purchase something, but we purchased it on account and not with cash on account means either accounts receivable or accounts payable. In this case, because we're dealing with purchases, we mean accounts payable accounts payable is the account we will be using. But it might be difficult to know whether it goes up or down or to debit or credit might be easier to first consider what we have received, that being meals and entertainment and expense. And like all expenses, expenses have debit balances and they only go up. How do we make something go up? We do the same thing to it as it's normal balance, which in this case, would be a debit. So we're gonna debit the meals and entertainment as always and meaning. As always, the expenses always basically are debited. And once we know that we're going to do that, we know that we're going to credit the other account of that other account, not be in cash, not to decreasing the cash because we didn't pay cash. We are increasing the liability instead, that liability being accounts payable. We already know that we credit accounts payable because we debit the meals and entertainment expense, but we do want to double check that. And so let's do that now. Accounts payable has a credit balance. It needs to go up. The bad thing needs to go up. Our bills going up, our credit card balances going up or our accounts payable is going up. How do we make something go up? We do the same thing to it as it's normal balance, which in this case, is a credit. So if we post this out, then we have meals and entertainment increasing by 1500 to 1500. In the deputy direction, we have accounts payable, increasing from 3 20 by 1500 in the credit direction to 1820. Accounting equation assets remain the same liabilities increasing due to accounts payable going up and the equity decreasing due to expenses going up meals and entertainment the specific expense. And that brings down net income calculated as revenue minus expenses and net income going down means total equity is decreasing. Next transaction were going to say that paid cash for auto service done on account in the past 321st question is cash affected? We're gonna say yes. Keyword paid meaning cash is going down. Therefore, cash has a debit balance. How do we make it go down opposite thing to it, which in this case, is a credit. So we would credit the cash. Remember that we have paid here, and we also know have this on account. So don't let the on account parole you off thinking that the paid doesn't still mean cash. It does still mean cash. Cash is going down. Then we need to know what the debit will be after knowing we're going to credit cash. Also, remember, cash will go on the bottom because we are crediting it at this point and we will think of cash first because it's the easy account to think of rather than trying to think of the debit first just because it's on top, then we need to think what the debit will be. And in this case, we purchased something paid for something. We had purchased auto expense. That's something that we had purchased on in the past. On account, Remember, on account means accounts receivable or accounts payable. In this case, we're talking about purchasing, So we're talking about accounts payable. So the debits going to go to accounts payable. And so we already know that we're gonna debit the accounts payable because we credited cash . That's why we start with cash. But let's think it through. Accounts payable has a credit balance. We paid it off. We paid off the amount that we owe and therefore that credit balance needs to decrease. How do we make something go down? We do the opposite thing to it as it's normal balance. This being ignore Mel's credit balance the opposite, then a debit of 320. If we post this out, then we're going to say that the cash is decreasing from 49 550 minus the credit of 320 to 49 230. We know that the accounts payable then, starting at a credit of 1820 decreasing by 320. Bringing that balance, too. 1000 and 500 Effect on accounting equation Is assets decreasing because cash went down? Liabilities decreasing because accounts payable went down and the equity remaining the same ? The effect on the net income? None note that there's no impact. Neither of these accounts are revenue or expense accounts, even though cash is going down. No effect on net income. And we have the net income calculation still at the 10,000 credit minus 1500 meals. Entertainment Debit minus the auto expense. Debit for the credits. Winning revenue. Beating expenses. Credits beating debits on the income statement of 8180. That being the same in the beginning and ending of this transaction, we are now able to listed transactions involving accounts payable record transactions involving accounts payable using debits and credits. Explain the effect of transactions on assets, liabilities, equity revenue expenses and net income 22. 245 General Ledger: hello in this presentation that we will discuss the General Ledger. At the end of this, we will be able Teoh, define what the General Ledger is list components of the General Ledger and explain how the general ledger is used when looking at transactions in terms of journal entries and posting those journal entries in trap Prior presentations, we were posting those journal entries mainly to a worksheet, in order to see a quick computation over the beginning balance. And what is happening to that balance posted it. Teoh, a format of a trial balance than an adjusting column have been adjusted. Try balance. Note, however, that we typically think of the journal entries being posted to a general ledger. The General Ledger. It can be very complex when we look at it, which is why it is often useful. Did not look at it when we first start posting the transactions, but to see that how those transactions affect individual accounts. But when we consider the General Ledger, it's not as complex as it would first seem. It just is going to be a list of accounts that will be in that familiar format, meaning it will be in the format of accounting. I'm in the accounting equation of assets. First, the green accounts, cash accounts receivable and supplies of n liabilities, then the capital accounts, then the income statement, accounts of revenue and expense accounts the well. The reason it's such an intimidating looking thing is because it's also going to include detail within these particular accounts. So