Zero to Hero: The Ultimate Accounting & Bookkeeping Basics Bootcamp

1. Introduction to the bootcamp!: Is accounting responsible for this headache? Do you feel overwhelmed with all the calculations and complexities, assets, liabilities, equity, financial statements, profit, adjustments. Do they confuse you? Don't worry. I'm here to the rescue. I'm Danish Omisha, your friendly accounting mentor. I am thrilled to introduce you to from zero to hero, a beginner's accounting boot camp. Join me on an exciting journey to master the basics, one step at a time, and gain useful knowledge which would set you apart. In this boot camp, there are 12 comprehensive sections, 65 videos packed with real world scenarios and practice material. All in just 7 hours. That's right. In less time than a workday, you can go from zero to hero. I believe in making accounting fun and engaging. My real world scenarios and visuals bring concepts to life, making it easy to digest and comprehend. Whether you're a high school student just starting out, an A level student looking to deepen your accounting concepts, a university student pursuing a business degree or even a medical student exploring new niches such as accounting, this boot camp is for everyone. So are you ready to kickstart your accounting journey? Ready to level up your counting game? It's time to conquer the fundamentals and climb new heights of financial understanding. Enroll now, and let's get started. 2. Six Important Definitions: Hi, everyone. I warmly welcome you to the first video of my entire course. In this video, we would be discussing the most important definitions. These are six of the most important definitions that revolve around the entire accounting course, regardless of the fact that whether you're studying Olave accounting, Ali accounting or further accounting, you have to have a complete knack of these important definitions. So what are they? Let's dig right in. In this entire playlist, we would be covering these definitions, and we would start from assets, expenses, drawings, moving on to incomes, liabilities, and we will conclude with capital. So sit back, relax and enjoy. 3. Assets: Hi everyone. In this video, we would be covering the first important definition which is called asset. So let's dig right in what is an asset. Now, the first thing that I would be doing is that I would break down the definition into small, small points. All right? An asset refers to the resources an entity owns. Now, I would pause here for a moment. I wrote entity. The word entity is of crucial importance. I did not write owner. I wrote entity. Accounting is all about the business. We do not care about the owner. We only care about the business. Okay? Now, this is a very important accounting concept, which is called business entity. We would cover that later on. So resources and entity owns resources that are owed to the entity, and the final point is the most important. Whatever resources you own or owed to you, they must generate economic benefits. Now, economic benefits refers to money. Whatever you own, it must generate money for the business. It must generate revenue for the business. Okay? Now, a little more, we would dig more deeper into each point. The first point was resources and entity owns. Now, this is for you. I want you to think about all the catchy and attractive stuff you own. It could be an iPhone. I'm sure you have a smartphone. It could be an Xbox or PS five or whatever gaming console you own, or it could be a watch. You own all these stuff. So these can be your assets. Moving on, let's look at a more professional example relating to the ownership of an asset. Now, let's assume there are two vehicles that are currently being used in my business. Now, you can see the left vehicle is a delivery truck and the right vehicle is a Jeep. So the delivery truck is used for the delivery of essential supplies, which is of key importance. The Jeep, however, it's not mine. It's owned by John, even though it's in my garage. And even if I'm doing business with that Jeep, this is never my asset. Why? Because it's owned by John. I don't have the ownership. My business does not have the ownership. So the first point of an asset is that you must own the asset. Moving on. The second point we resources owed to an entity. Now, let's suppose your birthday is next week, happy birthday. Now, your dad promised to give you $1,000 as a present. What a wonderful dad. Now, in other words, your dad owes you $100. He owes you. Now, this is what it means resources owed to an entity, right? So that's your asset. Next, I wrote generates economic benefits. Now, let's move on to the first slide where we spoke about whatever you own, the phone, the Xbox, the watch. Now, a very important question. Fine. You own all this stuff. You have a phone, you have a gaming console. You have a watch, you have shoes. You have all fancy stuff. You have earphones, apods. But the most important question is, do these items generate money for you? Are you generating money from these items? I'm sure you're not. Are you doing business with these items? If the answer is no to these questions, then these are not your assets. Economic benefits refers to money, income, revenue. Whatever you own, you must do a business with that. You must generate money. Economic benefits refers to money. Now, the final checklist, what you have to always remember resources and entity owns, number one, very important. Or it could be resources that are owed to entity, and the final and most important point is what? Generates economic benefits. Finally, you have to know that there are two types of acids. There's a non current acid and a current acid. We would be covering these in the next video, so I'll see you in the next video. Thank you so much. 4. Non-Current Assets: Welcome back, everyone. In this video, we would be covering non current assets. A very, very important concept that we would come across various topics in lable accounting. Non current assets are also known as long term assets. They're also known as fixed assets. Let's look at the definition first. These are assets that are held in the business for a very long time, generally more than a year and generate economic benefits for a long time as well. The intention is to hold the asset. We would not resell it. Now, these assets are generally quite expensive, and the intention is just to hold it in the business. We would use it in the business. We would generate benefits out of it. We would not resell it. In other words, it's fixed in the business. This is why they are also known as fixed assets. Now, let's look at the most common non current assets. What are they used for, and what are the expected economic benefits? Now, a motor vehicle is a very common non current asset, and they are used for the transportation of goods, providing delivery services, commutation of employees. Now, all these could save tremendous amount of costs. So these are the economic benefits of a motor vehicle. Land is another, very, very important non current asset. It could be used for building structures, or it could simply be leased out or rented out, and the business could be generating for the income. Furniture and fittings is also a very important non current asset. Imagine going to a restaurant or going to a business. There are no tables, there no chairs. There's nothing. You just runaway, isn't it? So these enhance the reputation of the business in front of the clients, which leads to an efficient working environment. Lastly, machinery a very, very important non current asset. So machinery could lead to production efficiency. It could lead to higher output. It could lead to economies of scale, reduced labor costs, and much more. Now, I want you to note one thing. All these non current assets have a very important role in the business. Right? They have a crucial importance in the business. All these benefits that you can see, these are the economic benefits that the non current assets generate. And these economic benefits would be for a very long time. They would be earned over the period of many, many years. This is why they're known as long term assets. See you in the next video in which we would be covering current assets. Thank you very much. 5. Current Assets: Everyone. Welcome back to our next video. In this video, we would be talking about current assets. Now, current assets are also known as short term assets. It's the complete opposite of a non current assets. They were known as long term assets. So let's dig right into the definition. It's very important, so I want you all to focus. These are assets that are expected to generate economic benefits up to a year only. A year means 12 months. They would never exceed 12 months. Now, when I talk about economic benefits in current assets, I refer to cash. This is the only economic benefit that current assets generate. It's expected that these assets would bring cash into the business within one year. They are never held for more than a year. Now, for better understanding, let's have a look at the most common examples of current assets that are very, very important. Inventory. Inventory is also known as stock. Now, I want you all to picturize a business that deals in the buying and selling of fruits. Well, let me make it easy for you. This is what it looks like. Now, you can see all sort of fruits over here. Now, my question to you is, why do you think the business is buying all the fruits? Because they like it because for fun, for hobby? No. The reason why you see all the fruits over there is to resell it. If you remember, when I explained the definition of non current asset, I said the intention is to hold, not to resell. Now, over here, the intention is to resell, never, ever to hold. Why do we buy all these items? What's the intention in our mind that we want to resell it one day? So this is inventory. Inventory also refers to purchases, items we buy for reselling. Next receivable. Very, very important. We will study an entire chapter on this bad debts, but it's very, very important for us to have understanding about receivable. So let me give you guys a small scenario. Now, the owner of the business is Emily, as you can see, on the screen. Now, whatever she's selling, that's irrelevant for now. Now, she sold goods worth $100 to John. But the problem is, John said that he is Emily's loyal customer buying goods for years. So he requested Emily. Can I take the product now and pay you next week? Now, Emily knows that John is a loyal customer. She also trusts John. She was a bit reluctant. She said, Um, okay. Now, let's understand the entire story. What happened? John owes Emily $100. So John is the credit customer. Credit refers to selling something and collecting the amount later. So John is the credit customer. Emily has to receive $100 from John. Now, the word receive comes from receivable. Since Emily has to receive $100 from John, John is Emily's receivable. Receivable is your credit customer who owes you money. And if you remember the definition of current of assets, the second point, I told you, resources owed to the entity. In this case, John owes $100 to Emily, the owner of the entity. So this is what receivable is. There are some other small examples of current assets. The cash you have in your hand. That's very important current assets. The cash you have at the bank, that's also a very important current asset. Prepaid expenses, we will cover this later on in the accruals and prepayments chapter and accrued income. We'll cover this later as well. So, guys, that's it for current assets. I'll see you in the next video. Have a good time. Bye bye. 6. Liabilities: Everyone. Welcome back to our next video. In this video, we would be covering a crucial concept which is called liability. So let's get started. Liabilities are your debts, financial obligations or burdens which are to be repaid by the business. Now, these are not good things. These are burdens, obligations which have to be repaid. Now remember, just like assets, there were two types, non current and current. Similarly, even in liabilities, there are two types. Non current liability and current liability. The concept is very similar to the non current and current assets, like in non current assets, they were assets held for more than a year, if you remember, same goes for the liabilities. So non current liabilities are those debts which have to be repaid after a very long time, generally more than a year. Now, most commonly, there are two examples of non current liabilities. Number one, long term loan. Now, long term loan is a loan which is generally paid over an extended period of time. Minimum after three years, five years, ten years, and it can even stretch up to 20 years. The amount is also massive. It's used for long term purposes, such as buying non current assets or for investments. There's another very common example, which is called debentures. Now, debentures, we would cover this later in the company accounts chapter, so I don't want to confuse you all. Now let's move on to current liabilities. Now, before I move on to current liabilities, I want you to recall the definition of a current asset. Now, current assets, if you remember, it's expected that the economic benefits would flow in the business. They would generate economic inflows. So now, these are debts. Obviously, current liability. These are your debts. So these would create outflows. It's expected to create outflows. These are debts or financial obligations which have to be paid within one year, same as current assets within one year. So and the current liabilities have to be paid within one year. The difference is, these are outflows, current assets are inflows. In other words, the economic benefits cash is expected to go out of the business within one year. Now, there are some very common examples. Some are technical. We would cover them in detail, and some we'll cover later on. There's payable bank overdraft, accrued expenses we would cover later on, and prepaid income would also cover later on in the accrued and prepayments chapter. So let's understand what payable is. Now, again, I will give you a short scenario. The person you see on the screen is John. He's the owner of the business. Now, John bought goods with $100 from Emily. So Emily is the supplier, and John is the business, and John bought goods on credit. Now, I hope you understand the word credit. I explained this in the current asset chapter. So now, let's assume that Emily is John's supplier for years. So based on that relationship, John made a request. Can I take the product now and paint next week? Now Emily acknowledges the fact that John is a loyal customer. She says, okay, I don't have a problem. Now, let's understand the scenario from John's perspective. Now, John owes Emily $100. All right? John owes Emily how much? $100. So John is Emily's credit customer. And now John has an obligation to pay $100 to Emily. All right? Obligation to pay. The word pay comes from payable. In other words, Emily is John's payable. So Emily is the liability of John. He has a debt of $100, right? So this is what payable is. Payable is your credit supplier to whom you owe money. Now, I want you guys to understand one thing. This general rule would always apply. One party would always be the payable. Now, if I talk of John's perspective, Pause the video for a second and tell me what is Emily? Is she a payable or a receivable? Right, from John's perspective, Emily is the payable. Why? Because John has to pay Emily. From Emily's perspective, who is John? Emily sold goods to John. So Emily has to receive the money from John. So John is Emily's receivable. So always remember one party is the receivable, the other party is the payable. So this is the concept of payable. Now, let's move on to bank overdraft. This is also very important. Now, let's assume John has $10,000 in his bank account. Well, sounds pretty good. He can go for holiday. Anyways, the problem is, he's paying a crucial expense, a very crucial expense of $11,000. He only has $10,000 in his bank account. Would he be able to pay the expense? Yes or no. Yes, he can pay the expense. Now, he has 10,000 in his bank account. The bank would allow him that, Okay, fine, we will pay the extra expense. You can pay us later. So he paid $11,000. Now his bank account would appear as hundred dollar negative. Now, in accounting, whenever we show a parenthesis, it means it's a negative balance. Always remember that parenthesis means a negative balance. So this is a bank overdraft when you withdraw an amount more than your limit in your bank account. So John overdre sorry, John overdrewt hundred dollars from his account, and now he has to repay it to the bank. So a bank overdraft is a temporary loan that allows bank customers to continue paying bills overdrawing money even after their accounts are empty. So this $1,000 is another debt that has to be repaid by John. So this is a liability. That's it for today's class. In the next video, we would be covering some other crucial concepts. See you tomorrow. Thank you very much. 7. Expenses: Right. Hi, everyone. Welcome back to our next lesson in which we would be covering the concept of expenses. Pretty straightforward, but it can get a bit tricky at times, so let's cover this concept. Now, expenses are all the costs incurred by your business in order to generate income. When I refer to income, I mean revenue, which we would come in the next video. What's the purpose to generate income. Now, why does a business pay all these bills, electricity, gas, salaries? Why do they pay all the bills? Because they like it to have fun? No, they pay the expenses because of only one purpose which is to generate income. Now, I'll give you an example about a school, okay? This is a school. Now, I want you to pictuze visualize all the possible expenses a school generates. For instance, the salaries to the teachers, now, if they don't pay the salaries to the teachers, the teachers would resign, ultimately leave. With no teachers, how can they generate students? How could they generate income, in other words? If they don't pay the rent of the building, they will be kicked out from this building. And then how would they run the school? How would they generate income? If they don't pay the electricity bills, the government would cut off the electricity supply, and who would send the students where there's no electricity, no fans, no lights, nothing. Okay? So these bills are paid with only one purpose. That is to generate income. So this is what expenses are, the costs incurred by a business in order to generate income. Thank you very much. In the next video, we would be covering income. 8. Incomes: Hi, everyone. Welcome back to our next video. In this video, we would be talking about incomes, a very important and straightforward concept. So let's dig right in. Incomes refer to the earnings of a business. Now, this earning can be generated by either selling goods or rendering services. It all depends on the type of your business. Now, let's look at the example of a school. What's the main source of income of a school? Who's the video. School fees, right? Let's talk about a farmers market. What's the main source of income generated from a farmers market? Selling of vegetables and fruits. Let's talk about an ice cream parlor. Their main source of income is the selling of ice cream. So these are all the earnings generated by either providing services like the school or selling goods like the farmers market and the ice cream parlor. Moving on, there are two types of income. There's your main source of income and your other income, which is also known as secondary income. So the main income is the primary source of revenue, which directly relates to the core operations of activities. Okay? Like in this example, what I gave you, the core source of activities of the school is collecting school fees. The core source of activity for the farmers' market is selling vegetables. The core source of activity of the ice cream parlor is the selling of ice cream. So this is the main source of income, okay? Like a car manufacturer, the selling of his cars is the main source of income. The other income, however, this refers to earnings not directly related to the core business activities. If I have a school, my main source of income would be what? Colecting school fees, right? But what if the canteen, the tuck shops, they give me a profit share. The stationary shop, they pay me rent. I sold some extra chairs and tables. I earned income. So any income earned that's beyond your core or principal activities, that's called other income. Okay? For instance, selling of assets, salary or commission received. Now I'm going to give you a very, very important tip, a very, very important tip. When ever the word received is mentioned, that refers to other income. Remember, you'll come across so many questions and transactions with the word received. That refers to your other income. For instance, commission received, salary received, discount received, bonus received, and XYZ received. That's always going to be your other income. So that's income. In the next video, we will talk about drawings. See you in the next video. Thank you so much. 9. Drawings: Hi everyone. Welcome back to the next video. In this video, we will discuss the concept of drawings. Now, what is drawings? Let's have a look. Drawings refers to anything withdrawn or taken out from the business for personal use. Remember, not business use for personal use. Alright? It could be money. It could be inventory. It could be non felon asset san. Okay? Anything withdrawn. You had a personal use to do. You withdrew items from the business. That's your drawings. For instance, Emily, the owner of XYZ Enterprises, she withdrew $1,000 from the business for an emergency at her residence. Okay? Another example, John, the owner of IkiaFurnitues. He took a bed set for his house. Okay? Anything withdrawn from the business for the personal use desk drawings. We don't really care about the nature of the activity. Why is the owner withdrawing the items? We only care if it's personal use, fine, desk drawings, okay? However, I want you to remember something very, very important. If anything is withdrawn by the business for office use, that's not drawings, okay? Like, if I change the example slightly, he took a been set for another branch. Okay. If John is the owner of Akira furnishes, he took a bed set for another branch, then that's not drawings. Why? Because this is not personal use. This is office use, all right? Okay, so that's it for this class. I'll see you in the next lesson in which we'll be discussing the concept of capital. Thank you so much. 10. Capital: Everyone. Welcome back to the next video in which we would be discussing the concept of capital. Capital is also known as equity or owner's equity. Now, let's dig right in and try to understand what this refers to. So capital represents the interest and stake of the owner in the business. Now what is stake? Beef tendaoin Rube, medium ray, medium well, I'm not talking about beef or that stake. So stake of the owner in the business means that the owner has a share in the well being or in the misery of the business. He owns something in the business, okay? He has something to lose or something to gain from the business. This is what stake refers to. He would be affected by the business actions. If the business does well, his equity goes up. If the business goes down, his interest, his stake, his ownership goes down as well. Now, why does the owner have a stake in the business? Because it represents the amount of resources the owner has invested into the business. Whenever a business commences operations, where does that money come from? It comes from the owner's investments. So that refers to capital. Investment can be in the form of money, assets, or any other resources, not just money. For instance, let's say me and you, my student, we started a business, okay? You invested money. I had no cash, but I had some properties, so I gave the properties to the business. It could be anything. Moving on. How does capital represent the owners stake? This is a very important confusion that students don't understand what does owners stake mean. So I've prepared some points. Let's go through them. Ownership stake, what I just spoke about. The owner has a claim on the company's assets and earnings. Why? Because he invested his money. The higher the investment, the higher the claim he has on the company's assets. Then alignment of interests. Remember, as the owner, you're investing your capital in the business. So whatever decisions that you would make, they would always be aligned with the interests of the business, because you both are on the same page. Risk and reward. By investing capital, the owner is taking a risk. It's a risk, right? The business can go down. It can do well. There is an expectation of future rewards. The success of the business directly impacts the value of the owner's capital. This is a crucial point. Remember, equity doesn't stay fixed. Equity can go up, equity can go down. If the company does well, the company is profitable, profits are blooming, the equity goes up. If the company is making losses, the equity goes down. Remember, it's not always fixed. We would cover this in detail in the near future. Control over affairs. When you invest your money in the business, you will have control over the business, over the strategic and tactical and crucial decision making in the business. So this is why I said that capital represents the owner's stake and interest in the business. These four points are the stake and interests of the owner in the business. That's it with this video. I'll see you in the next video. Have a good day. Bye bye. 11. Introduction to the Double Entry System: Hi, everybody. Welcome to our next video in which we would be talking about the double entry system. Or, if I be more specific, the world of debit and credit. Debit and credit is the building block of the entire realm of accounting. So it's very, very important to have understanding about this concept. So let's dig right in. Before I teach you the concept of debit and credit, you have to understand about the concept of gain and loss, increase or decrease. So let's have a look at this. I'll be giving you an example. This person is Emily. By the way, her name would come again and again. And he's John. All right? Emily and John. Emily sold a car worth $10,000 to John. Okay? Emily sold a car worth $10,000 to John. Now, I want you all to understand a very important concept. Emily gave the car to John, right? So what decreased over year Emily's car, right? On the other hand, John gave $10,000 to Emily, right? So what did John lose? John lost the cash and gained the car. Emily gained the cash and lost the car. Okay? So in every transaction, we would find increase or decreases, okay? Moving