rather than just having a trial balance, providing us with these ending balances the Indian balances, then adding up Teoh um, the debits equaling the credits we're going to show the actual detail for a particular time period in order typically by date or order of transactions as they occur within the general journal. So all the transactions that we posted in prior transactions, whether they be Teoh, the using cash or part of the accounts receivable, cycle or comport of the payable psycho part of the sale cycle or purchasing cycle, they will then be posted Teoh the General Ledger, and we can think of the general Ledger than being the thing that is used to construct the trial balance. So in this example, we're showing these two particular accounts that deal with cash that are then posted to the cast. In General Ledger, we've got the cast G l the geo often for short, for in General Ledger. And we have the debit side and the credit side Note that we have be a cashier being debited in this journal entry being debited in this journal entry. It being listed in order by date, within the cash account on Lee showing that half of the transactions here, the other half would be in accounts receivable and accounts receivable for these two transactions. And we can see that we are increasing the running balance as we go. So everything that we have posted in the General Journal remember our terminology here. We're gonna have this whole sheet. Here is the general journal. That's what we post the journal entries into these air. Going to be the journal entries. The process of recording journal entries is the process of journal lining journal entries into this general journal. Then we need to get those that information to the General Ledger. We call that process posting. So when we pull this information over to the General Ledger here, we call that posting from the General Journal to the General Ledger. So we're gonna post the journal entry from the General Journal, too. The General Ledger account of cash in this example. Once we make the general Ledger accounts, we're gonna take these. Ending balance is that's what we used to construct the trial balance. Note that when we consider this in terms of a test question, in terms of what happens first, what happens next? What happens then? We're gonna have first the journal entries, then post into the General Ledger, then the creation of the trial balance. When we consider that in a problem, Oftentimes we mean we're gonna post all journal entries within a month or a certain time period. We're gonna record all journal entries within a month or a certain time period, then post all journal entries within a month or certain time period and then create the trial balance for that. But in real life and in a computer system, we're probably going we are going to see these happening at the same time. So note that when we go to a computer system, or if you were to set this up in excel and not having to erase the balances all the time, then you would want this to happen simultaneously. This is also something that would happen in an automated system. This is a process that can be automated once we have the first data entry. We can then automate the system to do the post into the General Ledger and the creation of the trial balance. We need to, however, still understand this, and the only way to really understand it is to do it so that we can then see when there's problems in the system, so that we can understand what the system is doing when it kind of generates this trial balance so that we can then drill back down from the trial, bounced to the source documents to the data that has originally being input in order to troubleshoot problems with the ending data. Let's consider a few of these accounts. In turn, we looked at the cash account. Let's consider now the accounts receivable accounts here the accounts receivable account. We are having an asset account. That means that of course, the debits will always be winning. You may have learned that when considering the tea accounts, when we consider the tea accounts, we may have been thinking about this primarily, in the case of we add up all the debits. Then we add up all the credits and subtract them, and in this case we would get 780 debits over credits. But note that the benefit of a trial of Ah, General Ledger in this format the benefit of using Excel is that it's very easy for us to also calculate a running balance. So note that this is the same as a T account. In essence, in that a T account is a shorthand way to write the debits and credits by hand and then figure out by adding up the left and right side, the debit and credit side and subtracting them what the balance is. But if we put this into a computer system, we can just add another column very easily and then have a running balance. And so we still have our tea here. But now we have another running balance on the right hand side, and that just means that we have zero starting here. And then we had 13 increasing on the debit side. Debits will increase a debit balance account, bringing that balance to 13,000 debits winning. Then we had a credit of 13. It's a debit balance accounts credits or the opposite opposite makes it go down back down to zero in this case. Then we had a debit of 650. The debits being the the type of account, were in normal balance. Step. It's increasing the normal balance to 6 50 We then have another debit of 780 bringing that balance from 6 50 up by 7 80 to 4 1030 We then have a credit of 650 bringing the balance down from 4 1030 Down by 6 50 Credit Teoh 780 that then our Indian balance also no should see a pattern here in that we can see what is happening. We should be able to interpret pretty much what's happening in the accounts receivable, I should say in the accounts receivable. What? That pattern is meaning that the debits represent invoices we sent out. If we look at the journal entry back to the journal entry, where this with posted from, we can see that we had a debit to accounts receivable and it credit to revenue. So here's the credit to revenue Over here. Here's the debit to accounts receivable. That typically means we did work. We sent an invoice out. Then we have the credit Teoh accounts receivable that we're getting paid for the work that we did in the past. So here's the Receivable. We're getting a credit and we're debuting Cash Cash being received. Here's the cash being received. Here's the credit to the receivable, and that's gonna be a typical pattern in receivable, meaning we're gonna send the invoice out. People always money. Then we're going to get the money, and we should be able to tick and tie those out. Here's another instance of that. We sent an invoice out here. Same journal entry up top and the debit to accounts receivable, the credit to revenue. And then down here, we paid it off and we should be able to ticket or we didn't pay that. We got paid on this, meaning the accounts receivable. The IOU to us is decreasing and we have the debit going to cache. Here's the debit to cash. Here's the credit to accounts receivable in the middle. There we had another invoice that went out this 780 increasing the receivable and increasing revenue. There's the increase to revenue. There's the increase to the receivable. Of course, that is what has not yet been paid. That is what still remains in the accounts receivable account. If we take a look at another account for an example that being the revenue account in this case, we have the revenue starting at zero, it's increasing by 13,000 then by 6 50 than by 7 80 Note that the revenue account is representing, uh, credits all of our accounts of representing credits with brackets, and we have the credit in the credit column when considering The General Ledger. Accounts also note that revenue on Lee has credits, meaning it's only going up. Revenue typically does not to go down, and that will be the pattern. Then, when we look at revenue, we should just see a bunch of credits. Unlike when we looked at the accounts receivable where we had debits and credits over here , the balancing of accounts of accounts receivable is a debit Normal balance accounts, but we'll have credit transactions of the credit transactions, reducing the account balance, the debit transactions, increasing the accounts balance on the revenue side. It's a credit normal balance account and therefore credits increase. Debits would decrease. But typically we won't see any debits because revenue on Lee goes up. Customers only pay us. We do not typically pay customers. What will the transaction be? It will usually be debuting accounts receivable, crediting revenue if we're in the type of company that invoices clients, meaning we do work than we invoice the client and expecting an IOU expecting money, a check in the mail from the customer in the future. So you'll note that all these transactions related to the increase in revenue are a debit to receivable credit to revenue. The second piece of that being, the accounts receivable going down and the cash then being received. If we take a look at the next step, then that step. The creation of the trial balance. So we have just a small trial balance here because the General Ledger can be overwhelming. Clearly, if we're looking at a fairly extensive problem or a extensive company, this G l will be a very large. It could be a very extensive G l and especially if we're looking for an entire year worth of data were. We're looking at only a few transactions here if we're talking about a year's worth of data than especially the cash account and the receivable account and say the revenue accounts could be pages long. So just keep that in mind that we're kind of simplifying the data here. But the essence is the same. If you look at an extended Messi, a huge general ledger, all you're looking for those Indian balances when constructing the trial balance, we're just pulling those. Ending balance is here, in this case, those being cash being pulled over from the G L to the trial balance at 6 13,050 the accounts receivable being pulled over at 780 from the Geo to the accounts receivable. Nothing in supplies, nothing in accounts payable. Nothing in owners capital at this point, and revenue is that credit of 14 430. Bean pulled over to the trial balance at 14 4 30 Nothing in the wages, expense or utility's expense at this time, and therefore it's gonna be easiest for us to see on the trial balance one of the reasons four pulling these balances to a trial balance is that it's easy to see that the debits then should equal the credits once we pull off his data over. Then, if we were to add up the debits the 13 6 50 the 7 80 we would be equal in the credit of 14 4 30 And therefore, if we were to subtract the two out, we would have a zero balance. We can also calculate net income easily in this case that just the 14 4 30 revenue minus expenses us at this point only having revenue of 14 4 30 no expenses. Remember the sequence. If you were to add to get a question as How does this happen? In order, we have the journal entries that journal entries have been posted to the General Ledger, the General Ledger than we're taking these Indian balances to create the trial balance. The trial balance will then be adjusted after adjusted trial balance, but will ultimately be used to create THEAN product of the financial accounting. Those being the financial statements, balance sheet income statement, statement of equity objectives. We are now able to define the General Ledger, list components of the General Ledger and explain how the general ledger is used 23. Compare and contrast liabilities and equity: Hello. In this discussion, we will discuss the discussion question of compare and contrast liabilities and equity. When considering an essay question like this, one approach to this type of essay question would be to first look at those two terms. Those two terms of a liabilities and equity defined those two terms as best we can, and then look for the similarities, listing out the similarities and listing out the differences between these two concepts. Before we get into doing that, I do want to point out that when we are first learning accounting, we often don't really see the similarities between liabilities and equity. We see you know, we have an idea of what those two terms are, but they're also they're often not very linked in our minds later on. And I want to suggest that there are a lot of similarities between these two terms, and it's helpful to understanding the accounting process, the financial statements and how to record financial statements to know what those similarities are. So let's start off with, given some type of description and definition of these two terms, liabilities and equity. First, we'll start with liabilities. Liabilities represents