on. Debit and credit. Very, very important. Now, remember the concept I taught you of gain or loss, okay? Every transaction has multiple accounts. Now remember, every transaction has multiple accounts. If I take you back to Emily and John's example, here, there are multiple accounts. There's Emily, there's John, there's Car, okay? So in every transaction, in all these financial events, you would have multiple accounts. And these are recorded on the debit or credit side of the account respectively. Okay? Every increase or decrease is shown in the debit or credit side of the account respectively. Now, what's debit or credit? Very simple. Debit is the left side of the account and credit is the right side of the account. Okay? Now, every accounting class, whatever I taught you, I taught you the important definitions of all these assets, liabilities, incomes, expenses, capital and drains. They are either debited or credited. Now, I'm sure you're wondering something. What to debit and what to credit, right? Now, to help you understand, I made a rule which will make it very easy for you to remember what will be debited and what would be credited. That's called the dead click Rule. Let's click right in to the dead click rule now. D stands for debit. Now, what to debit? These three things would always be debited, expenses, assets and drawings. These items would always go on the debit side. On the other hand, what items to credit? Liabilities, incomes and capital. These items would always go on the credit side. However, there is an important catch over here. This rule only applies on increases. If expenses, assets, and drawings increase, that would go on the debit side. If liabilities, incomes and capital increase, that will go on the credit side. If any of these items decrease, then this entire rule would be reversed. Like if an asset decreases, that would go on the credit side. If income decreases, that would go on the debit side. So the debt cruel always applies on increases. Now, you guys might be wondering another question. I'm always talking about increase or decrease. How will we identify whether an item is increasing or decreasing? So I'll try to help you understand this confusion. If anything is coming in the business, that signifies an increase. Now, always remember in accounting, we have to always focus on the business. We are not supposed to focus on the owner. We are not supposed to focus on any other party or any other thing happening in the world. We will only prioritize the business, and whatever is coming in the business, that's an increase. Whatever is going out of the business, that's a decrease. Oh, if the balance of an account increases, that signifies an increase as well. All right? If something is going out of the business, that's a decrease like in Emily and John's example. The cash went out, right? So that's a decrease. Or, if the balance of an account decreases, that signifies a decrease as well. Now, let's look at some examples to help you understand this concept. Example number one, very simple. Bought a car for $10,000 cash. Very simple. Now, the car is coming in the business. So this asset, your car is increasing. The cash, however, that's going out of the business. So your asset cash is decreasing. Okay? So number one, you have to look at the flow. If it's an inflow, that's an increase. If it's an outflow, that's a decrease. Then I spoke about balance increasing or decreasing, right? Let's look at the second example. A credit customer, you receivable. Johnny of ABC Limited paid them their entire balance. Now, your receivable, your customer who owed you money, finally settled his balance. He paid the entire amount owed to you. So that's a decrease, right? You're going to wipe off Johnny's name from your book. Johnny doesn't owe me money now. So Johnny's balance has decreased. Why? Because he paid the account. So I hope you understood how to identify an increase or decrease. I'll see you in the next video. Have a good time. Bye bye. 12. The Four Step Model in mastering Double Entries: Welcome back, my genius accountants. In this video, we are going to commence the second part of the double entry system. This is the most important element of the entire double entry system series. In this video, I prepared a four step model, which will help you master the art of double entries. You will never go wrong if you follow my four step model. So let's have a look at the four step model. Whenever you solve a double entry question, you have to apply this four step model. Step number one. Very, very simple. Account identification. Now, if you recall, I taught you that each transaction involves multiple accounts. For example, sold goods for cash. So there's sales and cash. Step number one is to identify all accounts involved. Step number two is account categorization. Now, whatever items you identified in step number one, now it's time to categorize them based on their nature. For example, cash. That's an asset. So asset is the account category. Loan, that's a liability. So that is the account categorization. Asset liability, income, expenses, capital, drawings. These are all the categories. Step number three, we have to determine whether the items are increasing or decreasing. In the previous video, I explained in detail how to do that. You can have a look at that. And the final step is to apply the dead click rule. Then you are done with double entries. You will never, ever go wrong. Trust me. Now, what was the dead click rule? I won't go over it again. I'm sure you know it very well now. See you in the next video. Thank you very much. 13. Step 1 - Account Identification: Welcome back my genius accountants. In this video, we are beginning the first step in my four step model in mastering the art of double entries. And step number one is called account identification. So let's dig right in. Remember, every business transaction involves two or more accounts. This is also known as the dual aspect concept. So the first step is to identify what are the accounts involved. So let's begin. I prepared some examples for you. Example number one. The transaction states started business with cash of $10,000. This is the easiest step. You just have to identify what accounts are in the transaction. Now, you will see a minimum of two accounts. Over here, I see started business, which is called capital. So I see the capital account and the second account in the transaction that can be seen is cash. So we are done. This is step number one. Moving on to example number two, paid rent with cash of $5,000. So this is pretty obvious. What are the two accounts in the transaction? Rent and cash. All right? Example number three, bought goods on credit from John for $5,000. Very, very simple. The two accounts in the transaction are bought goods, which is your purchases. Now, I hope you know what his purchases. I explained in the first section of the course purchases and John. These are the two accounts involved in the transaction. Example number four, sold goods on credit to Jamie for $4,000. So this sales and Jamie, okay, Jamie's our receivable. He owes us money. Example number five, withdrew $5,000 cash for personal use. Okay. So the two accounts involved are cash, and what is personal use, your drawings. All right? So these are the two accounts involved in the transaction. Example number six, withdrew cash from the bank for office use. Now, this is similar to the previous example. The only difference is one word. I replaced the word personal with office. So this is not my drawings. The two accounts involved in the transaction are Cash and bank. All right? Example number seven. John, our receivable, paid us $3,000 by cash related to the balance he owed us. Very simple. So in this example, there's John and cash. Alright? Final example, paid Alex our payable $5,000 by check pertaining to the balance we owed him. So in this transaction, you can see two accounts, our payable, Alex and check. Okay? So there's Alex and bank. Okay, bank is the name of the account. There's nothing called check account. It's bank account, right? 'Cause check is a source document involves the bank, okay? Right. See you in the next video in which we will discuss the second step. Thank you very much, guys. 14. Step 2 - Account Categorization: Welcome back my genius accountants. We are now on the second step of my four step model involved in mastering the art of double entries. In the previous video, we covered the first step, which was account identification. In this video, we would categorize the accounts we identified in the first step. So let's dig right in. After identifying the accounts involved, now we have to categorize them into their relevant nature. Now, when I talk about nature, I'm talking about the class of accounts. So there's six classes of accounts. Asset is a class or nature, liability is a class, income expenses, capital and drawings. So each accounts we identified would go in one of these six categories, right? So let's dig right in. We would cover the same examples we did in the previous lesson, we would include the second step. So let's begin example one, started business with cash of $10,000. We identified capital and cash in the previous video. Now we have to identify or categorize them into the nature. Now, capital. Capital retains its own category, which is capital. It's part of equity. So we would just put it into capital. That stays its own nature. Cash is an asset. We own the cash. So that's an asset, right? Example number two, pay rent with cash. We identified the two items in the previous video, rent and cash. Now what is rent? Rent is an outflow. It's a bull in order to run the business. So that's an expense, and cash is an asset. Example three, bought goods on credit from John. We identified purchases and John in the previous video. Now, what is purchases? I explained this in detailed in section one. However, purchases is part of your cost of sale. Now, what is cost of sale? I covered this in detail in a section ahead called Basics of sole trader Financial Reporting. However, cost of sale is similar. It's not exactly it's similar to an expense. It's an outflow, okay? So this would be debited just like expenses. And John is your payable, your liability. Okay? Let's move on. Example four, sold goods on credit to Jamie. We identified Sales and Jamie. Now, what is sales? What is that? It's your earnings, right? You income. And Jamie is your payable? No, Jamie is your receivable, your customer who owes you money. So John sorry, Jamie is your asset. Okay? Next example, withdrew $5,000 cash for personal use. So we identified cash and drawings in the previous video, right? Cash is your asset, and drawings would remain in the drawings category. It reduces your equity, but it goes in its own category. Right. Next, withdrew cash from bank for office use. We identified cash and bank in the previous video. I told you this is not drawings, and both are your assets. Alright. Next example, John, our receivable paid us $3,000 by cash. So we identified John and cash. It's pretty evident that John is our receivable, so our asset, and cash is also an asset. Final example, paid Alex our payable $5,000 by check. So this is pretty evident we identified Alex and Bank in the previous video. Alex is our payable. We owe him money, our liability, and bank is our asset. Alright? So this was the second step. See you in the next video, we will cover the third and most important step, which is affect determination, increase or decrease. Have a good day. Thank you very much, guys. 15. Step 3 - Effects Determination: Welcome back, my genius accountants. In this video, we are moving on to the third step of my four step model in mastering the art of double entries. And this step is called effects determination. Determine whether the effect is an increase or a decrease. We saw in the previous videos in the first step of double entry, and I taught you in detail how to identify an increase or decrease. So let's dig right in. After identifying the items, which was step one and then ascertaining them into the natures, that was step number two. Now we have to figure out the increase or degree. So let's begin. Example one, started business with cash. We identified capital and cash in the previous video. We identified the nature as well in the previous video. The third step is to see the two items, the two accounts we identified, capital and cash. Are they increasing or decreasing? Very, very important. So the business started operations. The owner invested cash of 10,000, so the capital is increasing. His stake is increasing. The cash is coming in the business. We don't focus on the owner. Some students say that the owner is investing his cash, so the cash is going out of his pocket. Well, my answer is, in accounting, we don't care about the owner's pocket. We care about the business only. The cash is flowing in the business, hence the cash is increasing. Okay? Second example, pay rent with cash of $5,000. We identified the accounts in the first step, we categorized their nature in the second step. Now, is rent increasing or decreasing? The rent is increasing. Why? Because the business incurred a bill. They availed the services. They availed the office space or the flow area. Now they have to pay rent. So your bill is increasing. Hence, rent is increasing. The cash, however, is flowing out of the business, okay? So the cash is decreasing. Example number three, bought goods on Kid from John, we identified the counts in the previous video. We categorize their nature as well. Now, I purchases increasing or decreasing? The answer is that purchases is increasing. The cost of sale is increasing. You just bought goods, so you incurred the cost. Okay? So that's increasing. John, my liability is it decreasing or increasing? It's increasing, because now we owe him money. His balance is increasing. So John is increasing. Example, number four, sold goods on credit to Jamie. We identified sales and Jamie, we categorize their nature as well. Sales. My earnings as a business is increasing, right? I just incurred a sale. So sales is increasing. Jamie, my asset, my receivable, is it increasing or decreasing? It's increasing because he took my goods on credit. Now he owes me the balance, right? So that's Jamie is increasing. Example five, withdrew cash for personal use, we identified cash and drawings in the previous video. The nature, as well, we categorized them in the previous video, the effect determination now. Widrew cash. Well, the owner withdrew cash, so his pocket is increasing, right? So cash is increasing. No, we focus on the business only. The cash is going out of the business. Hence, the cash is decreasing and the drawings is increasing. All right? Example number six, withdrew cash from the bank, we identified the two accounts, cash and bank. We categorized them as assets. Now, the third step is effect determination. So now focus. There are two items cash and bank. What's happening? The owner withdrew cash from the bank. So his cash balance, his cash till the draw is increasing. Now he has more notes, right? However, the bank balance is decreasing because he withdrew money from the bank. So bank is decreasing. Okay? Example number seven, John, our receivable paid us cash. So we identified John and cash. We categorized them as assets. Now let's see whether they're increasing or decreasing. Now, John is my receivable. Once upon a time, we sold goods on credit to him, he owed us money. Now, he's an honest person. He came and paid us 3,000 by cash. So does he still owe me money? No, he settled his balance. So the balance of John is decreasing. And he paid me what? He paid me chocolates? No, he paid me cash. So I took the cash put in the business till. The cash is increasing, right? Final example, paid Alex by check. We identified Alex and bank. We categorized them as well. However, the most important step are their balances increasing or decreasing? Now, Alex was an obligation. Alex was a headache because we owed him money. So we took 5,000 and threw it on his face. Take it in a lighter note. So, Alex, my balance, is it decreasing or increasing? My debt is going down, my liability is going down. So Alex is decreasing, right? However, what about the bank balance? We gave him a check. My money went out from my bank and entered his account, so the bank balance decreased. Alright? I hope you guys understood the third step. Now we are going to move on to the final step, which is dead click, right? So see you in the next video. Guys, thank you very much. 16. Step 4 - Double Entry Application (DEAD CLIC): Welcome back my genius accountants. We are now in the final step in mastering the art of double entries. And this is the most important, the concluding step. This is what is required in accounting. Alright? This is called the double entry application Dead clack. I hope you guys remember the dead lick rule I explained in detail. However, let me recall the concept. So this was dead click. Debit. What to debit? Expenses, assets and drawings. If it increases, remember, the rule only applies in increase. If anything decreases, like, for example, you sold an asset, your receivable paid you. Okay, you paid someone by check. You assets are decreasing, so we'll reverse the dead click rule, and assets would go on the credit side, right? So this is the dead side. Debit expenses, assets and drawings. Come on the click side. What to credit, liabilities, incomes and capital. The same thing, it only applies in increases. If I pay off my liability, I paid off a bank loan. I paid off my payable, so my liabilities are decreasing, we would debit the liability. The rule would reverse, right? So this is the dead click rule. I hope you understand why I taught you the four step model. Now you'll understand why so let's come back to the same examples, example one, started business with cash. We identified the two accounts. We categorized them as well. We identified increase or decrease. Now, debit or credit. These two accounts would either go in the debit side or the credit side. Remember, we always write the debit account first. This is a standard presentation you have to follow. The debit account first, followed by the credit account. So what to debit? What to debit? You can see cash is increasing. That's an asset. So cash would come on the debit side, the dead side. Capital is increasing on the click side, so capital would be credited. All right? Example two, pay rent with cash. We identified the two accounts, rent and cash, we categorize them as well in expense and assets. We identified increase or decrease as well. Now the most important part debit or credit. Rent is an expense. You can see the nature. Rent is increasing. So as per dead click, expense increasing goes on the dead side, the debit side. So expense would be sorry, rent would be debited. Cash is my asset. It's decreasing. Asset decreasing, so we reverse the dead click rule and put cash on the credit side. All right? Example number three. Bought goods on credit from John, we identified the two accounts which were purchases and John, we categorized them as well, cost of sale and liability. We identified increase or decrease as well in the previous video. Now, debit or credit, most important thing. Now, purchases is increasing. It's a cost of sale, similar to an expense. So we would debit purchases. For your own information, there's another school of thought which says purchases because inventory is flowing in the business, so your asset is increasing. That's why we'll debit. That's also correct. We'll study this in detail in the chapter of inventory. So purchases would be debit because your cost is increasing. John, my liability is increasing, as you can see, click liability. So on the click side, on the credit side, I would write John. Okay? Example number four, sold goods on credit to Jamie. We identified the two accounts, sales and Jamie. We categorized them as well, income and asset. We identified increase or decrease as well. Now most important thing, debit or credit. Jamie is my asset. You can see the nature. It's increasing. So dead. On the dead side, the debit side, I would write Jamie. And on the credit side, you can see sales is your income. Click. Income is increasing. So sales would go on the click side, the credit side. All right? Example number five, withdrew 5,000 cash for personal use. So there's cash and drawings, we identified the nature as well. We covered that. We identified increase or decrease. Now most important thing, what to debit and what to credit. So cash is decreasing, right? Drawings is increasing dead. Drawings is on the dead debit side. So drawings would be debited. Cash, my asset, you can see it's decreasing. So we'll reverse the dead click rule, throw cash on the credit side. Example six, withdrew cash from the bank. So we identified cash and bank. We categorized them as well. Both were assets. We identified increase or decrease. Now, cash is increasing dead. Asset is increasing. So on the dead debit side, I would write cash. Bank asset decreasing, reverse the dead accrued, put the asset on the click side, credit side. So bank would be credited. All right? Example number seven, John Our receivable paid us. So the two accounts we identified, the nature we categorized, increase or decrease done. Now, debit or credit. Cash, my asset is increasing. Okay? So dead, asset increasing, I would debit cash. John is also my asset. However, he's decreasing. So we'll reverse the dead lick rule and put John on the credit side. Final example, paid Alex our payable. We identified their two accounts, Alex and Bank. We categorized them as well, liability and assets, increase and decrease done in the previous video. Now debit or credit. Alex, liability, always on the click side. However, you can see that the balance of Alex is decreasing. So we'll reverse the dead leak rule, put Alex on the debit side. So Alex would be debited. Bank is my asset, Dad. However, it's decreasing. So instead of debit reverse the deadlek rule, we'll put bank on the credit side. Guys, I hope you understand my four step model. The first step was account identification. Second step, account categorization, third step affects determination and four step double entry application. Dead click. This will always help you. No matter how complex the journal entry is, how complex the double entry is, you would easily do it. I hope you understand this video, see you in the next video, guys. Thank you very much. 17. Introduction to Journal Entries: Hi, my genius accountants. Welcome back to the next video. In this video, we would be starting a new topic called journal entries. Now that you've understood my four step model on double entries. We are now beginning a chapter called journal entries. Now, journal entries is a very, very important concept in accounting, and you have to have understanding about this. Otherwise, you'll have problems later on in the next chapters. So let's try to understand what are journal entries. It's just double entry, right? It's based on dead click. It's a system made in order to record transactions, and it's the building blocks of accounting, the basic foundation of accounting. Now how do jill entries look like? Let's have a look at that. So they are the first step in the accounting cycle. I told you after a transaction, we post the transactions into the books of original entry. Now, before we move on to the books of original entry, you have to have understanding on journal entries because the books of original entries are old journals. So let's have a look at the journal. How does it look like? So these are journal entries, okay? You can see there's a date column. There's a details column. In this, we write the name of the account, and then there's debit and credit. So it's totally based on DedCliq. We apply the four step model of double entries, what I toad you, and we solve the journal entries. Now, let's do an activity. In the next video, we are going to do an activity on journal entries, which will help you understand it very well. So see you in the next video. Thanks. 18. Journal Entries - Activity: Hi, my genius accountants. Welcome back to the next video. In this video, we are doing a class activity on journal entries. Now, if you still don't understand my four step model, kindly review those videos before this lesson. All right? It's a very, very important concept which will help you in solving such double entry questions. Okay? Now, let's have a look at the question. It says, prepare journal entries for the following transactions. So there are nine transactions in this question, and we have to prepare journal entries. All right? So follow my four step model in each question. What was the four step model? The first step was identifying the items in the transaction. Okay? The second step was ascertaining the nature of those items. Are those assets, liabilities? What are the accounts that we're supposed to write? The third step was identifying whether are these items increasing or decreasing? That's very important because when you understand the increase or decrease, we are going to apply the fourth step, which is the dead click rule. All right? Now, let's start this. Before I even move on, let's write Dead Click so we don't forget anything. Debit expenses, assets, drawings, credit, liabilities, income, capital, and they only apply on increases. I'm sure you'll remember that. If there's a decrease, then we will reverse this rule. All right? Right. Now, let's start the first question. Started business with cash for $10,000. Okay? Now, in this question, there are two items. They started business and cash. All right? So the owner invested his cash. So the capital is increasing and the cash is also increasing. I explained this before, how to identify increase and decrease. Watch that video. The cash is not going out. It's coming in the business. So let's assume it's first of January, all right? So our cash is increasing. And also remember one more thing, we'll always write the debit item first. Whenever we write journal entries, the debit item has to be on top, right? So cash is being debited because it's increasing as per deed click, it will go on the debit side, and capital is also increasing. So I'll write capital on the credit side. Because as per dead click, capital goes on the credit side. Now let's move on to the second question. Bought goods on credit from Fox. Okay. Bought goods on credit from Fox for $2,000. Now, in this transaction, there are two items board goods, which is purchases, Fox. Is Fox my payable or my receivable? Think. Tell me quickly, pose the video and think. Fox is my payable. As a business, we owe him money. It's an obligation to pay. He's a liability, all right? So my purchases is increasing, all right? And my liability is also increasing. So purchases would go on the debit side because it could either be an expense or an asset. Both schools of thoughts, it would go on the debit side. So two, let's assume it's 2 January, purchases on the debit side, $2,000. And Fox is my liability is increasing. So as per dead click, Fox would be credited. Okay, this is how we do journal entries. The debit item first, and the credit item would come after that. The third transaction. Sole goods on credit to Roy. Now, in this question, there are two items sole goods and Roy, right? Now, who is Roy? Is Is Roy my receivable or payable? Think. Pause the video and think. Roy is my payable. I'm just joking. Roy is my receivable. Why? Because I sold goods on credit to him, he owes me money. All right. And in the asset definition, the second point, what was the second point resources owed to the business. So he owes us money. He's my receivable. It's increasing, right? There's a new person who owes me money, Roy, so I'll write Roy on the debit side because as per DedCliq, assets would always go on the debit side. And the next item is sales. It's my income. That's also increasing. I sold something, so my earnings are increasing. My income is increasing. Second, there's one more question students ask me. You might be confused that, why is this my sale, even though I didn't get the money, and I recorded that as a sale. Accounting is accrual basis. It's not cash basis, okay? We record incomes when we earn them, not when we receive the cash. That's the reason. Okay, second, for January, paid rent by cash for $1,500. Okay? My expense is increasing. I just incurred a cost, a bill, rent. My cash is going out of the business. So cash is my asset. It's normally supposed to be debited. But because my cash is going out, I'm going to credit cash, and I'm going to debit rent with $1,500. Okay. Next, question number five, paid Fox $0.20 every dollar owed in cash. Post the video and solve this. I want to see what you guys can do. Now, remember, once upon a time, once upon a time, we bought goods on credit from Fox for $2,000. Okay. Once upon a time, we bought goods on credit from Fox for $2,000. I didn't pay him the entire amount. I just made one payment. Okay, one payment. And what's that payment? We paid $0.20 for every dollar owed in cash. Okay? Now, how to do this? Now, let me show you this involves a little bit of maths. So $0.20 for every dollar owed means 0.20 multiplied by the amount we owed him, which was $2,000. So it's like 20% of $2,000, which is $400. So we just made one payment. We owed him 2000, we paid him 400 so far. So we have to record this. We paid in cash. So the cash is going out, right? And my liability is decreasing. Why is it decreasing? Because first my debt was 2000 now we made a small payment. So my debt has decreased from 21,600. Okay? So my liability is decreasing. Alex, sorry, Fox, my payable is decreasing. So we would reverse the debt leak rule. I'm going to debit Fox instead of credit with $400 because that's the payment I made. My cash is going out, so I'm going to credit my cash. All right. Next transaction, withdrew cash from the bank for office use. This is drawings, right? It's drawings. No, it's not drawings. It's not for personal use. If you go to the bank, you take out cash, put that cash in your cash still in the business. That's not a personal use. You're doing that for the business, okay? So in this transaction, there are two items, there's cash and bank, okay? There's cash and bank. So the cash is increasing. Obviously, you got cash, you put some cash in the cash still. You flow increased, but the bank is decreasing. Okay? So as per dead click, as per dead click, my asset cash is increasing, so I'll debit that. My bank is decreasing, so I'll credit that. There's no drawings involved here because it's not drawings. Okay? Question number seven, is this drawings? No, it's not. Yes, it is. I'm just kidding. So the inventory is going out from the business, right? And I just incurred a drawing. So my drawings balance is increasing. All right? So as per dead click drawings is on the debit side when it increases. How much? 1,000. And my inventory asset is going out, it's decreasing. So would reverse the deedlu rule, this asset would go on the credit side. Okay. Next, paid Roy half the amount he owed. No, sorry, Roy paid us half the amount he owed by cash. This is not the full payment. So far, he paid me half the amount. I probably made an agreement with him that first gave me half the amount this month and half later. It's not the full settlement, okay? This is why I'm not writing any discount in the Fox transaction or in the Roy transaction. Now, Roy paid me cash. So first of all, straight away my cash is increasing. Asset is increasing. Roy, my receivable is decreasing, okay? Because receivable means you are yet to receive money from someone. So initially, Roy owed me how much. How much did Roy owe me $3,000 this transaction over here. Roy initially owed us $3,000, and he paid us half the payment. So what's half of 31,500, right? So now he owes me 1,500, which is lesser than 3,000. So notice how my receivable balance has gone down. So my asset receivable is going down because he's paying me, okay? So what I'll do now is I would debit my cash because that's increasing with 1,500, and I'm going to credit my receivable who is also decreasing by 1,500. All right? Next, one more transaction. Come on, guys, tell me how to do this. We borrowed a loan from the bank. Okay? We borrowed a loan from the bank. So my liability loan, my debt is increasing, and my bank balance, my asset is also increasing. So as per DetClik Rule as per DetClRu my asset bank on the debit side because it's increasing. My liability, which is called loan payable, a liability, my debt is also increasing. All right? So this was how to solve journal entries. Note one thing that the amount on the debit side would always be the same as the amount on the credit side. If there's 10,000 on debit, it should be 10,000 on credit. Otherwise, there's either a problem in you or a problem in the question or an error. So make sure that the debit and credit amounts are always the same. All right. So this was how to solve journal entries. Now let's move on to books of original entry. In the next video, we are going to start the first step in the counting cycle, which is called books of original entry. Thank you so much. 19. Introduction to Discounts: Hello, my genius accountants. Welcome back to our next video. In this video, we would be covering some important transactions such as discounts and returns. So in this video, we would have a look at discounts. All right? So there are two types of discounts. Number one is your trade discount. Your second discount is called a cash discount. Both these discounts have different treatments in accounting. Both are treated separately. Both are different concepts. So in the next videos, we would be covering each discount. So see you in the next video. Thank you. 20. Trade Discounts: Hello, my genius accountants. In this video, we are going to discuss a very important concept, which is called discounts. And in particular, we are discussing trade discount in this video. But before we commence this chapter, there are some important terms you have to have understanding on. And what are those terms there too? Number one, list price. Okay? And number two, net price. So list price is the price before discount, before the deduction of any discount. So it's a pre discounted price. The net price is the post discounted price, meaning after deduction of all the discounts, the selling price that's left is called the net price. So post discount. A very simple example, if I'm selling a product for $100 and after applying 10% discount, 10% of 100 is ten, subtract ten from 100, you'll be left with 90. So this $90 is the net price, and this hundred dollar is the list price, right? Right. Now let's move on to the chapter and understand all this. Right. These are some products from Amazon. You can see some beads, you can see a petere. You can see drone products, a computer LED and an air purifier. Note, it says 20% of limited time deal, 38% of 22% of 41% of 42% of 22% off. These are all the discounts. All right. This is called the trade discount. Discounts offered by businesses to customers when you make upfront payments. All right? These discounts reduce the selling price. All right? So now, what is trade discount? Reduction in the list price of the product. All right? Why is it given when customers do bulk purchases, when they buy immense orders, okay? Or to encourage sales. If a business is trying to increase the number of orders or to increase their customers, they can offer trade discounts. Let's look at an example that I prepared for you guys. Suppose a manufacturer sells a pair of earphones for $10 each. Okay. They're selling a pair of earphones for $10 each. If a retailer purchase 100 pairs, the manufacturer may offer a 10% trade discount. So we have to calculate the purchase price for the customer. Pause the video for a moment and tell me what you understand from this. Try to solve it yourself. It's a very simple question. First, we would calculate the list price, okay? So the manufacturer sells one pair for $10. They sold 100 pays, so very simple 100 pays multiplied by $10, you'll get $1,000. This is the list price, okay? The revenue. Now, let's subtract the discount. Okay? Since 100 pair of earphones are bought, 10% discount would be applied. So 1,000 times 10% is 100. You can subtract 100 from 1,000, so you'll get $900. This is the price paid by the customer. This is the purchase price for all these earphones. Okay. Now, let me teach you a quick hack, as well, how to solve this question. We multiplied by 10%, then subtracted the discount. You can just take $1,000 multiplied by 90%. So you'll get 900. This is a quicker version. All right. Moving on now. Let's look at the accounting treatment for trade discounts. Remember, a very important point. Trade discounts are not recorded anywhere in the accounting records. There's no need to record anything. They're simply subtracted from the list price. The reason is very simple. Let me give you an example. Okay. If your mum gave you money to buy a cake, let's say she gave you $50 to buy a cake, and you thought that the cake would be for $50. You went to the shop. They offered 20% discount. So the cake was for $50, but they offered 20% discount. So $50 multiplied by 80%. 40. This is the price paid by you. When you take the cake back home, if your mom asks you, how much was this cake, what would you say? You would see the cake was for $40, right? That's the price you paid. So when the inventory arrives at the warehouse of the business, it arrives at the net price. So we assume this is the price, this is the selling price we paid. There's no need for any accounting treatment because I'll assume I bought this for $40. So when I would record purchases by cash, so I would debit purchases, and credit cash. I would simply put $40. That's it. This is the net price. So there's no need to record the trade discount anyway. Thank you very much. See you in the next video. 21. Discount Allowed: Hello and welcome back my genius accountants. In this video, we are moving a step forward in the discounts chapter. So in the previous video, we studied trade discounts. In this video, we would be talking about cash discounts. Now, cash discounts are also known as settlement discounts. Now, please understand what does the word settle mean? So if someone owes me money, he finally pays the amount. It means he cleared his account. Oh, he settled his account, done and dusted. If I owe someone money, I fulfill my obligation. I clear the account. That means I settled the account. So there are two types of cash discounts. There's discount allowed and discount received. In this video, we would be focusing on discount allowed. So let's dig right in and see what the definition is. Discount allowed is given by the business to a customer for paying their account early or by a specific deadline. Let's say I sold goods on credit to someone amounting to $100, and the expectation is that he would pay after 30 days. So I decide to give him a motivation that if you pay me within 15 days, I would give you a concession of 15%. Meaning pay 85% of the amount, I will accept that as the full and final settlement. So the 15% discount that I gave, that's called discount allowed. It's a concession given to your customer, okay? It incentivizes timely payment and helps maintain healthy cash flow for both the seller and the buyer, both parties. Obviously the buyer would be happy, you'd pay less amount. The seller would be happy as well as he can get timely payment before the expected payment. I prepared a small example for you guys. This is XYZ Limited, and this is Emily, the credit customer of XYZ Limited. So XYZ Limited sells goods on credit to Emily worth $500. So who's Emily? Guys, Emily is the receivable? XYZ Limited has to receive money from Emily. Now, the company makes an offer to Emily that if you pay within a month, they will waive 10% off for you. In other words, they will give you a concession of 10%. Remarkably, Emily accepted the offer and paid in cash after 20 days, so ten days before the expected time. Now, let's try and see what's happening. First, let's look at the journal entry when we sold the goods. So we'll follow the Dead click rule, debit expenses, assets, drawings, credit, liabilities, income capital, and this rule only applies in increases. Okay? Pause the video and tell me what's going to be the double entry. Pause the video. So this is very simple. We did this many times. We'll debit Emily because she's my receivable was increasing, and would credit sales because that's my income, which is increasing. Now, the second aspect is more important. Understand what's happening. I booked a receivable, Emily, worth $500. So in my books, there's $500 that I have to receive from Emily. We have to give her a 10% discount because she paid on time. So 10% of 50 is $50. And how much cash did we receive? 450. Because we received 90% of the amount, and that's the full and final settlement. So what you can simply do is just take 90% of the original price, the list price. So then you would arrive at the discounted price. Now, there are three things happening. I have to wipe off my receivable, okay? I have to record the discount and the cash we received. So this is what happened. We debited cash for 450 and discount allowed is my expense. So I debited that as well. And then I credited Emily with $500. So this is what happened in this transaction. All right? Because now Emily doesn't owe me any more money. It's finished. I recorded 500 at the beginning. So when I finish her account, I have to credit 500 as well. All right? So that's discount allowed. I'll see you in the next video in which we'd be talking about discount received. Thank you very much. 22. Discount Received: Welcome back, my genius accountants. In this video, we would be covering the second type of cash discount, which is called discount received. So let's dig right in. Now, discount allowed was a concession given by us as a business to our customer. Discount receipt is the opposite. It's a concession we receive from our supplier in order to pay earlier. All right? Now, let me give you a small example. Let's say we bought goods on credit worth $100 and we have to pay within 30 days. If our supplier gives us an offer that if we pay within 15 days, he would give us a 10% concession of the liability. So if we pay 90% of the entire amount, you would accept that as the full and final settlement. No need to pay anything else. So this 10% concession that we received, that's cold discount received. It incentivizes us to pay earlier. Let's do an example that I prepared for you all. Our business XYZ Limited, buys goods on credit from James worth $400. Okay? James gives us an offer that if we pay him within a month, he's going to give us a concession of 10% of the liability, which is $400, 10% of that. We accepted the offer. Remarkably, we accepted the offer and paid within 20 days in cash. So that's ten days earlier than our deadline. So we got the discount. Yay. Now, tell me the journal entry upon buying off the goods, upon purchase of the goods. Follow the dead click rule that I taught you many, many times. We are buying goods, so that's going to be debit. Our liability is increasing as well, James. So we would debit purchases, and we would credit James. Now, tell me about the settlement. This is more important. Think what's happening. We booked a liability of $400. We got a 10% discount of 40. We ended up paying only hundred $60. So we have to show these three items in the transaction. We debited sorry, we credited our liability with 400. We increased our liability. So now we have to decrease it because we paid our amount in full and final settlement. So the first thing we would do is debit James 400. We paid cash of 360, and we receive discount of 40. This is our income. Always remember, if you remember, in the important definition videos, I told you, wherever the word received is mentioned, that's your income. So discount received is an income. It's a benefit we attained, which is why we credited discount received. So this is discount received, CEO in the next video. Thanks. 23. Discounts Activity: Welcome back my genius accountants. In this video, we would be solving three questions which relate to the discounts chapter that we carve it. So let's start with the first question. It says, XYZ Limited, sold goods to John on credit for $1,000. Okay? $1,000. A trade discount of 10% was given. In addition, a cash discount of 15% was offered if John paid within 20 days. What is the maximum discount John attained? Now, I've seen many multiple choice questions in your paper one, which are exactly like this. I want you to solve the question, pose the video, and let's see if you do it correctly. Right. My question is, would both the discounts apply this question or only one? The answer is only one. We would only apply the trade discount. And if I ask you why the reason is very simple. The question does not mention did John pay within 20 days? That's a mystery. So we can't apply the cash discount because we didn't know if he paid within time before the time or what. So we would only apply the trade discount. So in this question, the maximum discount that John attains would be $1,000 multiplied by 10%, which is $100. And if I ask you, what's the journal entry that we would pass in this question, so we would follow the dead click rule. Okay? We sold goods to John. John is our receivable is increasing, so we would debit John. Our sales are increasing, so we would credit sales with the amount of hundred dollar -100, which is $900. If you remember, I told you that we do not record any accounting treatment for trade discounts. We just subtract that from the list price. Question number two, Japan limited bought goods on credit from Leyla for $1,500 on 1 January 2020. Now, this is a bit of a technical question as we are advancing forward, I added slightly more spices in the question. So remember the dates, $1,500 on first of January 2020. They received a 10% trade discount. In addition, Leyla offered 20% cash discount. If Japan Limited managed to pay within 30 days, this is important. The last line. They ended up paying the amount on 21 January. So the goods were bought on 1 January, and the offer of discount was still 31 January. Because that's within 30 days. Remarkably, we paid on 21 January. That's less than a month. That's within 30 days. So we attained the discount. If I ask you, what's the maximum discount? So there's $1,500 multiplied by 10%. So that's 150. Okay, that's $50. So what's 1,500 minus 150? 13 50. They ended up paying the amount on 21 January. So we would offer 20% discount, okay? So what is 20% of 13 50? I'll take my calculator. 270. And the remaining amount is 1080. So 13 50 minus $270 was the cash that Japan Limited paid Lela, what we paid Lela, which is 1080. So if I ask you all, what's the journal entries that we would pass? So first, we would record the purchasers entry number one. That's the first step. So we would debit purchases as per dead click, and we would credit our liability, Leyla because Japan Limited owes Lala. Okay? So 1,500 minus 150, which is 13 50. This is our purchases. We don't do any treatment for trade discount. The second part is the settlement. So I would wipe off our liability, Leyla. So instead of credit, our liability will go on the debit side because deadcru is reversing, our liability is decreasing. How much cash did we pay? We paid 1080 on the credit side, and our discount received also on the credit side. $270. So this is the journal entry for discount received. Now, let's go to third question. ABC Enterprises sold goods n cred to Miranda for $800 on 1 January 2021. Okay, so this is a selling question. They gave a generous straight discount of 10% and in addition, a 20% cash discount if Miranda pays within 45 days. Miranda presented a check and cleared account on 28 February. So now we have to see is this within 45 days or not? Let's do a small calculation. On 1 January, this transaction began. So at the end of January, that would be 30 days. Okay. And she paid on 28 February. So 28 days of February. Oops, this is not 45 days. This is 58 days. So this means that this cash discount would not be applicable, right? We can't give her this discount because she did not pay within the time we agreed on. So first, we would record our sales entry. We would debit our receivable Miranda. Because she's an asset, that's increasing. So Miranda debit, 800 times 10% trade discount. So basically 90% because we would wipe off the trade discount. So 800 times 90% is 720. And sales is our income. So that would be 720 as well. Now, upon settlement, there's no discount at all, okay? We would finish our receivable Miranda with 720, and we would debit cash with 720. So we debited cash 720, and we finished our receivable. We credited our receivable Miranda with 720. Okay, there was no discount applicable because she paid us later in 58 days, and the offer was 445 days. So this was a discounts activity. See you in the next video. Thank you very much. 24. Returns Inwards: Hi, genius accountants. Welcome back to the next video. In this video, we are beginning some small concepts and students find problems in preparing double entries on these concepts. So in this video, we are covering one concept of returns and in particular, return Iwids. Now, what is return inwards? Return inwards is also known as sale return. Okay? It's also known as sale return. Now, why inwards? It's called inwards because the inventory, the movement of inventory is flowing back in the business. The customer is returning the product to the business. It could be due to various reasons. Might be warranty claims, defects or simply a change of mind. And every company has a return policy, so they have to cater to such accounting. I prepared a smooth example. This is XYZ limited Our company. And we sold goods on care to Emily worth $500. Okay? Then Emily returned goods worth $50. Emily did not return the entire set of goods, probably a few units, which was accumulated to $50. Now, I want you all to apply the dead click rule. And tell me something very important. What's the double entry of the sale of goods? Obviously, Emily is my receivable. There's no doubt about that. She's our receivable. She's an asset. So Emily debit and the sale, our income on the click side, okay? So Emily debit and sales credit. Now, how would we show the return? It's the reverse of a sale. Okay? Now, I want you to know just one thing. When your receivable is returning a product to you, her outstanding balance would decrease. Emily initially owed $500, but she returned goods worth $50. So how much does she owe me now? She owes me 450. So her balance has reduced, right? 500-450. So Emily would be on the credit side, and sale return would be on the debit side. Now, there are two reasons why sale return is debited. The first reason is pretty obvious. It's the reversal of a sale. Okay, we would reverse the sale. The second reason is the movement of inventory. The inventory is flowing inside the business. Inventory is an asset. So as per Dead click, it will go on the debit side. Okay? Now, we need to record the final settlement. So initially, we booked a receivable of $500. Now that the transaction is finished finished, she paid us the amount we accepted 450. We have to remove Emily from our books. So initially, we debited 500. Now we'll credit 500 to indicate that our receivable is gone. We got $450 cash, 500 -50, and the sale return was debited to 50. So this is the double entry for sale return. I hope you understand this video. See you all in the next video. Thank you very much. 25. Returns Outwards: Come back, my genius accountants. In this video, we would be covering the second type of return, which is known as return outwards. Okay? It's the opposite of a sale return. So this is called a purchase return. Purchase return. All right. It's the opposite of return outwards. So it refers to the goods that the business returns to the supplier due to various reasons if there were some defective products, but change of mind, warranty claims, whatever. So as a business, when we return the goods we bought to our supplier, that is purchase returns. So let's jump to an example straightaway. XYZ limited. Bought goods on credit from James worth $600. Okay? How much? $600. So, James is our accounts payable? Our liability. Why? Because we owe him money. Then what happened, the business returned goods to James worth $100. Okay? So we initially bought goods worth 600. Now we return goods worth $100. Okay? So let's have a look at the double entry we will pass on the purchase of goods. Purchases debit 600 and James credit 600. So we'll just follow the deadlik rule I taught you all. Purchases would be debited, and James is a liability. So go on the click side. Now, how to show the return? So we would reverse the aforementioned entry. We would debit James and credit purchase returns. Now, why are we debiting James? Because our liability is going down? We bought goods on credit worth 600. Now we return goods worth $100. So do we still owe James 600? No, we returned $100 of goods. So we now owe him 500. The debt has gone down, which is why we debited James. The debt leak rule was reversed. Now, purchase return is credited. There are two reasons to this as well. The first reason is the reversal of purchases. Purchases is always debited, so purchase return would be credited. The second reason is the movement of inventory. The inventory is going out of the business, and asset is decreasing. Okay, it's going to the supplier, which is why the dead click rule would be reversed. Now what happened? The business paid all the remaining balance in cash. So how to show the settlement? Initially, we booked a liability of $600 in our books initially. Then we returned $100. So how much cash did we pay the entire balance, which was $500. So I would first of all, wipe off my liability of James because now it's over. I would credit my cash because the cash flow, the asset is decreasing, so Dead Click would be reversed. Now it will go on the credit side and purchase return 100 on the credit side. So note both entries are balanced, 600 on the debit and 600 on the credit. So that's with returns. See you in the next video. 