something that will be owed in the future due to a transaction that happened in the past. So something happened in the past, and we owe something in the future due to that passed the transaction. The most typical type of liability is accounts payable that resulting from us purchasing something on account. So we're gonna buy something pilot. But let's say supplies on accounts kind of like a credit card, and therefore we owe something in the future other types of activities that that could happen when we have our Justin entries. We could have had work that was done in the past and have an employee's payable or wages payable because we over the work in the future note that it's not always money liabilities . We owe something in the future, and it could be something such as we have unearned revenue, meaning we got to the money already. We don't owe the money necessarily in the future. If we provide what we said we were going to do in terms of the work in the future, that's gonna be the basic definition. Now, note that there are some areas where can be confusing, what what happened, like what happened in the past for talking about contingent liabilities and things of that nature. But for for this for this purpose is that's basically a sufficient definition. Something happened in the past, a transaction business transaction which obligates us to, uh oh something either services typically or money in the future equity. Then what is equity equity, whether we talk about a sole proprietor or a partnership or a corporation when considering act Equity as a whole were talking about the Nets value of the company. We're talking about assets minus liabilities of the company, the total equity in the company. We can also think of equity as what is owed to the owner of the company. So we can think about the owners whether they be stockholders, whether they be partners, whether they be just one individual as a total as a whole as of the entire equity section. Then that equity is owed to the owner. So the Net Valium This. This, of course, would make sense in that the the accounting or the business, whether it be a separate legal entity or just have a separate business assumption, we're typically going to we are always going to as much as possible. Keep the business books separate than the personal books. And therefore, by its nature, we can think of the business as being like a separate thing, even if it's not a separate legal entity, even if it's not, in other words, a corporation. Ah, and and we can think of it this separate thing, owning assets and therefore owing everything it owns to somebody off either a liability or in this case, we're talking about the net value, the equity. So how are these two terms related? Then how are liabilities and equity related? How are they different? Ah, and again, I think most people starting off we can kind of list out some of the differences, and we tend to think, Well, they're they're different with. This is something we owe to other people, and the equity represents kind of a book value of the company. But but no to that. If we think about the company as a separate entity, then the liabilities and equity, or the same in that they represent claims to the assets of the company. If we think about the right side of the accounting equation, total assets, that's what the company has the lab was an equity equal in total assets means that that's who the company owes those assets to. Either 1/3 party, somebody such as vendors or the bank or loan something like that or who are vendors or we owe Teoh the owner. The difference is owed to the owner. So that's how we have that similar to whatever we haven't asked if we got $100 in assets and 60 of it is owed Teoh liabilities than 40 of it is claimed by the equity. So it's really those claims to the assets of the business. That's what both libel is an equity represent. That's why they're kind of on that same side of that were one reason you can kind of think of why they're on the same side of the accounting equation. Liabilities and equity, Equal total assets, liabilities and equity listing out that claims to those total assets by those individuals that have claims to those total assets also can be considered. If you think why the liabilities and equities tend to have or do have mostly normal credit balances were as assets mostly have normal debit balances, so those are gonna be some of the similarities between between equity and liability. One. They're both on the right side of the accounting equation, too. They both represent claims, one being acclaimed by third Party and to being the claims by the owners of the corporation , or the or the business, whatever type of entity, whether it be so proprietor, partnership or a corporation. What are going to be the differences then? The major differences, of course, is who has those claims to those assets of the company? Liabilities represents third party claims that represent people that are not owners of the company claims to the liabilities of the company, whereas the equity section represents the owners claims whether those owners be stockholders, partners or just a sole proprietor within the business. So to wrap this up, in essence, for talking about an essay question. If we got a question, we got a discussion question comparing the liabilities and equity. You first want to define those two terms. That's one. This is one approach where you can first define those two terms. Here's the definition of liabilities, something that happened in the past that we that caused us to oh, something in the future business transaction in the past, causing ah future obligation not necessarily in terms of money, but some type of future obligation is going to be the liability. Equity could represent the net value in the company assets minus liabilities. The accounts in equation in that format, one definition of what equity is also represents what is owed to the owner of the claims of the owner and then think about those things that are gonna be the same. They're on the same side of the of the accounting equation, liabilities and equity. And they both represent claims to the assets of the business, listing things that are different in terms of liabilities and equity. We know that they're both claims to those assets. However, liabilities are third party claims claims by people other than the owners, and the equity represents claims to those assets by the owners. 