26. Misconception #1 pertaining to Journal Entries: Hi everyone. My genius accountants. Welcome back to the next video. Before we move on to Books of original entry, there's some misconceptions that I want to clear. There are some very common mistakes students make when they make journal entries. So there are two misconceptions that I want to clear before we move on. The first misconception we're covering in this video, and what's that misconception? Buying non current assets is purchases. Is that the case, really? What was purchases? I told you in the important definition video. There items bought for resale. All right. Whatever we buy for resale, that's purchases. Why does a business buy non current assets? Why? To resell them? No, to hold them in the business, earn value from them, use them, use them in production, use them in every aspect of your business, hold them for a very long time. All right? So an example, if XYZ Limited deals in the buying and selling of goods, then purchases would only refer to the buying and selling of those goods. Remember something in accounting in this O and A level course of accounting, we always assume that the standard principal line of business, the standard activity of every business is buying and selling of goods. Unless you are a nonprofit organization, unless you're a manufacturing business. The standard item, the standard activity is always buying and selling of goods, okay? So that's always going to be your purchases. If they buy a non current assets such as a motor vehicle, these are not for sale. Alright? Now, let's look at a scenario I prepared for you. An example This is XYZ Limited, a company. They approached Emily. Why? Because they want a car on credit. They're buying a car on credit. So Emily says, Okay, fine. You can take my car. It's worth $10,000. Now, what journal entry would we pass? We are getting a car, right? The car is coming in the business, isn't it? So the car is increasing. All right. The car is increasing. And we are buying on credit. So, Emily, my pay bill is increasing. Now let's look at the answer of this. Purchasers debit 10,000 Emily Credit 10,000. The student who wrote this journal entry, who answered this question is probably high on weed. Because that's not the case. This is not purchases. So why am I debiting purchases? We are not buying the car for reselling. This is the correct answer. We would debit car for $10,000 because my asset is increasing, and we would credit Emily because my liability, Emily is also increasing. So this is the right answer. Don't confuse yourself and avoid this misconception that buying a non car asset is purchases. All right? Now, see you in the next video in which we would cover the second misconception. Thank you very much. 27. Misconception #2 pertaining to Journal Entries: Hello, my genius accountants. Welcome back to the next video. In this video, we are going to be covering the second misconception, right? Regarding journal entries. So this misconception is very, very similar to the first misconception, which was buying goods on credit is purchases. This is very similar to that. Now, what's this misconception that selling non current assets is your sales. That's not the case. When I explained what sales were, I told you, all those items which you are selling in your principal activity, the core activity of your business, the reason of existence of your business, that's sales. If you sell something else apart from that, that's not your sales, okay? If I'm selling fast food, then my fast food is my sales. In my fast food business, if I had an extra machine, I sold that, that's not my sales, right? So as I told you about the core business activity, example, if XYZ Limited deals in the buying and selling of goods, sales would only involve the buying and selling of those goods. I told you in the previous video that in our O and lable accounting course, the standard business activity is always buying and selling of goods unless you're a nonprofit business or a manufacturing business, all right? If they sell a non car asset, that's not the core business activity, so that's not your sales. Now, let's have a look at some transactions, a small example. It's very similar to the previous example. Now, in this case, Emily is approaching my company. She wants my car. She's my customer, and she noticed our car is stuck and getting rotten in the garage. So she wants my car, but she wants on credit. We said, fine. You can take it on credit. No problem. Now, what's happening in this transaction? Emily is my receivable now, right? She owes me money. So she's my asset as per dead click, Emily is increasing. The car is also my asset that's going out of the business, so that's decreasing. Now let's look at the solution of this example. Again, Someone high on weed solve this question. This is wrong. Fine. I debited Emily. That's okay. Fine. She's my receivable. But why am I crediting sales? This is not a sale, right? It's not my co activity. So this is wrong. This is what's right. Debiting Emily and your car is going out, so you would credit the car, right? So avoid this misconception that selling of non current assets is your sale. That's not your sale. See you in the next video. Thank you very much. 28. Advanced Journal Entries: Hey, everyone. Welcome back to our next video. In this video, we would be talking about discounts, returns. These are advanced journal entries that I've prepared for you all. After this activity, your understanding would become a lot better. So let's begin. Prepare journal entries for the following transactions. Now I'm sure you all have a good understanding on journal entries. Recall the dead click rule I taught you. So debit expenses, assets, and drawings, credit, liabilities, income, and capital. Okay? Right, let's begin question number one. Sold goods on credit to Roy for $1,500. A trade discount of 10% was offered. So in this question, we are selling items on credit. So the two items are Roy and sales. Roy is my receivable, an asset that's increasing because now he owes me money. Sales is my income which is also increasing. So I would debit Roy and I would credit sales. But let's calculate the amount. The amount was $1,500 and a trade discount of 10%. It means we paid 90% of the amount. So 1,500 times 90%, we paid 13 50. Okay? This was the amount we paid. And there's no other treatment. We don't show trade discount anyway. Next question, Roy returned a third of the goods bought a third of the goods Roy bought. That means from 13 50 if I divide it by three, so $450 is the amount of the return. So let's write 450 on both sides. Debit and credit. Now, it's a sale return. So we would reverse the entry. My receivable is going down because now he owes me 450 less. So reverse the dead click rule, put Roy on the credit side, and we would debit sales return. Okay. Coming to the third question, bought goods on credit from Nishum for $1,000. Trade discount of 5% was offered. So in this question, the two items are purchases and Nishum. Nishum is a liability, a debt. We owe him the $1,000, okay? And purchases, my inventory is coming in, so that's going to be debit. So purchases debit and Nishum credit. However, let's calculate the amount. The amount was $1,000, but we attained a 5% trade discount. So we paid 95% of the total amount. So 1,000 times 95%, 950 was the amount paid by us. So we would write 950 on both sides. Okay? Fourth question, we returned a quarter of the goods to Nishum. So a quarter means divided by four, isn't it? So divided by four is $237.50. So let's write this amount on both sides. And we would reverse the above entry. My liability, Nishum is going down by $237 because I'm returning items to him. So we would reverse the dead click rule, put the liability on the debit side, and purchase return on the credit side because the inventory is flowing out of the business. Right, Roy paid the remaining amount by cash, and a discount of $300 was given. Now, this is a technical entry. Let's first see the entire story. What's the entire story of Roy? We created a receivable by selling goods on credit. So initially, Roy owed us how much? Initially, Roy owed us 13 50. Then Roy returned a third of the goods. So Roy returned 450. So if we subtract 450 from 13 50, Roy owes us $900. So we gave Roy a discount of $300 in this question. See, question number five, Roy paid the remaining amount by cash, and a discount of 300 was given. So we'll subtract $300 This is the amount we received. Now, let's break everything down. This is the cash amount we received. This is the discount we allowed Okay. And 900 was the value of my receivable. So this 900 is going down now, right? Because we are settling the count. We got the entire amount. Roy paid us the remaining amount. So let's go step by step. How much cash did I get? I got $600. So I'll debit $600. There was a discount that we allowed I'll debit that with $300 because discount allowed is an expense. The remaining amount, this 900 Roy owed us 900. Now it's finished. We settle the account. He paid us 600. We said, fine. Okay. It's over. So now I'll finish my receivable Roy by putting it on the credit side, reversing the debt click rule, and I would write 900. So now this is how we do the fifth question. Right, sixth question, paid Nishum the remaining amount by cash after attaining a discount of 100. So now let's see the story of Nishum. What's the story of Nishum? Right, so this is how we created our payable. We bought goods on credit from Nishum for $1,000 then a 5% rate discount, so the amount was 950. Then we returned a quota of goods to Nishum and then we attained a discount of 100 and paid the entire remaining amount and settled the balance. Now let's see what happened. What's the story? So first, were we owed Nishum 950. After that, we returned a quarter, which was 37.50 what we calculated before. So let's subtract $237.50 from 950. So how much do we have left? Let's see. $712.50. This is the balance that we owe Nishum. This is our liability. Now, what happened? We got a discount of 100. So if we subtract 100 from here, the amount that we paid was $612.50. Okay? So this is our cash outflow. This is our discount that we received and this is the entire amount of the liability that has been finished. The debt has been finished. So these are three items we have to record now. First of all, let's finish our liability of $712.50 because now the debt is finished. The account has been settled. So I will reverse the debt click rule, put Nisham on the debit side. With $712.50. This was my pending liability. Why? My initial liability was 950. I returned a quota of the goods, so I was left with $712.50. Now, this is a liability. I'm finishing. Okay? So we paid cash of $612.50, and we received discount of $100. So this is the entire transaction. And you can see the transaction is balanced. The same amount is on the debit and credit. Right. Now, let's go to question number seven. That's easy. Bought a motor vehicle on credit from Johnny worth $10,000. Remember, if you remember the important misconception I told you, this is not purchases. Why did we buy this motor vehicle not to resell? So this is not purchases. So I'll debit purchases with $10,000, and I would credit Johnny with $10,000, as well. No, this is not what we'll do. It's not purchases. It's not purchases. I will debit motor vehicle. This is not purchases because we're not buying it for reselling next. We returned the motor vehicle to Johnny. So the motor vehicle is going out, so that will go on the credit side. Isn't it my asset is reducing? And my payable is also reducing. Now I don't owe Johnny 10,000. I gave him the car back. So now we reverse the dead cruel, put the liability on the debit side. There we go. Right, sold a machine to CJ. Is this my sale? Is this my sales? No. Only selling of inventory is your sales. This machine is my non current asset, not inventory. So the machine is going out, and we sold it on credit. Okay? We sold it on credit. So I will debit CJ. He's my receivable. He owes me isn't money for the machine. And I would credit my machine. I won't credit sales because this is not my sale. Only the services you provide that's part of your core business activity, that is your sales. So I hope you understand journal entries. Keep on doing more practice. Practice makes a man perfect. I'll see you in the next video. Thank you very much. 29. The Accounting Cycle: Hello, my genius accountants. Welcome back to our next video. In this video, we will be covering a very important concept, which is called the accounting cycle. It is a very, very important concept, and you have to have understanding about this. Now, what's the accounting cycle? We'll look at that in a moment. Let me give you a background first. What is accounting all about? The purpose of accounting is to prepare financial statements. The financial statements are documents like the income statement, the balance sheet, the statement of cash flow, the statement of changes in equity and notes to accounts. This is what accounting is all about, and this is what we'll do in this entire course. Now, these are very, very crucial, complex and technical documents that contain important information about the insights of a company. How well are they doing? Are they operating at a profit or loss? What is their financial position? Do they have enough assets to pay off their liabilities? And so much more these financial statements show. Now, these complex financial statements are made using steps. So these steps are covered in the accounting cycle. Now let's move on and see. And introduction. So this is a systematic process used by all businesses in order to record, analyze and report their financial transactions. All right? It shows a sequence of steps I told you that financial statements are prepared using steps. The first step starts from a simple transaction, what we covered in the previous videos, boot goods on credit from John, sold goods on credit to Jamie, paid rent by cash, et cetera, et cetera. Now, let's have a look at the accounting cycle, okay? And obviously a very, very important benefit of the accounting cycle is that it upholds credibility of the company. Okay? Right. Now, this is the accounting cycle. We start from transactions. These transactions are then posted to books of original entry. We'll cover this in detail in the next videos. From that, they are posted to the ledges. Edges are accounts, okay? From the ledges, we prepare a trial balance. And the trial balance is very, very important. It's a list of balances. We'll cover that too. From the trial balance, we prepare our financial statements. So this six step model is a systematic approach which is called the accounting cycle. I hope you understand this. In the next video, we would cover books of original entry. Thank you very much. 30. Introduction to Books of Original Entries: Hello, my genius accountants. Welcome back to our next video. In this video, we are covering a very crucial chapter which is called Books of original entries. They are also known as books of prime entries, day books or journals. The reason why I taught you journal entries, we did practice. I taught you important terminology such as returns, discounts. I taught you important misconceptions, DadCliq. All those concepts were to enable you to understand the books of original entries chapter. So let's dig writing. I'm going to start with a scenario. Let's say you have a football match, okay? And you are in search for your football kit, which is in your cupboard. You went to your cupboard and your cubed looks something like this. It looks terrible. Devastation everywhere. Everything is just stuffed inside your cupboard, and it looks more like a fish market. There's no organization. There's nothing. It's so difficult to search for something you're looking for. See, shoes and shirts and trousers and even bottles. Everything is just stuffed. When such a situation happens, it becomes very difficult to search what you are looking for. It becomes difficult to keep track of the items you have. How many pairs of shoes do you have? How many shirts do you have? How many bottles do you have? It becomes very difficult to keep track, and it's also very confusing. It makes life terrible and devastating. Now compare this carpet to this carpet. Now, this looks so beautiful. Everything neat and tidy, shirts with the shirts area, trousers with the trousers area, shoes with the shoes area, bottles with the bottles area. Everything is in a proper sequence, neat and clean, tidy, organized. It becomes very easy if you're looking for something. I can keep track of how many shoes I have. I can keep track of how many shirts I have. I can keep track of how many bottles I have, right? So this organization is actually the purpose of books of original entries. If you remember, once upon a time, not a few videos ago, we prepared journal entries, and this is what we did. This was the journal entries exercise we did. Now, everything is just stuffed over here. The cash transactions are over here, the sales transactions are over year, the receivable transactions are over here, the loan transactions, everything is stuffed in one place. The purpose of books of original entry is to keep your accounting records organized. Certain transactions only go in certain books. So this is what the main core purpose of books of original entries are. Now, how many books are they? Obviously, you might be wondering a very important question. I'm talking about books, books. How many books are they? So these are the books. Now this is a sales journal. In the sales journal, we only record credit sales transactions. Nothing else. In the sales returns journal, we only record sales returns on credit. Nothing else. In the purchasers journal, we record credit purchases. Nothing else. In the purchase returns journal, we only record purchase returns, nothing else. In the cash book, we only show the flow of cash and bank. If it's a cash sale, that's a cash flow. So that doesn't go in the sales journal, it will go in the cashbook, okay? If it's a sale by check, even that doesn't go in the sales journal because that's signifying the flow of bank. So that goes in the cash book. Anything which has no place in any of the journals I mentioned, that would go in the general journal. If you remember, there were two important misconceptions I told you. The first misconception was that some people say bought a car on credit, from James. Now, some people assume that this is purchases, and if it's purchases, some people would put this in the purchases journal. But this is not your purchases. I told you before, isn't it? It's not your purchases. So we record that in the general journal. It is not your purchases, so it can't go in the purchasers journal. So this transaction goes in the general journal. The second misconception I told you was sold a car on credit. Is this my sale? It's not my sales because a car is not your inventory. Okay? A car is not your sale, so this won't go in the sales journal. It will only be recorded in the general journal. So any transaction which fits nowhere else, we put that in the general journal. So these are six books of original entry. They're also known as day books. They're also known as journals. So in the next videos, we would cover these in more detail. So see you in the next video. Thank you very much. 31. The Sales Journal: Welcome back, my genius accountants. I warmly welcome you to our next video. In this video, we are commencing the books of original entries. In the introduction video, I explained all the type of books. In this video, we would be covering the sales journal. Now, in the sales journal, you would find double entries of only credit sales. You won't find anything else. You'll only find credit sales. We've done a lot of practice. Now, let's have a look at an example. There is an example I prepared for you, sold goods on credit to the following individuals. 10% trade discount is to be offered as well, right? So to James, $2,000, Watson, $1,500, Peter, $1,600. All these prices mentioned are the list prices. This means we have to apply the 10% trade discount. Now, let's follow the Dead Click rule, and I want you all to remember debit expenses, assets, drawings, credit, liabilities, income and capital. And this is dead, click, right? So when we are selling something on credit, my receivables, my assets are increasing because these are my customers who owe me money. So their balances are increasing. And my sales is also increasing. That's an income. So now I'm going to show you the journal entries that we are going to pass, right, based on the dead click rule. James debit sales credit. Watson debit Sales credit. Peter Debit sales credit. That's it. We've done practice of journal entries. This is what the sales journal is all about. We would only record the credit sales entries. Now, I recorded the net prices. Just multiply 90% on all the values because we are paying these customers are paying 90% of the amount. They're not paying the entire amount due to the trade discount. And there's no other separate entry that's required, right? So this is the sales journal. See you in the next video. Thank you very much. 32. The Sales Returns Journal: Welcome back my genius accountants. In this video, we are going to discuss the second book of original entry that is called The Sales Returns Journal. It's also known as the Return inwards Journal. And in this journal, we record the credit sale returns. Right? So let's have a look how this looks like. An example I've prepared for you all. The following individuals return goods. If you remember the previous example of Sigel journal, we sold goods to three customers. Now, these three individuals return the goods. Okay? But there's a small catch the amounts mentioned over here are the list prices, okay? So 10% trade discounts were offered to all these three individuals, and these are the value of the returns, the list prices. So I want you all to understand one thing. When we sold goods to James Watson and Peter, we sold the goods at the net prices. This means that we offered a trade discount. To all these individuals, to James Watson and Peter. So now when they're returning the goods, the value has to be the net price because when we dispatch the goods, they were at the net price. So when we receive the goods back, they should be at the net price. So net and net. Okay? So again, we'll just multiply 90% on all these values. After you multiply 90% on all the values, you would arrive at the net price. Then follow the dead click rule what's the journal entry for sale return? I'm sure you all know it now. My receivable is going down because these customers are returning some goods, so I have to adjust their values. I will reduce their balances. So receivable will be on the credit side. Sale return would be on the debit side. The reason is the inventory is coming back into the business. So let's have a look at the journal entries now. So this is what it looks like, okay? A on 1 January, sale returns 180, James credit 180, then sale return 360 Watson credit 360, sale return 270, Peter credit 270. So this is the sale returns journal. We are just putting everything into an organization. Everything should be well organized. So in this journal, we only record the sale returns. See you all in the next video. 33. The Purchases Journal: Hi, my Genius accountants. Welcome back to the next video. In this video, we will be talking about the next book of original entry. That is the purchases journal. Now, the purchaser journal is primarily used to record the credit purchases. Okay, only credit purchases. Nothing else. No cash purchases, no purchases of non current assets, either. Okay? Now, let's have a look at the example I prepared for you all. XYZ Limited bought goods on credit from the following individuals. 10% trade discount was offered. Ron 13 50, Harry, 1,500 and Ben 1,000. Okay. So as you all know that the trade discount of 10% was offered, so we have to deduct the value of discount from the purchase price, and no other treatment for trade discount is ever required in accounting. We don't do any treatment at all. We simply subtract the discount from the list price. So we'll take 90% of all three values. Because after 10% trade discount, it means you paid 90%, right, 100 minus the 10%. So follow the dead click rule I taught you all. Okay. This is how you record all three transactions. Purchases would be debited in all cases because inventory is coming in the business, okay? And Ron Harry and Ben are your liabilities. They are your payables. XYZ Limited owes them money. So the liability increase, so as per DadClick Ron Harry and Ben on the credit side. So after taking 90% of each value, we got these values. All right? So this is the purchases journal. See you all in the next video. Thank you very much. 34. The Purchases Returns Journal: Welcome back, genius accountants. In this video, we will be covering the next book of original entry, which is known as the purchases Returns Journal. Pretty simple, pretty straightforward. This is used to record all the credit purchases returns. So you bought goods on credit from a supplier. And then you return some of the goods to the supplier, all those entries would be recorded in this journal. So let's dig right into a small example. I prepared for your XYZ limited return goods to the following suppliers. The prices mentioned are the list prices. 