24. Describe accounting opportunities: hello. In this presentation, we will discuss the discussion question of describe accounting opportunities. This will be a common essay question, and it's also a really relevant question to people working in the accounting field. Accounting is often thought to be somewhat of a narrow kind of field, and really, in reality, it's a really big field, and there's a lot of areas within it, and we have to break accounting down into certain components when we work in accounting and we're gonna have to break our our abilities, our job performance to certain areas. So when we're thinking about accounting in terms of where do we want to be with an accounting, we may have picked accounting as something we want to do or a component of something we want to deal, and we may feel that we've narrowed down our choices. Teoh accounting. We're gonna focus in on accounting, and we're gonna look for a job within accounting and think that we have sufficiently narrowed down our options. In that case, to really focus on something that we can take in and just note that, um, accounting still very broad. It's still too broad for us to focus in on. We're still gonna have to narrow down more than accounting. So note that I count in itself. Many different areas of accounting can be. It touches on different areas, including areas of just business, general business areas. And it also touches on areas of law areas. And you could see this when we look at something like the CPI exam where we have to taxation clearly is a component of law. And when we deal with something like business type of activities and transactions were typically dealing with areas that are gonna be touching on on business law on law areas as well, so so note that accounting is kind of originated from the subcategory. Some of the professions that really are some of the older professions is the legal profession and the medical profession. And accounting has is something that over time has kind of been a subcategory of those in terms of and accounting being a subcategory of a legal profession that has broken out as things have gotten more complex. And now the accounting field does continue to change and get more get more complex as well as things that there's more data out there there's a lot of different areas within accounting. So if you're in accounting major, if you're working in accounting field and you think that things there, too, you know you narrow things too to narrow, or you think that accounting is narrow enough? Probably not. You probably need to narrow down within accounting somewhere and focus in on where you're gonna be within the accounting field, just like a law major would take the bar, which is taking everything within law or something that's way too much information. When you actually go into law practice, you're going to be focusing in on something a lot more narrow than you would be taken in terms of studying for the law of the account is gonna be much the same accountants, you know, more, more narrow, possibly than a law degree. But it's still very covered, a lot of different things, and we've got a We've got a narrow that down in terms of what we're actually going to do there. So a couple of ways we can do that we can weaken, break accounting down in terms of private accounting on public accounting, meaning we can think about the ideas of working either for a company or working for a public accounting public accounting, typically dealing with attestation. You might be doing like some types of bookkeeping, working with different clients in that and attestation being like audits and reviews that are gonna be required form for different companies for different reasons. And then you could be walking. If you're working for a business, then you're working in the G L department. You could be working in very many, many different areas when you're working within a business. So if we break out the accounting field between public accounting, which is kind of like taxation and audit, working for a public accounting firm versus working for ah company in the accounting department, by far the most people within accounting work in a company in the accounting department, and there's a lot of different areas within within the accounting department. But that's one of the major broad categories weaken break out. If we're working in public accounting firm, we're typically working for an accounting firm for a C P a firm, and we would then be doing things like taxation audits, reviews, compilations and consulting with different clients. If you work in a c p a firm. Typically, it's set up Maura's a partnership, so you might have different partners with different kind clients that they focus in on and working for those partners. And the nice thing about working out of CP a firm is that you deal with that. You do deal with more of a broad set of of, ah, problems, meaning you're not focused in and on one thing per se. You are working with a bunch of different clients now within that field, if you're working in public accounting, depend on the size of the firm you're working at. The public accountants might specialize in in different ways, meaning. If you're working in public accounting, you may be working in a in a firm that specializes in a particular industry. So although you're working with different companies, you might be working with a firm that specializes in in a specific area, meaning we might be specializing in in real estate. But we might be specializing in manufacturing companies, or we might be specializing in merchandising companies and those that that specialisation is what oftentimes different firms will do so it might have a bunch of different clients and you get variety in that way, If you work at public accounting, we're working with a bunch of different clients, as opposed to if you work for one individual company where you're really focusing on what one company, But But even if you're in public accounting, you're still going to specialize oftentimes by the whole firm or the partners you're working in with, oftentimes specializing in a particular area. Know also that if you're working in public accounting in a bigger firm that deals with bigger clients, then you're probably going to be specializing. In particular. Areas of the audit mean you're probably gonna be getting good at particular areas. The bigger