10% trade discounts had initially been offered. This means that $150 return this signifies the list price. We have to apply the 10% discount in all these prices, okay? I told you guys this before that if you buy goods at the net prices after deduction of trade discount. So when you return goods, they wouldn't be recorded at the list price. They would also be recorded at the net prices, all right? To show the true and fair view to record the accurate records in accounting. So simply, we can take 90% of all these values. After you multiply 90% in all these values, you would get the value of your returns, the net prices, okay? Another simple method is, if this is confusing you, just multiply the value with 10%, then subtract the value with 150. But this is a longer route. Multiplying by 90% is very straightforward. If you applied a 10% trade discount, that means you paid 100 minus that, which is 90%. Now, follow the dead Click rule and tell me what is the journal entry for this transaction. Now XYZ limited, their liability is going down because they're returning goods to their suppliers, isn't it? So now, the dead click rule would be reversed, and these payables, Roy Harry and Ben would go on the click side or on the credit side. On the other hand, the return would be on the debit side. I told you this before. You can go watch my video on purchase returns that goes on debit because inventory is flowing in the business. The second reason was to cancel out the purchases entry. All right. This is why we put that on the credit side. Right. So let's have a look at the double entries. Ron Harry Ben would be debit and the purchase returns would go on the credit side. So this is how we record the purchase returns, and don't forget. Always remember if you buy something or sell something, At net prices, meaning after deduction of trade discount. So whenever you return the goods, they also have to be in the net prices. You have to make sure that the discount has been adjusted in both cases. Okay? If you buy sell in the list price, then there's no need to take discounts on the return. All right? See you in the next video. In the next video, we would be discussing cash books, a very important book of additional entry. Thank you very much. 35. An Introduction to Cash Books: Hello, my genius accountants. Welcome back to the next video. In this video, we would be discussing one of the most sophisticated, most complex and most interesting book of original entry, which is known as the case book. Now, cash books are used to record the flow of cash and bank. We don't record anything else over here. No credit items, credit sales, credit purchases, credit sale returns, credit purchase returns. We only record the flow of cash and bank. Any transaction which involves cash or bank, we record that in the cash book. Now, let's have a look at what the cash book looks like, okay? So let's dig right into this. This is a three column cashbook, and this is what we would cover in this course, because this is the most complex one. So why is it known as a three column cashbook? Because you can see discount cash and bank on the left side, discount cash and bank on the right side. So these are the major three columns. Date and details, that's just something straightforward. Discount cash and bank are the three columns. Now, the entire left side over here is known as the debit side. The entire right side is known as the credit side. Okay? I'm sure you guys know what's debit or credit now. I don't have to explain that again. You can review my previous videos. The date column signifies the date the transaction had occurred. The details column, it covers a brief description of the transaction. It could be the name of the customer, name of the supplier. It could be the nature of the transaction, sales, purchases, any expenses you paid. We write the details over here. This is the discount allowed column, any discounts offered to customers to encourage them to pay earlier. This is the discount received column. Any discounts we received from our supplier in order to pay our liability earlier. The cash column on the debit side shows the cash inflows, and the cash column on the right side credit side shows the cash outflows. The bank column on the debit side shows the bank inflows, and the bank column on the credit side shows the bank outflows. So this is how a cash book looks like. All right? So let's dig right into an example. In the next video, I prepared a comprehensive question on the casebook. So I'll see you all in the next video. I hope you understand the casebook. See you. 36. Cash Books Comprehensive Activity: Welcome back. Genius accountants. In this video, we are covering a very crucial and important exercise on cash books. After this lesson, hopefully, you would have the best understanding on this chapter. So let's dig right in. Before we even move on, I want you all to remember a very important point. Debiide the debit side of the cashbook would always signify inflows. And the credit side, the right side of the cashbook would always signify outflows. So if it's an inflow, just throw it on the debit side. If it's an outflow, you'll throw it on the credit side. Okay? Right. Now, let's begin the question. Balance is at one Jeni went in as follows. Cash 20,000, bank 35,000. I want you guys to understand one thing. These balances are the opening balances, right? And in accounting, the technical term used, its core balance brought down. Okay. It's called balance brought down. The opening balance means how much cash or how much money is in my bank at the start of the accounting period. Before any transactions, before any sales, before any inflows or outflows, at the start of the period, how much money do have available with me, which came from the previous period. So we call this balance brought down. Why B? Because this B stands for beginning, okay? Balance at the beginning of the period. So I'll put that on the debit side. It's possible to have a negative balance in your bank account. We study bank overdraft, if you remember. So if your balance is negative in the bank account, what would we do? We would put that on the credit side. Okay? Only bank can have such a balance, nothing else. Only bank, nothing else. So cash was 20,000 and bank was 35,000, but in this case, it's a positive balance. Right. Second, cash sales of 30,000 there's an inflow, isn't it? So I'll put that on the debit side with the name sales. There's one more confusion that students have, and I'll put the 30,000 in the cash column. What's that confusion? Some students make an error. They write cash over here. Remember, we don't ever write the same name in the same account. If I wrote cash, cash, cash, cash, cash, cash, cash, how would I know where this money came from? Like, over here, it says cash 30,000. How do I know where this money came from? I'll be confused, right? But if I write sales, I'll know, Oh, okay, this was a sale. That's from where I got this 30,000. So we always write the opposite names. Third question, sold a motor vehicle for 25,000 by check. That's also an inflow. Money is coming in. Only focus on the flow of money, cash and bank. Don't look at anything else. So when I sold a motor vehicle, I got money. So I'll debit this. I'll write motor vehicle. In the bank column, I'll write 25,000. Right. Question number four, borrowed loan for $15,000 by check. So it means the money came in my bank account, okay? I got a check. It came in my bank, so that's also an inflow. So I'll write loan. In the bank column, I put 15,000. Okay. Next, question number five, following receivables paid us by cash. Okay. Following receivables paid us by cash, 30,020 thousand. Okay? 30,020 thousand. However, these prices mentioned are the prices before discount. This discount was not applied. Okay? So we have to apply this discount before anything. Right. So I'll write five January over year because they are inflows, Jamie paid us, and Jury paid us. If I ask you how much money I got, I have to subtract the 10% discount that I allowed to these customers, okay? So 30,000 times 10%. If I do 30,000 times 10%, so my discount would be 3,000. Okay? Let me open the calculator. So everything is here in front of you. You don't get confused. 30,000 times 10% is 3,000. Just wipe off 10. That's a discount. So I'll write that in the discount column. Okay. Jewry, 20,000. So 20,000 times 10%, the discount we gave was 2000. Now how much money I got in cash, we would subtract the discount. So Jamie 30,000 minus the discount of 3,000. So there is $27,000 discount in the cash column. And for Jewry, 20,000 -2,000, so I would write 18,000 over year. Okay. Right. Question number six is pretty interesting. Trust me, following receivables paid us by check, net of discount. I don't know the discounted value. I know that these are the net of discount values, meaning this is the actual amount I got. Compare this with question number five, what we just did. We calculated the discount first, then we calculated the net values by subtracting the original amount from the discount. But in this case, I know the net values. So I'll show you what you do in such questions. I'll share a small formula with you all. David and Ben. So 9,000 of David and 8,000 of Ben, these were the actual amounts we received, okay? These were the actual amounts we received. So I'll just put these amounts in the bank column, 9,000 for David and 8,000 for Ben. Now, how to calculate the discount? How do I get the discount? These are already the discounted values, so I have to first move to the original value. Okay? Before discount, then I would calculate the discount. So listen, I'm going to share a formula with you a very important, very easy formula, which will help you in such questions. What we have to do over here is simply take $9,000 divided by 100% minus the discount, which is 10%. So in other words, I will do $9,000 divided by 90%. Then I will reach my original list price. Okay? So if I open the calculator in front of you all, I'll do 9000/90 percent, which is $10,000. This is the original price. Okay? So if the net price is $9,000 or original price is 10,000, how much is the discount? Subtract both values. So we'll subtract 10,000 from 9,000. It means $1,000 is the discount. You can cross check yourself. If I multiply 10,000 multiplied by the discount of 10%, I will get 1,000 anyways, what I just got right now. So this is the formula we'll use. For Ben, what are we supposed to do for Ben? 8000/80 percent. Okay? So 8000/80 percent, you'll get 10,000. So if 10,000 is the list price, 8,000 is a net price. Subtract both values, you'll get your discount. Which is $2,000. Right? You can cross check yourself. What is 10,000 times 20%? It should be 2000. It means we calculated the correct values. Okay. I hope you understand this treatment. We will do this again. Okay, right. Question number seven. Now, question number seven is called the contra entry. Now, why is this called a contra entry? It's called a contra entry because this involves a transaction on both sides, on the debit and on the credit on both sides. So listen, what happened? I withdrew cash and put it into the bank. So I took out money from my cash. I took out money from my cash. I put it into the bank. So it's involving both sides cashnk cash and bank. Now, it's very simple. Let's focus on the inflow and outflow, okay? Whenever you solve a contra entry, you have to focus on the inflow and outflow first, okay? So step number one. What is the inflow? What is the outflow? I took out cash and put it into the bank. It means my cash is decreasing, and my bank is increasing, isn't it? So I'll write 10,000 in the bank column because that's increasing, and I'll write 10,000 in the cash column on the credit side because that is decreasing. Now we'll write the opposite names. Okay? In the bank column, I'll write cash, and in the cash column, I'll write bank. I just told you in the beginning of this video, we do not write the same name in the same account. Otherwise, we won't know from where this money came. Okay? And let's put the date of the transaction. I hope you understand the contra entry. Right. Next, cash purchases 20,000, so that's an outflow straightaway. We'll just write purchases in the cash column, 20,000. Purchased a motor vehicle by check. That's also an outflow. Money is going out, so I'll write motor vehicle. There's no trade discount. If there was a trade discount, we would subtract that. 15,000 in the bank column. Next paid the following payables by cash. Okay? So this is the list prices. Okay? So we would take 25% of all these values. That's how we would calculate the value of discount. It's an outflow. We are paying our payables, so this will go on the credit column. Okay, so let's write ten January. Rose, ten January happy and ten January Roberts. Okay. So how much money did we pay 25 first, we'll subtract the discount. We paid 85%. No, sorry, 75% because 25% was the discount we attained. So we paid 25% of these value. So 15,000 times 75% just directly. So this is the value we paid Rose 11 50 by cash. So I'll write 11 per 250 in the cash column. Okay, sees in the cash column. Then for happy, it's 7,500. So 7,500 times 75%. So 5625. I'll write that over here. For Robert, it's 10,000, 10,000 times 75%. I'll write 7,500 over here. If I ask you what's the value of discounts, then we'll just subtract these original list prices with the net prices over here. So for Rose, it's going to be 15,000 -11 50. That's 3750 Okay, for Happy, it's going to be 5625 -7,500, which is 18 75. Okay. For Robert, it's going to be 10,000 -7,500, so that's going to be 2,500. All right? Okay, next. Yeah. Now again, back to the net of discount question. Paid the following payables by check, and these are the net values. Okay? For Zuko and Ruki, these are the net values mentioned. Okay? So it's an outflow. I would put that over here. On the credit side, I'll write Zuko, we paid a check of 17,000 in the bank column and Rooki as well. We paid 15840. Okay, 15840. Now, how would we calculate the discounts? I just told it to you right now a moment ago. How would we do it? Quickly, Son? Tell me pause the video and solve it yourself. Right. We would do 17000/80 5%. So you would arrive to your original list price. Then we can just subtract both values, we'll get the discount. So 17000/80 5%, 20,000. So 20,000 is the list price. 17,000 we paid. So 3,000 would be the discount for Zuko. Same goes for Rookie. Let's calculate for rookie. So 15840/80 8%. 100% -12% is 88%, isn't it? So 15840/80 8%, you get 18,000. Okay? You'll get 18,000. So 18,000 is the list price. 15840 is the net price. So subtract this, subtract 18,000 -15 840. So 2160 is the value of discount that Rooki gave us. Okay. Next. Now they're easy paid electricity by check. That's an outflow, isn't it? That's an outflow, so we put that on the credit side, electricity. 10,000. Okay. Insurance by cash, 7,500. That's also an outflow. So that will go on the credit side. In the cash column, 7,500. Next, paid rent by check. That's also an outflow. So that will go in the credit side in the bank column, 5,500. Drawings. The owner withdrew cash and bank for his personal use. So these are also outflows. They're going out of the business, right? 16. So I'll write drawings from the cash column, 10,000 and from the bank column, 5,500. Okay, now we are done. Now what's left is to balance. Now, how do we balance the case book? In the next videos, I have taught the entire method how to balance ledges. That same method would apply over here, but I'm just giving you a quick technique how to balance. So step number one is to total all sides, okay? That's the first step. The second step is figure out which side is greater. Is that the debit side or the credit side? Which side is greater. Then after you figure out the greater side, the bigger side. You would write the big side on both sides, write the bigger side amount on both sides. Write that amount on both sides, whatever is bigger. Then finally, figure out the missing value. That missing value would be your closing balance. The closing balance would mean the cash and bank you have left at the end of the period after old outflows, after old inflows, after old outflows, the money that's left, that's called the balance carry down or the closing balance. The C is for closing. Right. Now, it's pretty evident that the debit side is greater, okay? So let's calculate the total of the debit site. Which. No, it's not error. Let's do it ourselves. 20,000 plus 30,000 plus 27,000 plus 18,000. 95,000 is the total on the debit side, okay? In the cash column. So let's write that on both sides because that's greater. I told you we write the bigger amount on both sides. Don't forget that. So let me highlight this separately. That's the total. Now, let's calculate the cash column total of the credit side. 10,000 plus 20,000 plus 11250 plus 5625 plus 7,500 plus 7,500 plus 10,000. 71875 is the total of the credit side cash column. So see the steps I taught you. Number one, we totaled. Number two, I figured out that the debit side is greater. Number three, I wrote that amount on both sides. Now, what's the missing value? -95,000. So 231-252-3125 is the balance carry down. It's always the last day of the month. I'll write balance carry down. This is my closing balance. In other words, this is the amount I have left with me. See, 95,000 cash came in my business, and I spent 71875. So how much money I have left? 23125. This is the carry down. This is what balance carry down means. The money we have at the end of the period in the cashbook, okay? Now, let's do the same thing for the bank column. Even over here, the debit side is greater. It's pretty evident. So 35,000 plus 25,000 plus 15,000, plus 9,000 plus 8,000 and plus 10,000. 102000, 102000 on both sides because that's the greater amount. Let's highlight this separately, so there's no confusion. Okay. Right. Now, let's calculate the missing value on the credit side. Plus 10,000 plus 5,500 and plus 5,500. 68840, and we got 102,000. So let's subtract 102,000. So this is the amount we have left in our bank, 33160. This is the carry down. Okay. And we would bring this down to the next period. So this is co balance brought down. Okay. So this is how we solve the case book. Now, remember all the important terms I taught you, the important concepts I taught you. You have to understand that if the net value is given, how do you calculate the discount? I showed you the formula for that, what to do in a contra entry, I showed you the method for that. So see you all in the next video. Thank you very much. 37. Contra Entry Cash Books: Hello, genius accountants. In this video, we would be discussing another major treatment in the cashbook of contra entries. We also covered this in the activity we did in the previous videos, but students had some problems. So hopefully after this video, you would understand this concept very, very well. So now what you do? Let me show you. Now, what's a contra entry? A contra entry is when you will have two simultaneous effects on the debit side and the credit side as well in the cashbook. Question number one, it says, withdrew $100 from the bank and put it in the cash tel. Before we even go into question, there are some steps I want you all to remember, okay? What are those steps? How to master the contra entry. So the steps are quite simple. Let me show you. Step number one, you have to identify the increase or decrease. What item is increasing and what item is decreasing. That way, you'll be able to debit or credit the item. Okay? After you do that, put the amounts, apply the amounts on the debit or credit side based on your understanding of what's increasing or decreasing. Then the final step is to write the opposite names. Like if the cash column is debited, in the debit will write bank. If bank is credited, in the credit column, we'll write cash. Now, let's do the first question based on the steps. Widrew 1,000 from the bank and put in the cash term. Let's identify what's increasing and what's decreasing because that's the first step. So withdrew from the bank. So the bank is decreasing, and the cash is increasing. Okay. So it's very, very simple. Cash is increasing. So remember, debit side is the increase, the inflow, and credit is the outflow, the decrease. So I'll write $1,000 in the debit side in the cash column because cash is increasing. And I would write 1,000 in the bank column because bank is decreasing. And step number three says write the opposite names. Here, bank is credited, so I would write cash. And here cash is debited, so I would write bank. This is how we do the contra entry. Question number two, deposited 500 into the bank from the cash till. So in this case, the cash is decreasing and the bank is increasing. Okay? It means I would write 500 in the bank column on the debit side because that's an increase, and I would write 500 in the cash column on the credit side because that's a decrease. Now step number three says write the opposite names. So in cash, I would write bank and in bank, I would write cash. All right? So this is how to do contra entries in the cash books. See you all in the next video. Thank you very much. 38. The General Journal: Hi, welcome back Genius Accountants. In this video, we are covering the last and final book of original entry, which is called The General Journal. Now, if you remember, we studied the sales daybook that's used to record credit sales. We studied the sale return daybok, used to record the credit sale returns, purchases daybok for credit purchases, purchases returns day boook for credit purchase returns. We covered the cash book in detail, and the cashbook involved the flow of cash and bank. Now the general journal is a book for general items, all items that fit in no other book of original entry. Such items have no place in any other book of original entry. We record those items in this book. So let's have a look, example number one, bought a motor vehicle on credit from Mary for $10,000. If you remember, I covered this transaction in the important misconception video, you can have a look at that. This is not credit purchases. You might think that the business is buying something on credit, so that's purchases. No, the intention is not to resell the motor vehicle, right? Goods are bout for reselling purposes. Goods are bought for reselling purposes, not a motor vehicle. So this is not your credit purchases. Next, it's not a cash purchase as well. If it was a transaction that involved cash, this would go in the cash book, but this is not cash. It's on credit. It's not a sale, it's not sale return or purchasers returns. So this entry would be reflected in the general journal. Now, follow the Dead Click rule. See, the motor vehicle is flowing in the business, and Mary is a payable, a liability. Okay? So Mary would be credited, and motor vehicle would be debited. This is the transaction that would be recorded in the general journal. Example number two, sold a motor vehicle on credit to ECO for $10,000. Now, is this a sale? It's not a sale. I also covered this in the second misconception video. You can have a look at that if you have any problem. Now, sales are those items which involve selling goods that are part of your core business operations. The purpose of existence of your business. Okay? So this was just an idle motor vehicle the business sold. It's not their business to sell motor vehicles. I told you goods is the standard business activity, but this is a motor vehicle. So this is not credit purchases. This is not cash purchases. This is not credit sales, the most important part. It's not any returns as well. So this entry would be reflected in the general journal. Now, follow the deadly crew. It's not a SAO, so we won't write sales anywhere. ECO is someone who owes me money, right? So he's my receivable. ETCO would be debited. Motor Vehicle is my non current asset, which is going away. Okay? Go away, so that would be credited. ECO debit and motor vehicle credit. Okay? Next, there are some other transactions that are recorded in the General Journal. We'll cover these chapters later, not now. Depreciation, a very important chapter, bad debts are very important chapter. Accruals and prepayments are very important chapter. These transactions are recorded in the general journal. Okay? Yeah, so that's it. See you in the next video. We are done with the books of original entries. If there's any problem, then you can feel free to discuss. Thank you very much. 39. The Accounting Equation: Welcome back, my genius accountants. We are now beginning a very, very important concept, which is called the accounting equation. The accounting equation is a fundamental concept in the double entry bookkeeping system. We've done a lot of practice in the double entry bookkeeping system. We've practiced journals, we've practiced T accounts, ledgers, we've practiced the trial balance. Now, we are beginning the accounting equation. And the accounting equation shows the multiple accounts that are being affected in each transaction. We know that one effect would go on the debit side and on the credit side, there are multiple accounts. So this is what the accounting equation shows us. And miraculously, the accounting equation would always balance. It's an equation. You know what an equation is? The left and the right side before the equals two and after the equals two, both sides would always balance. Now, let's look at what the accounting equation is. Assets is equal to equity plus liabilities. You know what assets, you know what are liabilities. Equity might be a bit confusing for you. I explained this in detail, but let me explain again. So equity is the owner's stake in the business. The owner's interest in the business. How much proportion of the business does he own? The claim on the business assets, the claim on the profits and losses of the business. Okay? So that's what owner's equity refers to. Now, equity isn't fixed always. It's not like if someone invests $10,000, then the equity of the business is $10,000. No, equity always changes. If the owner invest additional capital, he would gain more equity. If the owner withdraws items for his personal use, his equity would go down. If the company does well, the company earns more profits, his equity goes up, and vice versa for losses. So I gave you a hint about the formula for equity. It's capital plus profit minus drawings. Always remember this is how equity is calculated. Capital is the investment of the owner, profit earned by the company, and drawing subtracts the equity because you are taking out items for your personal use. So the business would deduct your equity. Right. Now you might be wondering something very important. Why does the counting inquon look like this? Assets is equal to equity plus liabilities. Why? Why are equity and liabilities added together? Why not added with assets? The reason is very simple. The accounting equation reflects how are the assets financed. Now, assets can be financed in two ways, either through equity, the investment of the owner or through debt by borrowing loans. So equity and liabilities are two ways how assets are financed. So this equation provides a snapshot of the financial position of the business. It shows the assets and how they are financed. Apart from that, it could also show your liquidity position. Liquidity position means how many debts do you have? Do you have enough assets to pay you of your liabilities? This is also shown in the counting equation. Now, because this is an equation, it would always balance, no matter what, every transaction in the world has an effect on the counting equation. Every transaction. So far, we stadied so many transactions. All of them would have effects on the counting equation. All right. Now, let's have a look at some examples. Like example number one, owner's investment. Owner invested $10,000 cash in the business. Right. So the owner invested $10,000 cash in the business. Follow the dead click rule. Cash is an asset increasing, capital is increasing. So cash on the debit side, dead, and capital on the click side, credit. So this is the double entry, cash debit, capital credit. Now let's look at the effect on the counting equation. So assets is equal to equity plus liabilities. You assets are increasing by $10,000. And remember the formula for equity capital plus profit minus drawings. So capital is added in equity. So 10,000 is added in equity, and there's no effect on liabilities. Now note one thing. On the left side of the equation is plus 10,000. On the right side of the equation is also plus 10,000. So the equation has balanced. Like I said, the counting equation would always balance. So assets have increased by 10,000, equity has increased by 10,000 and no effect on liabilities. Next example, I borrowing a loan. Now, the business borrowed a loan of $5,000 from the bank. So the money came in the bank, okay? So your bank is increasing an asset and your liability loan is increasing by 5,000, okay? As per the dead accrue. Now, let's apply this to the counting equation. Bank is my asset, so that's increasing by 5,000. Liabilities is my liability. Sorry, loan is my liability. So that's increasing by 5,000. Okay? So notice there's plus 5,000 on the left side of the equation and plus 5,000 on the right side of the equation. The equation has balanced and no effect on equity. Okay? Let's look at another example, purchasing equipment. This is not purchases, I told you many times. I'm not going to repeat it now. So when the business put equipment worth $3,000 by cash, okay? Cash. So equipment is an asset that's increasing and cash is an asset that's decreasing. So as per DetCliq, we'll debit equipment by 3,000 and we'll credit cash by 3,000. Okay? Now let's look at the effect on the counting equation. Assets is equal to equity plus liabilities. Now, equipment and cash both are my assets, okay? There'll be multiple effect on the assets. Number one, equipment that's increasing, so plus 3,000. Number two, your cash is an asset. That's decreasing by 3,000. Okay? And no effect on equity and liability. So there's zero on the left side because plus 3,000 -3,000 is zero and zero on the right side of the equation, equation is balanced. Okay? So assets have increased by 3,000 and decreased by 3,000 simultaneously, and Null on the other side, so the equation has balanced, zero on the left, zero on the right. Next example, credit sales. So sole goods on credit to Oliver for $1,000. Oliver is my receivable, my asset. Sales is my income, isn't it? So Oliver receivable, increasing debit side, sales income, Dad Click increasing. So Oliver debit by 1,000 and sales credit by 1,000. Now, let's apply this to the accounting equation. Assets is equal to equity plus liabilities. Oliver is my receivable, my asset, that's increasing by 1,000. Now, where do I put sales over here in this equation? Where do I put it? Remember the formula for equity capital plus profit minus drawings. So sales is increasing your profit. It's an income. So if my profit is increasing, my equity is increasing. So I would add the 1,000 in equity and no effect on liability. So there's plus 1,000 on the left, plus 1,000 on the right, equgens balanced, okay? And there's no effect on liabilities. Example, number five, paying expense. So paid the monthly electricity bill of 500 in cash. So electricity, expense, debit and cash credit as per dead click. Expense is on the debt side, asset is decreasing. We'll reverse the dead click rule. So now the asset would be on the credit side, cash. All right. Now, let's apply this to the accounting equation. Assets is equal to equity plus liabilities. It's pretty obvious that cash is going down, so I will subtract this from the assets, but remember something. Electricity is an expense. Expense reduces your profit. And the formula for equity is capital plus profit minus drawings. The profit is going down by 500, so equity is going down by 500. Okay? So are your assets going down by 500 and no effect on liability. So see, the counting equation is balanced, -500 on the left and -500 on the right. Okay? Another example, drawings. Withdrew inventory worth $400 for personal use. Apply the deadly rue, drawings on the dead side, inventory asset decreasing. So reverse the deadlrue, the asset would go on the credit side. So drawings debit by 400, inventory credit by 400. Okay? Now, let's apply this to the counter equation. Assets equal to equity plus liabilities. Equity is going down by 400. Why? Because the four wala for equity is capital plus profit minus drawings. Drawings reduces your equity, and your inventory is going down, your assets are going down. So there's -400 on the left, -400 the right, equation has balanced with no effect on liabilities. So, guys, this was some practice on the accounting equation. We are done with this chapter. You can see the equation will always balance. And whenever the transactions of expenses or incomes, remember they affect the profit, and profit affects your equity. Alright? Expenses reduce your equity because your profit is reducing. Incomes increase you equity because your profits are increasing, okay? See you in the next video. Thank you very much. 40. Ledgers: Welcome my genius accountants. In this video, we will commence a very, very important concept in the double entry bookkeeping. If you remember the accounting cycle I taught you, we start with transactions. We record those transactions in the books of original entry. From the books of original entry, we transfer them to the ledges. From the ledges, we prepare trial balance. Then from the trial balance, we finally prepare financial statements. So now we are on the third step of the counting cycle that is ledges, a very, very important concept in double entry bookkeeping. So let's dig right edges contain various accounts. So it's like an Excel sheet. It's a medium. It's a place which contain different accounts, and each represents different aspects of the business. With the help of ledges, a business can maintain up to date balances of their accounts up to date balances of their accounts. You might find the following accounts in ledges. You could find accounts of expenses like rent, salaries, insurance, discounts, gas, electricity, whatever. Incomes, like sales, commission received, discount received, whatever received you would find the accounts of assets, cash, bank, receivablls land, buildings, machinery, et cetera, et cetera. You would find accounts of liabilities, such as payables, loans, bank overdraft, and many more items. You would find the count of drawings and the count of capital. Basically, every item in the world of accounting, literally everything has an account. And these accounts, you'll find them in the ledges. Let's move on. Now, there's an informal word in accounting, a casual word in accounting, called T accounts. So T accounts are basically the accounts we prepare in the ledges. Okay? So let's have a look at a T account. It's called a T account because it looks like a a capital Okay? On top of the T would be the title or name of this entire account, cash, bank, motor vehicle, payable, whatever the name of the account, that would appear in the title. The left side of the count is called the debit side and the right side of the count is called the credit side. So basically the dead click rule applies here as well. Okay? Similar in the journals we saw in the journal entries, debit was the left side, credit was the right side. This is the same thing, okay? The double entry rule, the dead click rule would apply over here. One account would be debited, the corresponding account would be credited. These are the details of the accounts on the debit side, and these are the details on the credit side. Okay? The date is mentioned in the details. Now, this is not compulsory, okay? It's not required to write the date. It's better, okay? It's better. If you write the date, it's good. And I would also suggest you to write the date. But if you miss the date in your exam, that doesn't matter at all. Okay? Yeah. The details, the name of the corresponding account, this is very important. This has to be there and the amount would be there as well. Okay. So this is how we prepare a T account. We would do a lot of practice on this. Similar, we did practice on journals, and you all understood that concept. We would do further practice on ledges, as well. But before we even do practice of ledges, there's something very important you have to understand. There's a misconception. We never ever write the same name in the same account. If you watched my cash book video, in the case book, I told the same thing. We do not write the same name in the same account. Otherwise, we would be confused. For example, look at this. This is a cash account on the debit side, which represents the inflows, and the credit side represents the outflows. As per dead click, cash is an asset. Increase would be on the debit side, decrease on the credit side. So now see these are all my inflows, cash, 2000 cash, 1,500, cash, 17 50 cash, 1,400. These are all my outflows, cash, 1,000 cash, 900 cash, 850 cash, 1,000. Now, if I look at your account, I won't understand anything. Where did this money come from? I don't know. Where did this money go? I don't know. That's a mystery because we wrote the same name in the same account. These are big inflows, $2,000. $1,500, 17 $50, $1,400 and massive outflows of $1,000, 900, 850 $1,000. If we write the same name in the same account, we would always be confused, right? So never write the same name in the same account. Number two, if I write the same name in the same account, there would be confusion for sure, but how would I keep track? I won't know where my expenses are going. I won't know what are these outflows. If I write the opposite names, I can keep track of my expenses. I can keep track of my incomes. Okay? So now, it would be more feasible if instead of cash I wrote rent, so I will know that this $1,000 was a rent expense. Instead of cash, I could write John. I'll know that this $900 went to John. Here I could write electricity. I'll know that this 850 would go to the electricity bill. Here, I could write loan. I will know that this $2,000 was a loan I received, which is why my cash flow increased. Here, I could write sales. I would know that this 1,500 came from sales, okay? So now, if we write the opposite names, the corresponding names, that is what would make it better for understanding, and we could keep track of our records. Okay? Number one, number two, as per the dead click rule, a very important double entry concept, I taught you that two corresponding accounts would always be affected in a transaction. One account would be debited, one account would be credited, okay? So over here, if you look at rent, another misconception, students say that the rent is being credited. No, look at the title of the account. You are standing inside the cash account. So cash is being credited with the name of rent. It's not rent being credited, okay? So if cash is being credited, then the rent account would be debited. So if I make a small rent account over here, I would write cash on the debit side, 1,000. This is the double entry system. One account would be debited, so the other account would be credited. Now, if you look at sales, over here, sales is not being debited. Look at the title of account. What is the title? I'm standing in the cash account. So cash is being debited with the name of sales. So if I prepare a small sales account, sales cash is being debited with the name of sales. So sales would be credited with the name of cash. Okay? We would always write the corresponding names in the alternate accounts. Okay? When one account is being debited, the other account would be credited. Okay, we would do practice of this, so it would be better, and you would understand hopefully you would understand all these concepts, okay? So see you in the next video 41. Balancing Accounts: Welcome back. My genius accountants. A very, very important and crucial video. We just started ledges. So this video relates to that. In this video, I will teach you how to balance accounts. This is a very important system you have to understand before attempting any ledger question. So let's dig writing. I've prepared some scenarios for you, and hopefully with my scenarios, you would develop excellent understanding on this chapter. Right. Let's assume that on the month of January, Max Tennyson gave his son, Ben Tennyson, $100 pocket money. So how much money did Ben receive? $100, okay? So Ben spent $60 from the hundred dollars. So Ben has $40 left in the month of January. All right? In the month of February, Max Tennyson gave his son, Ben, another $100. Now my question is, how much money does Ben have as of February? Pause the video and think and tell me the answer to the question is, Ben has $140 at the start of February. Okay? He spent $90. Now, Ben has $50 left at the end of February. Let's go to March. Max Tennyson gave his son another $100. So my question now is, how much money does Ben have at the beginning of March? Post the video and tell me. Think, right. Ben has $150, $100.50 from the previous month. So Ben has 150. From the 150, he spent 130. So how much money does Ben have at the end of March? Ben has $20 at the end of March. Now, this concept is what balancing is all about. Now, let's see some details of these examples. In January, Ben had $40 left. Okay? Now, this is known as the closing balance. Or, in accounting terms, balance carry down. Now, why do we call the C slash Because the C represents the closing. It's the closing balance. Now, I want you to note something very, very important. This $40 of January was carried forward. It got carried forward to the month of February, isn't it? Now, this is a very, very important point you have to remember. The closing balance of one month becomes the opening balance of the next period. So he had $40 at the beginning of February, and then he got $100 from his father. So this 40 is the opening balance. This is called balance brought down. Why B? Because the word B stands for beginning, the balance at the beginning. Okay? So the closing balance of one period becomes the opening balance of the next period. Now, in the month of February, Ben had $50 left. So this $50 signifies the closing balance of February. So this is the closing balance. And in technical terms, we would refer this as balance carry down. Okay. Now, this 50 got carried forward to the month of March. So the closing balance of one period becomes the opening of the next period. So this 50 was the opening balance. Meaning, at the start of March, Ben had 50 with him. Before receiving his pocket money, Ben had 50. He started with 50. So this opening balance is referred to as the balance brought down. All right. And at the month of March, he had $20 left. This $20, guys, is the closing balance. Oh, the balance carry down. All right. So I hope now you understand what are the opening balances. The opening balance refers to the balance at the beginning of the period before any transaction. Balance carry down is the balance at the end of the period. After all transactions, inflows and outflows, increases and decreases. What's the balance left at the end of the period? That's called the balance carry down. All right. Now let's move on. Right. There's a small question here. The following information relates to John's cash flows for the month of January. We are supposed to prepare the cash account. All right? There's the opening balance of $1,000. There's cash sales of $900, cash purchases of $700, rent of $400, and salaries paid in cash $600. Okay? Now, as per the DedClq rule, now, deadlk is very important, okay? We would apply DedClq over year two. So debit expenses, assets, drawings, credit, liabilities, income, and capital. And this rule only applies in increases. So, guys, cash is an asset, so the increase would be on the debit side, okay? And the decrease would be on the credit side. Okay? Very, very important. The plus on the debit side and the minus on the credit side. Right. So now let's start this question. Opening balance of $1,000. That's the balance brought down, okay? So we would write the balance brought down on the debit side. Which is 1,000. Okay. Then cash sales. That's an inflow. And I just told you in the previous video, we do not write the same name in the same account, so we'll write sales. 900 cash purchases is an expense. Okay. So I would write purchases on the credit side, $700. Rent is an expense, an outflow, so we would write that on the credit side as well. Salaries is also an outflow, so that will go on the credit side as well. Okay. Now we are done with filling the account. Now the second step is very, very important. The second step is to balance the account. So when we balance the account, the first step is to total both sides, and we would write the greater amount on both sides. So I have 1,900 on the debit side and 1,700 on the credit side. So 1,900 is the greater value. So we would write this on both sides. I explained this concept in the cashbook video as well. You can watch that again. You can watch the end of the cashbook video. So I would write the value on both sides, 1,900 on both sides. Now the difference would be referred to as balance carry down. So 1,900 -1,700 is $200. So $200 is the balance carry down. And I told you the closing becomes the opening of the next period. So this would be brought down in the next period, the first day of the next month. Now if you try to understand this question, our inflows were $1,900 and outflows were $1,700, which means we had $200 left at the end. My friends, this is what you carry down means. Even my balance carry down is 200. It means at the end of the period, we have $200 cash present with us. Okay? So this is how we balance accounts. Now there's something important. Let's have a look Now, the closing balances may differ to the type of accounts. Let's have a look at what I'm trying to say. Number one, the balance carry down. Now the balance carry down, you would only find them in the balance sheet items, meaning in the accounts of assets, in liabilities, in capital and drawings. Only in these four accounts, you would find the balance carried down. Like, cash is an asset, motor vehicle, building, receivable, bank. In all these accounts, you'd find the balance carry down. Payables, bank overdraft, loans and liabilities, you'd find the balance carry down. Capital, okay? Drawings. You would find the balance carried down in these accounts as well. The reason is that these accounts, they represent crucial information. The balances would be carried forward to the next period because they represent ongoing obligations that are going on. Cash. My cash balance would be carried forward to the next month, okay? The balance of my receivable would have to go to the next month. If he doesn't pay me the entire amount this month, he would have to pay me next month, okay? So these are ongoing obligations. They go throughout the course of the business. Like a car. A car is not just for specific period. You would have the car for a very long time. So we have to prepare accounts with balanced car down to show the ongoing obligations. For example, the cash account, how much cash you have left at the end of the month would go to the next month and become the opening balance. Your receivable, any outstanding amounts owed at the end of this month that he still owes us, he would have to owe that in the next month, our payables, any outstanding amounts we owe at the end of the month to our payables, that would go to the beginning of the next month. Okay? So in such accounts, we write balance carry down at the end when we balance the accounts. However, income statement is also something we write in certain accounts. These are used in the accounts of expenses and incomes only, only in these two type of accounts. For example, you know, rent is your expense, salary, discount allowed, electricity. All these are expenses. Sales is your income, okay? Sales and discount received. Whatever you receive, that's your income. So when such accounts, we write income statement. Even sale return and purchase return, we write income statement, okay? The reason is that these items they directly affect your profit. So if we don't record them in the correct place where profits are calculated, the value of our profits could be understated or overstated. We don't we don't want to do fraud. If I don't record these accounts, these crucial accounts in the income statement, my profit would be incorrect. So we transfer these accounts to the income statement at the end of the period. There's no ongoing obligation. If I have to pay rent for January, it signifies rent of January only. It cannot be carried forward because the obligation is for a particular period only, okay? For example, sales in January represents sales of January only your earnings of January. In February, you will make more earnings, but that applies to February. It cannot be carried forward. However, however, there's an exception. There's something called accruals and prepayments, okay? Like, for example, if someone owes me rent and he doesn't owe me rent, this balance would be carried forward to the next month. If I owe someone salary and I did not pay him at the end of the month, I have to pay him the next month. So that would be carried forward. If you look at your electricity bill, there's something called arrears. Now, arrears means the portion of bill you did not pay in the previous month, now you have to pay it. So that's accrued. So when expenses or incomes are accrued or prepaid, in those cases, we write balance carry down, but we will discuss this later when we reach that chapter. Okay? Right. Let's do a small example of rent now. The following information relates to John's cash flows for the month of January, paid rent in cash, 800, prepay the rent account. Right, so let's do this. It's very simple. Rent is an expense. Expenses go on the debit side, so outright 800 over a year. And I would write the opposite name cash over here. Now, when I close this account, guys, I would not write balance ky down because this is an expense. So I would write income statement. I'm transferring the expense to the income statement to signify that this is an expense, and it should reduce my profits by 800. Okay? Now, as per the dead click rule and double entry system, if I prepare a cash account, because rent is being debited, now cash would be credited because I'm paying rent, it's an outflow. And when one item is debited, the other item would be credited, and we would write the opposite name. From waste is coming. It's coming from the rent account. So here I would write rent. Now, cash is an asset. So when I close this account, I would write balance carried out because it's not an income or expense, it's an asset. And then it would come down in the next period. Okay. So this was T accounts. I will see you in the next video in which I prepared a comprehensive activity on T account. So see you all in the next video. Thank you very much. 42. Ledgers Activity: Welcome back genius accountants. A very, very crucial lesson today in which we are doing practice on edges, T accounts. Okay? So let's begin all these T accounts. Okay, so here they are about 14 questions, and we have to prepare T accounts of each transaction. So first of all, first of all, if you remember, I taught you something, which is what I taught you the dead click rule. Okay, so deadst dead click, debit expenses, assets, drawings, credit, liabilities, income, capital, and the rule only applies in increases. It applies nowhere else, okay? Right, question number one. Jamie invested the following in the business, cash, furniture and equipment. This is his investment. He capital investments. So cash furniture equipment are your assets. They're coming in the business. So these three items will be debited and capital would be credited. So let's do that. Here, I prepared T accounts for you. Because cash is an asset, so increase would be on the debit side and decrease on the credit side. Okay? So cash is coming in the business of 40,000, so I will write 40,000 on the debit side. Furniture so increase of furniture would be on the debit side. And decrease would be on the credit side. So furniture would also be debited because it's an asset coming in the business, I would write 24,000 on the debit side. And he also invested equipment worth $15,000. So equipment is also your asset. Increase would be on the debit side, and decrease would be on the credit side. So let's write the value of equipment 15,000 on the debit side. Now, as per the deadly rule, when one account is debited, the other would be credited. So I would credit capital with 40,000. I would credit capital with 24,000. I would credit capital with equipment 15,000. Now we'll write the opposite names. In cash, we'll write capital, and in capital, we'll write cash. In furniture, we'll write capital and in capital, I'll write furniture. In equipment, I'll write capital. Okay. I equipment, I'll write capital, and in capital, I'll write equipment. Okay? So this is the transaction. All assets debited because they increased and your capital increased, so that's credited because the increase of capital is always on the credit side, and decrease is always on the debit side. Next question. Purchased goods for cash, 6,000. So your cash is going out, your purchases is coming in. So I will credit cash with 6,000. And I would debit purchases with 6,000 because increase would be on the debit side for purchases, and decrease would be on the credit side, and we'll write the opposite names. Here I'll write purchases, and here I'll write cash. That's it. These are T accounts. Question number three, sold goods on credit to Jack worth 10,000. So now, there's sales and Jack. Jack is your receivable, increasing your asset, sales is your income, increasing 10,000. So here's sales on the credit side, I'll write 10,000. And where is the count of Jack is year? Jack is my receivable, so I'll debit him with 10,000. Okay? The increase of receivables is always on the debit side, and decrease is always on the credit side. Opposite name, her we'd write sales. And here we'll write Jack. Okay. And sales and income. So as per deed click, increase on the credit side and decrease on the debit side. Okay. Next, question number three. Sorry, question number four, purchased office stationary for $2,000 cash. Now, office stationary is not your purchases. Okay? So we'll debit office stationary and we'll credit cash. Office stationery is an expense. Some people say it's an asset. Some people say it's an expense. So we'll assume it's an expense. Cash. So cash would be credited with 2000 and we'll write the