the company is, whether it be a company or partnership, the bigger the clients you're working with, the more they need someone to really specialize in a particular area. So as you as you work at at larger places, you're probably going to be specializing into not not just audit or tax, but specific areas within audit and tax, and becoming really proficient at particular things. Particular things that are going to be needed in these large companies versus smaller companies. If you work at at a c P A from that works with small to mid sized companies. Then you probably you may be working on a broader base of things, meaning you may be working in the accounting audit department and doing some taxation at the same time doing doing both of those things you might be having a broader scope of of the amount of the audit that you'll be involved in as well as the tax work. But not all of that work will be as in depth as it would be for larger companies. You're not dealing with the same level of transactions. You're not dealing with some of the things that a larger company would have to deal with. You may have less regulations that you'll have to deal with if you're working with smaller companies, so that's often some of the trade offs you'll have. You'll have. If you're working for a big public accounting firm. Big projects you typically will end up specializing. You'll typically be getting really good at a small piece, a small cog of a big of a big project. If you're if you're working at a public accounting from that smaller, you may be working in different departments and picking up more stuff. Be more of a generalist working Maurin different departments and doing more of a process within an audit because the audit itself or the attestation agreements or the compilations might be smaller. So that's that's in public accounting. Public Accountant used to be something that was kind of a requirement for some states to get licensed as the c P A license. And I don't think that's required for most states now that you can get a C p a license without the audit hours, although there's typically going to be an attestation, um, license that would allow you different different degrees of authority on terms of attestation. So there might be differences. Different depend on the state you're in in terms of licensing, if that's if that's something you're looking into. If we're in the private side, note. If we work for a company, then there's a huge range of areas within accounting. We've gotten managerial. Accounting is clearly going to be on the private side. Manager accounting is usually dealing with decision making, so when we consider manager accounting, it kind of takes a different note. When you think about it manager accounting in terms of accounting as it does in practice. If you talk to somebody in business and just say that talk about management, they typically will might be thinking of something just basically managing people. Managing a group of people is just typically that management skills, whatever they're managing to dio when you think about manager like counting were usually often thinking about very more specific kind of topics. Things that have to do with breaking costs out and doing variant variable analysis, breaking cross out to variable costs and fixed costs. And trying to do do these kind of analysis that are pretty standardized often times We're thinking about cost analysis in terms of production companies when we're thinking about manager accounting. So when you when you consider the concept of Manjural accounting, that's really more specific than just management. Oftentimes it's really if you want to study Manjula counting, it's more specific than you might think. If you're just considering just management, meaning it's typically going toe deal with this variance analysis and dealing with production models and how to make decisions and how to measure things not so much with the creation of the financial statements not so much with the debits and credits. You're really using that information in order to kind of trying, trying to measure how how different companies are doing. If you're working within the accounting department, of course, it depends on the size of the company. But if you're working at a large company, then you may have very a broad range of aereo areas you can specialize in, meaning you could be in in the accounts payable department, working just on, ah, tracking who the company owes and managing your cash flow in terms of how to pay the bills in the most efficient way. You could be working in accounts receivable, which you're really focused on managing the clients that are pain invoice in the clients, making sure that they're paying on time and managing. You know when those payments are received and keep it on track of that, we could be working in payroll, which is a whole whole specialty in and of itself. Depending on the size of the company, payroll might be done internally, meaning a company a large company might have their own payroll processing, but more and more that the payroll is often times being exported to external payroll, depending on the size of the company, because it because of the complexity. But whether the internal or external, the payroll itself is something that's really becoming specialized. The payroll, ah, rules are gonna change from country to country and within state to state. And, of course, we have so many withholding rules and different kind of rules in that the payroll department is integrated in many ways with human resource is, and therefore the Human Resources Department and the payroll are kind of working together a lot of times. So there's some overlap. Ah, within within that area. So you want to see if you're going into human resource is to rent a payroll. Do you wanna deal with numbers and calculating payroll with the journal entries that record payroll? Or do you want to be dealing with more with the The policy standpoints in terms of human resource is what of the hiring and firing policies in dealing with the clients that the customers or the employees that are going in and out of the company. So there's a There's a lot of different other specialty projects we could be working in just the budgeting department within a company you also want to think about when you're working within a company, what that company does, and you're probably going to end up specializing