opposite name. Here we'll write office stationary. And here we'll write cash, the opposite name. Okay, next question. Question number five, sold goods on credit to Percy worth $10,000. So my sales is increasing and Percy's my receivable increasing. So as per DedClick, Percy would be debited and sales would be credited. So let's credit sales is it 10,000? Yeah, so let's write 10,000. And let's find misses Percy's account. Percy Percy, are you Percy Percy, wire you? Yeah, here. So we would debit Percy with 10,000, and we write the opposite name. Here I would write sales. And in sales, we would write Percy. Okay? Yeah, Percy is a receivable. So increase of Percy's account would be on the debit side, and decrease would be on the credit side. Okay, and same for office stationary increase on the debit side and decrease on the credit side. Okay. After Percy, we paid rent in cash. So that's an outflow expense as per debt click on the debit side and cash decreasing, so on the credit side. So outright $1,000 on the credit side of cash. And in rent, where's the rent account? Where's the rent account? Rent, rent, where are you, rent rent, where are you. Okay, there's no rent. Oh, yeah, here. It's here. So I would write 1,000 on the debit side. Now we'd write the opposite names. Here, we would write cash, and in cash, we would write rent as simple as that. And rent is an expense. So the increase would be on the debit side. And decrease would be on the credit side. Okay, next, paid electricity in cash amounting to $600. Again, electricity is an expense. So as per dead clique on the debit side, my asset cash is going out, so we would reverse the dead click rule. So I would put cash on the credit side with $600. So 600 over a year. And let's find the electricity account, electricity, electricity, where U over here. So here we would write case, and in cash, we would write electricity the opposite names. Right, next. Billed Ben for services rendedten hundred dollars. Now, understand this transaction. What's happening? I provided a service to Ben, okay? And I gave him a bill. In other words, I provided him services. He owes me money. He's a receivable. So Ben is a receivable debit and service income credit. Okay? So, $1,000 where's Ben here's Ben. So I would debit Ben with $1,000. And wag service income over year on the credit side because that's an income. Now we'll write the opposite names. Here I would write pen, and here I would write service income. Okay. Understood. Very good. Next question. Paid traveling expenses, $850 via cash. So cash is going out, credit, and traveling expense debit as per the deadlick rule. So 850 on the credit side, traveling traveling, where are you traveling traveling over here, 850. So here we would write cash. And in traveling sorry in cash, we write traveling expenses. Okay, very good. Next, purchased goods on credit from Lee. Now, Lee is payable, a liability. My debt is increasing, and purchases is also increasing. So click on the credit side would be your liability, Lee and purchases on the debit side. 800? Yeah. So where is purchases over year 800. And where is Lee over here? Because Lee is a payable. So the increase of Lee would be on the credit side as Lee is a payable, Ben was my receivable, so increase would be on the debit side and decrease on the credit side. Service income is an income, so as per click, increase on the credit side and decrease on the debit side, expense on the dead side, on the debit side, and increase the decrease on the credit side. Right. So purchases, here we would write the opposite name. Here we would write purchases. And in Lee in purchasers who write Lee. Now, look at the purchases account. Focus on the purchases account. There are two purchases. One was on cash, one on credit. So 6,000 was by cash and eight ended on credit from Lee. So we owe Lee money now. Right. Next, paid service expense, 4,000 in cash. So now we paid an expense. We would credit 4,000 over here. And we would debit service expenses with 4,000 over here. We would write the opposite names. Here, I would write cash, and here I would write service expenses. All right? Good. Next question. Received cash from Jack amounting to 500. Once upon a time, guys, once upon a time, we sold goods on credit to Mr. Jack for 10,000. He owed us 10,000. So so far, he just gave us a small payment. No problem. We accept that we have an expectation he'll pay the remaining later. So cash is coming in, and Jack, my receivable is going down. So as per dead click, cash on the debit side, Jack as it going down, reverse the dead click rule. So cash debit Jack credit with 500. So here I will write 500. Now, Jack Jack, where are you? Jack Jack, where are you. Here. Now we'll write the opposite names. Here, we would write cash and here, Jack. Very good. Next question. Jamie withdrew cash for personal use. So the cash is going out as per dead click, asset is decreasing, cash on the credit side, and drawings on the debit side. As per dead click. How much 3,000? Yeah. So here I would write 3,000. And drawings, drawings, where are you? Drawings, drawings, here you are. Opposite names, okay? Here I would write cash. And here I would write drawings. Okay. Last transaction paid insurance for the month, $800 in cash. $800 in cash. So again, insurance expense increasing, cash going down. So as per deed click, expense on the debit side, asset reducing, reverse dead click rule, insurance debit and cash credit. So here I will write 800 and insurance insurance, where are you? Here you are on the debit side. So here I will write cash and here I will write drawings. No, insurance. Sorry. Yeah, insurance. We are done, guys. We are done, done and dusted. Okay, done and dusted. Now one thing remains something very, very important. That's balancing the T accounts. I taught you the steps in the previous video, requal them. Step number one, total. Step number two, write the larger amount on both sides. Step number three, the missing value would either be your balance carry down or income statement. So let's do that. It's pretty evident in the cash account that this is our greatest side. So I would write this on both sides, 40,500 over a year. And 4,500 over here. Now, let's see what's the total of our credit side. Let's see the total of the credit side. Okay, let's use our calculator. 6,000 plus 2000 plus 1,000 plus 600 plus 850 plus 4,000 plus 3,000. The sum formula is not working because of the dollar sign plus 800. So 18 to 50 -40,500. This is our balance cary down. 22 to 50, okay? 22 to 50. This is our balance carry down. I will highlight this in a different color because this is going to be important in the next video. This is an important value, okay? It's going to be an important value, and we'll bring down the balance for the next month with balance brought down. Okay? Right. Let's do the same thing for the capital account. There's 40,000 plus 24,000 plus 15,000. So 79,000 we would write on both sides. Let me add a box on the total so you guys don't be confused. Right. So now, this is going to be our carry down. I would write this in the red color, 79,000 balance carry down. Okay. Next, equipment, okay, we would write 15,000 on both sides over here, and over here. Okay. And balance carry down over here $15,000. Okay? Again, I would highlight this in a different color because it's going to be important for the next video. Write next, Percy, I would write 10,000 on the left, 10,000 on the right. Obviously, that's the greater amount because there's no other value on the credit side. Here, I would write balance carry down. 10,000, we'll bring down the value as well for the next month. Balance brought down. I think I did not bring down these balances, so let's do that, too. Balance brought down. Same goes for this one. Right. Apologies for this. This was the Balance carry down. 15,000. So here, we'd write 15,000 as well. Right, next. Furniture account, 24 is the greatest amount. So on the debit side and on the credit side, this signifies the total. Now let's do the balance carry downs. 24,000 over year and bring it down as well. That's it for furniture. So another color for the next video. Now, time for sales, 20,000 the total on the right, 20,000 on the left. So sales is an income. We won't write balance car down rather we would write income statement. Okay. Very good. Next, purchases. That's also at expense nature, I told you. This goes in the income statement. It affects my profitability. So here we would write income statement as well. 6,800. Okay, total over year. Okay, same goes for office stationery. I told you that's an expense. So total over year over year at income statement over year. So these are my totals, and this is the income statement value. Okay. Next, rent is my expense as well. So 1,000 total on both sides and your outrte income statement as my balancing figure. Okay, same goes for Jack. 10,000 on both sides. Because that's the larger site. Right. Now, the missing value, 10,000 -500. Here, I would write 9,500. This is my balance carry down, meaning this is the amount that Jack owes us at the end of the period. Okay? We sold Goods on cred for 10,000. He only paid 500 so far, which means that he still owes us 9,500. This is what the balance carried means. Okay? Same goes for Ben. Remember, we provided him services on cred. He still owes me 1,000. He didn't pay me anything yet. So total on both sides and over year, just be the total. Balance carry down, meaning he still owes us this much. Then bring down the balance at the next period. Okay. Right, electricity. 600 on both sides. That's the total, and this is the income statement value. We'll transfer the expense to the income statement. Okay, same goes for service expenses. We'll transfer this to the income statement. Now total on both sides. Okay, that's a service expense. Same goes for the service income. That's an income, which would be recorded guys way in the income statement. Now let's total this. Okay. Same goes for insurance is my expense, traveling expenses as well. Right. So 850 is the value to the income statement, and these are the totals. Now, Lee is my payable. So we would write Balance Caryn over here. We will write the carry down. We cannot discount that. Brrogt down, and these are the totals. Okay. Same goes for insurance. Total, total, total. And transfer to the income statement. A tank. Okay? Drawings, yes, that's a balance sheet item. So when I balance this, write this on both sides and this would be your balance carry down. And bring down the value. Right, my friends, we have balanced all the T accounts. You can see we've balanced all the T accounts. So this is how we prepare T accounts. We follow the Dead click rule. We write the opposite names in the opposite accounts. The same double entry rules apply over here. Okay? So see you all in the next video. Thank you very much. Bye bye. 43. The Types of Ledgers: Welcome back Genius Accountants. This is a very crucial video. In the previous video, we covered this activity, and we prepared all these T accounts on the question I prepared for you all. Okay? Now, I want you to look at this. Doesn't this look so messy, so unorganized? Where's the drawings account? Where is it? I can't find it. Where, wras drawings, drawings, drawings. Where are you? Drawings, drawings, drawings. Where are you? Oh, here you are right at the end. Where's Jack? Jack Jack account, where are you? Jack Jack. Oh, here you are. Okay. Where's capital? Capital capital capital, where are you? Oh, here you are right on top. This is so unorganized. I prepared a question of only 14 transactions. A business has millions of transactions in a month. Big companies have countless of transactions. Would it become so difficult for them to look at their accounts? Well, there's a solution. In accounting, there are three types of ledges, and in certain ledges, we only record certain T accounts. Okay? This would make it easier for us to identify certain accounts. The first type of ledger is called the sales ledger. And in the sales ledger, we only record our main receivables, who we sold goods on credit to. The thing is that in accounting, the issue of receivables and payables is very sensitive. Receivables are those people who you have to collect money from, they owe you money. And if you don't manage it properly, they could run away with your money. They could get carried away. Your payables are also so sensitive because you owe them money. And if you don't pay them on time, this could ruin your reputation. Your suppliers could leave you. They could sue you. So we record receivables in a separate ledger, payables in a separate ledger. So the sales ledger contains T accounts of your main receivables only. Okay? Like, for example, in this question, Percy was my receivable, so her T account should go away. And it should be recorded in the sales ledger only, okay? Here, you would find a T account. And who else was the receivable? Now, Ben was not your main receivable. You provided services to Ben, and those services were not your core business activity. So Ben wouldn't go in the sales ledger. So who did we sell goods to Jack? Okay, we sold to Jack, as well. So Jack is my receivable. He would go in the sales ledger, Percy and Jack. If I had 100 receivables, now it would be easier for me to keep a special check on them because I recorded them in a separate ledger. Similarly, the purchases ledger records your main payables, to whom you owe money, to whom you bought goods on credit from. Okay? So, look, there's Lee. Lee is my payable, so his account would go away from here, and it would be recorded in the purchases ledger. Okay? So purchases ledger contains T accounts for your main payables only. The general ledger, all other T accounts apart from your receivable and payable, everything else would be stuffed in the general ledger. So let's transfer this entire sheet to the general ledger now. Oh, let's just rename this general ledger. Okay? So, in fact, no, let's just transfer everything. Yeah. All these T accounts, I transferred them to the general ledger. Okay? Now, if you note, I said main receivables and main payables. If you recall, I told you a transaction that sold a car on credit to John for $10,000. This is not your sale, isn't it? You sold a motor vehicle. But John actually owes you money for this car. But if this is not my sale, John is not my main receivable. He's my other receivable, okay? Your main receivables are your credit customers who are generated from selling goods from your principal core business activity, your customers. He's just another customer. He's not my main customer. So John's account would be in the general ledger, okay? John's account would be in the general ledger and that motor vehicle would be in the general ledger as well. John is my receivable. Yeah, he's not my main receivable, so I wouldn't record John in the sales ledger. Similarly, there was another transaction like boat Furniture. On credit. From Leyla for $5,000. This is not my purchases. You guys know it now, because we're not buying the furniture for Deser. We bought it for the business. It's purchase of non current assets, not purchases. So Lila is not my main payable, isn't it? If this is not my purchases, then Lela is also not my main payable. Your main payable are your suppliers, who you regularly buy goods on credit from. Part of your core business activity, our work is not selling furniture, it's selling goods. So Leylas account would be in the general ledger. You would find Leylas T account and even the furniture T account in the general ledger, right? So your receivables, their T accounts would be in the sales ledger, your payables, their T accounts in the purchase ledger, and everything else in the world, assets, liabilities, income, capital expense, drawings, everything, even returns, remember, even sale return would be in the general ledger. Even sales the sales account would not be in the sales ledger, only receivables, okay? The purchases account would not be in the purchases ledger, rather in the general ledger. Okay? Remember that. Even purchases returns would be in the general ledger, not in any other ledger. All right? See you in the next video. In the next video, we would be discussing the trial balance. Thank you very much. 44. Debit and Credit Balances: Hello accountants. Welcome back to the next video. In this video, we will talk about a small concept. But if you don't understand this concept, it can become annoying and cause you problems at the later part of this course. This chapter is called the debit and credit Balances. So let's dig writing. In your screen, you can see a cash account I prepared for you. The balance brought down 10,000 signifies an opening balance, which means you have $10,000 at the start of the period. Before any transaction, this came from the previous month. You have this much cash in hand at the beginning of the period. Then you did cash sales of 5,000 and Kela paid you 2000, so all your inflows amounted to $17,000, okay? Your outflows were rent of $4,000. You paid salaries of $6,000. So your total inflows were 17,000. You total outflows were 10,000. You have $7,000 cash in hand at the end of the period. After adding old inflows and after deducting old outflows, this is what you have left, the closing balance. Now, coming to the important point, this is pretty obvious that because the balance brought down is on the debit side, this is called a debit balance. That's pretty obvious. However, how many of you know that even though the balance carried down is on the credit side, this is also called the debit balance. How many of you knew that? The reason is pretty simple. Because the balance brought down is on the debit side, the subsequent brought down of the closing balance is on the debit side. This balance is called a debit balance. The conclusion of this is that the balances are always denoted by the opening balances. Always remember this. Even though a balance car down is on the credit side, because its subsequent brought down will be on the debit side, so that's called a debit balance. Moving on. You see a bank account in your screen. Now it's an asset. Bank is an asset. Might notice something peculiar. Why is the brought down on the credit side? When bank is an asset, and as per debt click, it's supposed to be on the debit side. The reason is that this brought down is a bank overdraft. It's a negative balance. You owe the bank $5,000 at the start of the accounting period, okay? Then you earn sales of $1,000, David paid you 4,000, Kane paid you 3,000, okay? So your total inflows were 8,000, okay? However, you did purchases of $8,000. You paid rent of $2,000. So your total outflows were 15,000 and your inflows were only 8,000. Okay? So it means you have another negative balance of 7,000 in your account at the end of the month. The closing balance is 7,000 at the end of the month. Now, it's pretty obvious that the balance brought down is on the credit side, so that's called the credit balance. But how many of you know the fact that even though the balance carry down is on the debit side, this is also a credit balance. The reason is the same. Because the subsequent brought down is on the credit side, this balance is always called the credit balance because balances are always denoted by the opening balances. Now, this chapter is very important. If you understood this concept, then when we study the control accounts chapter, you won't encounter any problems. So see you in the next lesson. Thank you very much. 45. The Trial Balance: Welcome back Genius accountants. In this video, we are starting a very important concept, and we are moving forward in the accounting cycle. We covered the books of original entry, the second step. We covered ledges, the third step. Now we are covering the fourth step, which is called the trial balance. Now, what's the trial balance? Let's dig writing. So a trial balance contains a list of balances generated from all the ledger accounts at a specific point in time. In the previous lesson, we covered an activity on ledges. We prepared T accounts, we calculated the balances. So we extract the balance carry downs or the income statement balances, or the closing balances, and we make a list of them. That is called the trial balance. Okay? It's used to ensure that the total debits equal the total credits. If the total debit in the trial balance equals the total credit, that means your accounting is 100% correct. Everything you've done is 100% correct because from transactions, we make journals, from journals, we make T accounts, ledges, from the ledges, we'll make a trial balance. And this would signify the accuracy of your bookkeeping entries. Okay? And a heck, the trial balance is made by applying the dead click rule always remember, all items on the dead side, expense, asset and drawings would be debited. A on the click side, liabilities, income and capital would be credited. Okay? Have a look at a trial balance. Cash is an asset, so that's debit. Receivable is an asset, so that's debit. Inventory is an asset, so that's going to be debit. Office equipment is an asset, that's going to be debit. Accounts payable is a liability, so that's going to be credit. Capital is going to be credit, sales revenue is going to be credit, rent expense, debit, salaries debit, utilities expense debit. And note the trial balance Balances are the same. The total of the debit, 47,000 is equal to the total of the credit column. That's also 47,000. So this means whatever we did was absolutely correct. Right. I'm going back to the activity, what we had just done in the previous lesson, we made T accounts, if you remember, I highlighted the balance carry downs in red color. So now we're going to use those balances in order to prepare a trial balance. So see you in the previous activity. Right. This was the activity we did in the previous lesson. We prepared all these T accounts, and we calculated the balances. Now, how will make the trial balance? Listen to me very, very carefully. Okay? Now, this type of question would not come in your course. Okay. But you have to understand why a trial balance is known as a list of balances. You have to understand the role of a trial balance because if your trial balance is correct, it means whatever we did over here, all the T accounts, all the journals, everything was correct. So it signifies that your accounting is correct. Now, how to make it have a look. Listen to me very, very carefully. We are going to look at all the closing balances, such as this, okay, this, all the closing balances, all the closing balances. We'll look at all the closing balances. And in the opposite side of the closing balance, that's where we'll record it in the trial balance. For example, in the cash account, the balance carry down is on the credit side. It means in the trial balance, I should record it on the debit side. Okay? So let's do that. This is the trial balance. I'm going to write capital and no, cash. Sorry, I'm going to write cash. 22,250. We write it at the opposite side of the balance in the T account. After cash is capital, the carry down is on the debit side, so we would write 79,000 on the credit side. Next, there's equipment, the carry down is on the credit side, so I would write that on the debit side, 15,000. Okay. Next is furniture. Because the carry down is on the credit side, I would write this on the debit of the trial balance. This is the thumb rule. And this symbolizes DadClq. I can't credit assets. I can't debit capital. Okay? 24,000. Next, sales income statement opposite of the balance. So that's on the debit side, so I will write sales on the credit side. Okay. Next, Percy. Okay? The con of Percy is on the credit side, so I will write Percy's value on the debit side. Okay. After Percy, there's rent income statement credit, so I would write this on the debit side. Okay, rent 1,000. Next, electricity again, opposite side of the income statement. So I would write this on the debit side. Next, service expense, I would write there on the debit side because income statement is on the other side. Okay. Next, we wrote capital, we wrote furniture, purchases is left. So again, look at the purchases account. Income statement is on the right side. So in the trial balance, I'll put this on the debit side. Jack, Cardwn is on the right side, so I'll put it on the debit side over here. Carry on on the right side. So we would write this on the debit side. How much 1,000. Service income. Income statement is on the left side, so we would write it on the credit side in the trial balance. How much is it? 1,000. Okay, drawings. The car down is on the right, so here, we put it on the left side. Okay. Equipment was done, sales was done as well. Office stationary, income statements on the right side. So we'd write this 2000 on the left. Okay, let's extend the trial well slightly. There's no need for the date column the trial Wellen, okay? Traveling expenses. Income statement is on the right. So at the child balance, this will go on the left side, 850. Lee carried on on the left side. So I would put this 800 on the right side because it's a payable. And lastly, insurance, income statement on the right side. So in the trial balance, it would be recorded on the left side. However, guys, I'm giving you a disclaimer. I made this question myself. It's a random question. So if it doesn't balance, I will just add a balancing figure, okay? Because this question was totally random. Right. Now let's open the calculator. And see the total of the left side, 22250 plus 15,000 plus 24,000, plus 10,000 plus 1,000 plus 600, plus 4,000, plus 6,800 plus 9,500 plus 1,000 plus 3,000 plus 250 plus 800. 100,800, okay? This is the total of the left side. Now, let's see the total of the right side. What if it does balance? What if it does balance? 