in terms of industry so we could break out the industries in terms of a service company, someone that doesn't have inventory, and then merchandising companies that purchases in so inventory and manufacturing. When you're thinking about the accounting within a particular industry, those air really important you want, you're probably going to end up specializing in one of those areas, either by making a conscious decision before you look for a job and say, I want to work in a service company. I want to work for this particular company, which is a service company or a merchandising company or a manufacturing company, and then pursue that job. Ah, and look for it, whether it be in in private accounting or in public accountant, You could look public accounting firms that specialize in in these particular areas, in service companies or in merchandising companies or in manufacturing companies. And those were gonna be a lot of difference because if you're tracking inventory, that's gonna be a specialty in and of itself. So if you're talking about someone like Amazon, a merchandising company, ah, lot of their time is going to be tracking that process of purchasing and selling those goods as opposed to. If you're working for a service company like Dizzy, are Disney resorts or something like that, then you're you're not geared towards the merchandise so much as you're geared towards the experience. Completely different, completely different thing. If you're doing with manufacturing, that's a that's a whole different area in that we have to deal with the processing of the inventory, the making of the inventory, meaning we're going to deal with the raw materials to the working process, to the in goods, to the finished goods and within manufacturing. Even within their you could be in a process cost or a job cost system, meaning we could be processing something like oil or something like that to gasoline, which is it's just a process that will just be a process cost system. Or we might be working in something that has custom jobs where we make custom things like custom guitars or something like that, in which case we would we would be doing things by job Construction is another kind of industry in and of itself that tracks things by job typically and has its own revenue recognition principles and its own bidding process. You might work in the in the government accounting, which has fund accounting, and so you're gonna You would need to specialize in that area because that's a whole different set of rules in terms of how do you track things through different funds? How do you format the financial statements when revenue recognition isn't at least the stated goal? Even though all all organizations are basically fueled by, you know, revenue and summer Annalise cash flows in some way or another. Eso you could work in government accountant You could work in nonprofit accounting, which has its own its own set of rules. So there's gonna be a lot of different once you once you decide to get into the accounting field. Still not narrow enough. And if you're if you're in the accounting field as a student, then your goal is this. You can either try to narrow down what you're gonna do within accounting before you look for work, or you can just look for work, find a job with your basic accounting skills and wherever that job happens to land you. If you start working for manufacturing company, you will probably start to specialize within manufacturing. And whether you stay with that company or you move somewhere else, you will probably have picked up a specific amount of skills related to a particular company. Just remember that when you go into a company, if you if you go into a large company, whether it be private or whether it be a, um, a company that the public accounting firm there's usually more upward momentum that you have more opportunity to move up and and make increases in salary and what not? But it's also a case where you could very well end up specializing in particular areas, meaning you may not see the big picture as much because you're gonna be you're gonna be focusing in on your colleague in the in the big wheel, trying to do a big project, and therefore you may not see as much of the entire picture. If you're someone that likes to see the big picture, then you may enjoy Mawr working for ah, mid sized company or ah, see, P A from that works at mid sized or small clients. And then you get to work with the entire the entire process, often times. But there's gonna be limitations in terms of upward mobility because the company is just not as big and and you want to be. You want to be able to be able to take those skills, those general skills and put them to good use either within the company or somewhere else. So just keep in mind the size of the company as well. It's gonna be a a big factor in terms of the types of opportunities. Smaller company is not gonna have as many departments and as a large company, you're not gonna have as many internal controls as a large company. Ah, you know, a couple individuals within the accounting department are gonna be doing a lot more things just because of the size and the ability of the company to be able to process that information. So when you're when you're looking for the accounting firms, you gotta kind of keep all this all this stuff in the back of your mind as you're looking for a job within accounting to I want to be in public accounting, Private accounting. Do I want to work in taxation? Do I want to work for a particular industry? Do I want to work at a big company where I can have advancement and deal with the bureaucracy of advancing up within within a big company and dealing with all the all that goes with that? Or do I want to work in a small company and be more of a generalised and be picking up all the information I can in terms of general knowledge and be able to see the big picture, although not as much detail within the big picture in terms of what these smaller companies are going to need? For example, ah, non publicly traded company is not gonna have as many regulatory requirements as, ah, company that's on the public stock exchange. There's just not as many requirements that air. They're not going to see some of those things, although you'll be working with with a bigger picture of the company. You work at a large company, then they're gonna They're gonna have more requirements that they're going to deal with more regulations. But again you're not gonna be dealing with all that because you're gonna be dealing with your particular thing, your particular project within that bigger picture. So those are some things to consider it. If you're thinking of if it's an essay question that has to do with accounting opportunities, remember that you could basically start by breaking out the financial accounting versus managerial accounting and then go from there. Focus on finance the financial accounting, dealing with the creation of the financial statements often a public accounting firm and then managerial accounting, dealing with those manjula decision making processes. Ah, and and that and the decision making processes in order to make better business decisions. Never financial accounting is gonna be geared towards the creation of the financial statements that manager, like counting, is going to be geared towards the decision making. Then you can also break out from public accounting and private accounting. Meaning Do you work for a public c p, a firm dealing with audits, reviews, compilations, taxation and and advising different companies? Or do you work within a company within the creation or the generation of the of the data compiling the financial data porting it together into a system 25. Describe accountings role in the age of information: hello And this presentation, we will discuss the discussion question of describe accountings role in the age of information. If we see a discussion question or it s a question related to accountings role in the age of information, one place to start that type of question would be to define accounting, to find the normal role of accounting and then expand on that we can expand on that and see how it relates to a changing role, a changing environment and environment that has a lot more technology. Ah, lot more information. This is a type of essay question. We're going to see it more often, And it's another question that we see coming up in discussion a lot as well as computer age is advancing, there's gonna be a lot of questions in terms of how much information can be done with the computer and what types of jobs will be done with the computer as opposed to types of jobs that will still need ah person involved in them. And accounting is one of those areas where you got to think Well, what type of the accounting field accounting being a huge field? What type of those accounting field will be things that will need or can be done and automated without a smudge used for the, uh, the individuals involved the accountants involved. And what types of things within accounting will remain important part in terms of a person being involved. For whatever reason, what reasons are there for a person to be involved in those processes? So, first of all, if we just think about what accounting is, we can think that the accounting is going to be the compilation of information those financial transactions that are going to be compiled in order to make a relevant information, often in the form of financial statements. So it identifies records and communicates relevant, reliable and comparable information for business activities. So those those of the key components we wanted to be relevant, reliable and comparable so the information has to be has to be relevant to whatever decision makers are out there. If we're talking about third party decision makers, typically, the users of financial statements being investors and the bank, if we want to creditors are those external users, the ire s and those are the people that were looking Teoh have the information for It needs to be relevant to whatever decision they are making if they're going to invest in the company. Is this information relevant to their information to their decision making? Is it reliable? Obviously, the financial statements need to be reliable. A lot of the systems and checks are going to be put in place in order to have a reliability , including a standardised form. That's one of the reasons we have the general accepted accounting principles so that people can look at these financial statements or relate for him two other financial statements and have some idea. As Teoh, you know how these things are put together so that they can read them and be able to lie on them publicly traded companies they're gonna have on audit process that third party process in order to audit and make sure that the financial statements are reported in accordance with a set of rules, typically generally accepted accounting principles. And if we have, of course, all the financial statements for different companies reporting under the same standard and confidence that they are reported under that standard, then we have waken compare them and be more reliance on them, and that's gonna be one of the components of making the financial statements, reliability and comparability kind of go hand in hand. In some ways, note that one of the major things that we want to do with the financial statements is compare them to prior years and to future years. And in order to do that, we need some kind of standardization. So that standardization, those generally accepted accounting principles help us to do that. Help us to make that comparability so that we can compare the financial statements to prior years and Teoh other companies. So that's gonna be the goal of accounting in general. It's gonna try to identify when these financial transactions air happening. It's gonna that record that was financial transactions in some way and then compile that information often in the format over financial statements. Those being the end users for end users end users typically being the external users but also internal users and terms of management will then use that information on. Hopefully, it's relevant, reliable and comparable at that in point. Once we have that, the question is well, how much of that information can be put together with, with people involved and you know what's the accountant's role in that process? Clearly, in the past, the accounts role might have been to do this whole thing by hand. Basically, we're gonna find the financial transactions going to record those transactions within a ledger. We're going to create the trial balance from that information, and then we're gonna use the trial balance in order to create the financial statements. When we cons