79,000? Oh, whoa, whoa, whoa, whoa, whoa. 79,000 plus 20,000 plus 1,000 plus 800 gas. You should be proud of me. It balanced. I balanced. Yay. I'm like, the happiest man right now. It means whatever I taught you was absolutely correct. Whatever accounts we made was absolutely correct. Whatever we did so far was absolutely correct. So this is how we make the trial balance. These are all the closing balances, which is why the trial balance is known as a list of balances, right? I still can't get over the happiness of balancing the trial balance. Okay. So always remember one thing opposite side of the closing balance. So if the carry down is on the right side, it goes on the left side on the trial balance. If income statement is on the right side, so in the trial balance, it goes on the left side. Now, you won't ever be asked in your exam to prepare a trial balance from scratch like this, but this is for your understanding to master the fundamentals of accounting, right? Yeah, questions will come in you Ed Excel AS level exam, where you have to prepare trial balance, but the balances would be given. Just based on dead Click, you would have to debit or credit those items, so we will see such questions in a moment. Thank you. 46. Practice Exercise 1 - Trial Balance : Prepay Tim trial balance at 31st December 2020, including the balancing figure required in the suspense account. So sometimes when you prepare a trial balance, you have to put the missing value in any other account that's required in the question. Sometimes the question says the balancing figure would be capital. Sometimes it says the balancing figure would be sales. I totally depends on what the question is, okay? In this question, it says the balancing figure would be the suspense account value. We would cover suspense later on in the errors chapter. Okay? So let's begin. Here, the values are given. We have to just put them based on dead click, okay? So equipment is an asset. Okay? Let's write Dead Click before we forget. Well, I won't forget. You guys might forget. Equipment is an asset, so that will go on the debit side. I will write 4,000 on the debit side. Provision for depreciation reduces the value of your equipment. It reduces the value of your non current asset. We'll cover this in detail later in the depreciation chapter. So this will go on the credit side because it reduces the value of your non current asset. Next, Sundry expenses expenses on the debit side, so we put on the debit side. Guys, this is bonus marks. You'll already seek your ten marks in your paper. So don't get this wrong. Wages and expense. So 26330 on the debit side, inventory is an asset. So on the debit side, 6750 purchases, it's an expense nature. So on the debit side, I will write 52,000 over a year. Okay, revenue is an income on the click side, so I'll write 89,000 on the right. Equipment is an expense. So I would write that 11 20 on the debit side. Now let's do the rest. After equipment repairs, there's discount allowed. You know that? That's an expense. So I'll write that on the debit side based on dead click on the dead side. Discount received of 730. I told you, wherever the word received is mentioned, that's referring to income. Commission received, bonus received, salary received, XYZ received. That's always your income. Income is on the click side, on the credit side. Okay? So 730 on the credit side. Right? Bank overdraft is a liability. So on the click side, 700, electricity and water is an expense, so on the dead side, 2,800. Okay. Next trade receivables, 7,800. That's an asset. So on the debit side, 7,800. Okay. Next, trade payables, 4,700 on the credit side. Okay, capital on the click side, on the credit side, 8,000 and drawings on the dead side, the debit side, 900, totally based on DadClick. Now we will total, okay? We'll see which side is greater. I think it's pretty evident that the left side is greater. It has more transactions. Let's see. Okay, I'm totaling the debit side now. So let's total the debit side. Alright, guys, I totaled the debit side. The total of the debit side is 103 900, all right? 103 900. Now I'm totaling the right side. All right, guys, I total the credit side. It's 1047 30. So this is the greatest side. It means there's a difference on the debit side. So let's calculate what's the difference 1047 30 minus 103 900. So we would put 830 in the suspense account. Okay. And we would make the totals the same. All right? Let's make the totals the same. Right. So now 1047 30 on both sides. So this is the total of the trial balance. We have artificially balanced the trial balance by putting the missing value in the suspense account. This is one type of the trial balance question. Okay? The missing value can go to any account totally dependent on what's the requirements of the question. So see you in the next video in which we'll do another question of trial balance. 47. Practice Exercise 2 - Trial Balance : So in the previous question, we prepared a tried balance and we calculated a missing value. In this question, there's an incorrect trial balance that's given. It contains errors, okay? Whenever you see the word suspense, it means something is fishy. There's a mistake over here. So what we are supposed to do, we'll apply the dead click rule and find out what errors has this bookkeeper made, and then we'll prepare the corrected trial balance. So let's begin. We would begin by writing the dead click rule. Right. I'm sure by now you understand the deadlik rule. So debit expenses, assets, drawings, credit liability income capital. And this only applies, it increases not in anything else. Right. Let's begin. Capital, that's correct. It's on the click side, the credit side, so 70,000 on the credit side, that's okay. Drawings, that's on the dead side. That's also okay. Putting it on debit is fine. Revenue is on the click side, income side. That's also fine. Purchases would always be debit, always. Some say it's similar to an expense. So say it's inventory. Either way, it's going to be debit. So that's okay as well. How can purchases and participants both be debit? That doesn't make sense, right? A return cancels out the purchase. So return outwards should be credit. Inventory is an asset that would always be debited Bank overdraft is a liability, that should be credit. Why is it debited? Liabilities are on the click side. So let's put this on the cred side. 7950. Wages is an expense. That's correct. That's debited. Rent payable is your expense, that portion of the expense, what you are yet to pay. So the innate nature of rent payable is an expense you have to pay. So expenses are always debited. So let's put this 9,000 on the debit side. Rent receivable. Remember, rent received, received is your income. I said, wherever the word received, that's your income. So rent receivable is that portion of your income, what you are yet to receive. So the innate nature of rent receivable is an income. So it's supposed to be credit. Okay, electricity and water and expense, it should always be debited. Sundry expenses debit. As per the dead side, non current assets are always on the dead side, so 88,000 debit. Now, provision for depreciation, we'll cover this later in the depreciation chapter. This reduces the value of your non current assets. Okay? So this would be credited. Provisions are similar to liabilities, but the only difference is that the timing, the nature and timing is uncertain. Okay? For a liability, you know when you have to return the amount. But for provisions, it's not clear, but they're similar to liabilities. They're not liabilities. They're similar. So this will go on the credit side. Discount allowed is an expense, so it will be debit as always. Discount received is an income. I said, wherever the word received is mentioned, that will be your income. Receivables are assets, so they'll always be debited. Trade payables are liability, so they will be credit as per the click rule, the click side. Now, allowance for irrecoverable debts. This is a provision, okay? So this is an estimation of your receivables, amount of the receivables that will not pay you back. It's a provision. This reduces your receivable, reduces your asset, so debt click would be reversed. So this will go on the credit side. That's it. We are done now. Now, let's total if you did everything correctly, your trial balance should balance without any need for suspense. So let's add up the debit side first, 11 400 plus 107,000 plus 27 500 plus 31 500, plus 9,000 plus 5,700 plus 18750 plus 88,000 plus 1920 plus 13,000. So 32370. Three, 23 double 70. Now let's add up the entire credit site. 70,000 capital plus 205,000 revenue plus 1,900 plus 7950 plus 4750 plus 22,000 plus 4,100 plus 72 70 plus 800. This should balance. Who, it balanced. It means we did everything correctly. So three, two, 3770 on the right, we have showed the bookkeeper that who's the boss? It's us. So 48. Source Documents - Part 1: Hello, and welcome back my genius accountants. In this video, we will be talking about a very important concept, which is called source documents. So let's dig right into this concept and see what this is all about. Now, source documents are the original records that provide proof of a transaction. Let's assume you owe someone money, and you went to his premises, you paid him the money, and you settled the debt. If you don't take any document or he doesn't give you a document, tomorrow, you might go to court and say, you didn't pay him the money. You'll say to the court, I gave him the money. I paid him the money, but you have no proof of the transaction. Okay? So it's very important to settle these debts with proper documentation. If you go to the bank deposit money, the bank gives you a deposit slip. If you go and buy something, you get a receipt. So this is what source documents are all about. They are essential for maintaining accurate and reliable financial records and are used in the bookkeeping and auditing processes. So all these source documents can be used in the auditing processes. When all the financial statements would be checked, these documents would provide credible evidence of the transactions. Now, let's look what are all these source documents? So the receipts, invoices, checks, check counterfoil, payslip, supplier statement, debit note and credit note. In this video, we would be covering all the source documents except debit note and credit note. We would cover that in the next video. I'm sure you guys know what are receipts. So let's see what are receipts. You can see in your screen, this is a receipt. Okay? I'm sure you all are away with this. I'm sure maybe at least once in your life you saw this, you know what this is. So whenever you buy something, when you go to a restaurant, when you go to a shop, when you go wherever you go, when you pay cash, you are given a receipt. So it's a document that acknowledges that this person has paid me. It's an acknowledgment of the cash received. The word receipt comes from the word received. Okay? It's only used in cash transactions. Now, let's have a look at this in detail. You can see the company address, the product details, the items you bought, the payment details, and you paid straightaway cash. So this is a receipt, okay? Now, for example, XYZ Limited sold goods to Ben $400 in cash. So XYZ Limited would issue a receipt to Ben, okay? As proof that Ben gave us the cash, we received the cash. It's with me in my hand right now. And remember, a receipt is always issued after receiving the cash. It's never issued before receiving the cash, okay? Next, this is an invoice. Now, from the looks of it, you might think that, you know what? This is the same thing. It's exactly like a receipt. But, guys, that's not the case. Notice something strange. The issue date of the invoice is 1 December 2022. Okay? Now, on 1 December 2022, we bought all these products. The total bill is $2,257. Now, what does it say? Total due by the date 30th of December 2022. So we bought the items on credit, and we got a time frame of one month. On the last day of the month, we have to settle these amounts, okay? So this is what an invoice is. It's used in credit transactions. That's the difference between an invoice and a receipt, okay? So it's a document sent by the seller, the business, to the buyer, the customer, as a request for payment. It's a request for payment and outlines the details of the transaction and amount due. This is the most important thing. The amount due is mentioned here. It's used when goods are sold or bought on credit. Okay? Remember, credit, not cash. So the difference between a receipt and invoice, the first thing is about cash. That's for cash transactions. This is for credit transactions. But the most important point is what you can see on your screen. An invoice is issued before receiving the cash, okay? Before receiving the cash, it's sent along with the dispatch of goods. So this is the most important difference between a receipt and a cash. A receipt is issued after receiving the cash, an invoice is issued before receiving the cash. All right? Example, XYZ Limited sold goods to John on credit and expects payment after 30 days. So XYZ limited would give the invoice to John straight away along with the goods. And if XYZ Limited buys goods from a supplier, Shane on credit, then the moment they get the goods, that's when Shane would issue the invoice to XYZ Limited. So invoices are used for credit transactions only. Moving on. Check. I'm sure you guys know what are checks. I'm sure you've probably seen your parents' checkbooks, or maybe you have your own checkbook as well. So these are used for banking transactions, okay? Now, it's a written document that instructs a bank to pay a specific amount. Your money is stored in a particular bank, okay? So you're giving an order to the bank that pay this much amount from my account to XYZ's account. This is what a check is all about. So a check is used for many payments for expenses, reimbursements to customers when buying non current assets. This is a very, very safe medium. A business won't have to carry, no bags of cash. Just write a check and give it to the customer or whatever entity you owe money to. Okay? Now, customers can also issue checks. The business would accept the payment as a proper legal tender, okay? Right. Moving on something very similar to check. It's called a check counter foil. Okay? Now, if you've ever seen a checkbook, now, if I issue a check to someone, I have to keep some record with myself. So this is what a checkbook looks like. This small part remains with me, and this check is given to the person, okay? To the pay. So this check counterfoil, it's also called a check stub and it's part of the check that remains in the checkbook after the check is torn and given to the intended party. It's a record of transaction for me, for the drawer. Drawer is the person who writes the check, who's issuing the check to someone. There you see, I tore the check. It's gone. This part that remains, this is the check counterfoil. It's for my records that I know that I gave a check to someone. Okay? Right. Moving on. Statement of account. Okay? So this is a reminder given to my receivable. When a business sells goods on credit to someone, okay? You have to give him a reminder that you owe us this money. The time is approaching. If you look at my example, opening balance of $100. So at the start of June, our receivables owe us $100, okay? We sold goods on credit for 500, so now they owe us 1,500. They paid us 300, so now they owe us 1,200. They return goods of 100. Now they owe us 1,100. We sold a further goods of 400. Now they owe us 1,500. So this is a reminder. It's a summary of transactions. Whatever we had with our receivables, this is what the statement of account is all about. To remind your customers that you owe us $1,500 at the end of a particular period, okay? Normally, it's given every month, normally. They include, as you can see, the opening balances, invoices, credit notes and closing balances. We will see this later in the next video. Okay. Moving on to a supplier statement. Now, supplier statement is very similar to a statement of account. But supplier statement, how is this different from a statement of account? So the supplier, the payable, is giving a reminder to the business, okay? That you bought goods on credit from us, here's the summary, and you owe us 1,500 at the end of the month. Now, this is the opposite vice versa of the statement of account. Okay. Supply statement is an accounting document provided by the supplier to the business summarizing all the transactions that both parties had together. They include the opening balances, invoices, credit notes, and closing balances. Okay? So this was supply statement. See you in the next video where we'll cover the credit notes and debit notes. Thank you very much. 49. Source Documents - Part 2: Come back my genius accountants. In this video, we'll be talking about the second part of source documents. In the previous video, we spoke about receipts, invoices, statement of account, supply your statement, checks and check counterfoil. In this video, we would focus on two of the most important documents. These are hot topics. They always come in you exam. It's credit and debit notes. Okay? So let's have a look at it. We are going to begin with credit note. So let's dig right in. When a receivable returns goods to the business, the outstanding balance reduces due to the return. Now, you guys all know this. I taught you about receivables. When the business sells goods on credit to someone, the asset increases. When the receivable returns goods to the business, the asset decreases. The outstanding balance decreases. Okay? So I'm sure you guys know about this. The business then issues a credit note amounting to the return signifying that the asset has gone down. The asset has been credited. As per dead click, remember my dead click rule. When receivables go down, they go on the credit site instead of the debit side. All right? So this document is known as a credit note because the receivable goes to the credit side since the asset has decreased. So I prepared a comprehensive example for you. Let's have a look at the example. So this is Jack, okay? Now, Jack is the business. Jack sold goods on credit to Sparrow. Okay? So Jack is the supplier. Sparrow is the customer. Now, as per DadClick in Jack's books, what double entries would Jack record? For Jack, it's a sale, right? For Sparrow, it's a purchase, but right now we are focusing on Jack. For Jack, it's a sale. So as per the dead clique rule, Sparrow goes on the debit side because Sparrow is the receivable and sales go on the credit side because the income is rising. Okay? So this is the double entry Jack would pass. Now, Sparrow returned goods worth $250. So Sparrow owed $1,000 to Jack initially. Now Sparrow returned 250. That means that now Sparrow owes 750. His outstanding balance has gone down, okay? Now my question is, what double entry would Jack pass? You would reverse the above aforementioned entry. Receivable was debits. Now it will go on the credit side. Okay? Sales was credit. So now sale return goes on the debit side. We studied this in detail. If you're still having problems, you can go watch my videos on the return. So this is the double entry. Note. The receivable is on the credit side now. Okay? The receivable is on the credit side. So this is why Jack will issue a credit note of 250. In other words, Jack is informing Sparrow that your outstanding balance has gone down by 250. So a credit note, if I summarize, it's used in sale returns. Okay? Now, let's see the second document called a debit note. Now, focus on the business. When a business does a purchase return, okay? When a business buys goods on credit from their supplier, their liability increases. But when the business returns goods to the supplier, the liability goes down. Isn't it? As per deadlick now the liability, the outstanding balance of the business goes down. So the business would issue a debit note to the supplier signifying that the liability has been debited. We have debited the liability. We have reduced the liability. Okay? So this document is known as debit note because the payable balance goes to the debit side of the equation opposite of dead click. Why? Because the liability has gone down, isn't it? I told you when the deadlik rule reverses, we change the sides. When liability goes up, credit goes down, debit. Okay? Now, I prepared a comprehensive example Sparrow, okay? Bought goods from Jack. Okay? Sparrow bought goods worth $1,000 on credit from Jack. Okay? So the liability of Sparrow goes up. Jack is the payable of Sparrow. So purchases debit and payable credit. This is the normal double entry when we buy goods on credit, because the liability is going up, credit purchases is going up, so debit. Now what happens? Sparrow return goods worth $300 to Jack. So when Sparrow returned goods to Jack, the outstanding balance of 300 goes down. The debt goes down. So as a result, the payable would be debited in Sparrow's books and purchase return would be credited in Sparrow's books. Now, focus on payable. It's on the debit side. Why? Because the liability has gone down. Whenever there's a return, the outstanding amount owed goes down. So Sparrow would issue a debit note to Jack amounting to $250. So that Jack knows that, you know what? The liability of Sparrow has gone down. So subsequently Jack would accept the return. So if I summarize debit note, debit note is used for purchase returns and credit note is used for sale return. Okay? I hope you guys understood this video. Thank you very much. I'll see you in the next video. 50. Basics of Financial Statements: Hello, my genius accountants. I warmly welcome you to the next chapter we are starting today, which is the basics of sole trader financial reporting. Now, in the accounting course, we study accounting of different business structures. We study the financial reporting of sole traders, of partnerships, of a company, and of a manufacturing entity, as well. But sole trader financial reporting is the very basic fundamental of accounting. You have to master this because this is a very, very important component of accounting. And these financial statements they repeat to the other structures as well. So I'm sure you guys know what a sole trader is. A sole trader or sole proprietor is a single owner of a business. He runs the business. He owns the business, he manages the business. He owns it alone. Ownership lies to that one person alone. So there are two financial statements that we prepare for a sole trader. Number one, statement of profit or loss. Number two, statement of financial position. Okay, so let's dig right in to these concepts. Number one, you have to understand the difference between cost of sales and expenses. Cost and expenses are two different components. They are as different as day and night, so do not mix them. Okay? I would give you an example of KFC. In both cases, for cost of sales and expenses, we would talk about KFC. Now I'm going to ask you one question. What is KFC's main product? Their main product is fried chicken. So if I ask you what could be the cost of their main product? They could be the cost of chicken, the most important component of the product, cost of potatoes. Who likes KFC without french fries? No one, right? Cost of buns. For the burgers, very, very important. Cost of flour and the seasoning for the chicken mix. These are all very, very important and the cost of drinks. Okay? So these items are needed to prepare the inventory, to prepare the co product of KFC. So, guys, cost of sales are the direct costs involved in acquiring the inventory to be resold. In cost of sale, we only focus on one component, and that's inventory, the direct costs. If I talk about expenses, expenses are the overall costs of running the business. They are not limited to inventory. If I talk about KFC, they could be the rent bill, salaries, electricity, gas. These are all the overall bills a business pays. This is not related with inventory, okay? They are all indirect. I hope you understand the difference between cost of sales and expenses. Moving on, you have to understand the difference between carriage inwards and carriage outwards. This is also very important. So, guys, let me give you an example of carriage inwards. Let's say the business location of XYZ Limited is in Sydney and their supplier is in London. So this is a very, very important point. Look at the distance between London and Sydney. It's one of the longest flights in the world today. 20 hours and 30 minutes. Imagine the cost involved. So if the business imports inventory from London, it's going to be massive. The cost would be extremely high. So this is called carriage inwards, okay? The cost of transporting goods to the business location. Now, this is part of the cost of sale because this is a direct cost related to inventory. Okay? So this is added in the cost of sales. On the other hand, carriage outwits is something different. It's the cost of delivering goods to the customers. It's like the delivery charges. When you order something from Amazon or from Ebay or Shopify, sometimes you won't pay delivery charges. That's borne by the business alone. So that's carriage outwards. Now, carriage outwards is not your cost of sale. It's your expense because this is not related with inventory. After the goods have been acquired from London, after the products have been imported from London, when it's time to deliver the product to the customer, there is carriage outwards. So this is an expense. It's not related. It's not adding or increasing the cost of your inventory. So remember the main difference is carriage inwards is part of the cost of sale and carriage outwards is an expense. Alright? Let's move on. Let's look at the difference between gross profit and net profit. Now that you understand sales, you understand cost of sales expenses, so this would be easy for you all to understand. So, guys, gross profit and net profit. Gross profit is the profit a business makes after deducting the direct cost of sales from revenue. Okay? You only subtract your cost of sales from the revenue. It shows how profitable the core business activity is and how demanding is the product, how well the business controls its costs. This is gross profit. The formula is revenue minus cost of sales. So what is net profit? The word net means after all deductions. The word gross means before any deductions. So net profit is the final profit after deducting all expenses, including cost of sales from the revenue. This reflects the overall profitability, the overall picture of the business. So the formula is gross profit minus expenses. All right? Right. Moving on. We have to understand the movement of inventory. This is very, very important. We have to understand the movement of inventory and cost of sales. So, guys, the first thing a business uses. The first part of cost of sale is called opening inventory. Okay? Now, this is the value of the goods the business has on hand at the beginning of the period. It's the leftover from the previous period. The first priority of the business would be to sell your opening inventory. Consume this inventory. Otherwise, it could get worn out or it could get expired. Okay, for example, a bakery starts the year with 100 bags of flour. They already had 100 bags in the warehouse. This is the inventory left from the previous period, okay? So this is the first portion of cost of sales. After opening inventory, there's purchases, you will buy more inventory. Okay? Example, the business buys 500 more bags of flour, and the total cost of this was $2,500, okay? After purchases, you would return some purchases. Obviously, when you're ordering 500 bags, it's possible at least one to 2% of those items could be faulty. There could be some defects in those items. So the bakery returns 50 bags of flour worth $250. And obviously importing all the products. Now, not necessarily from another country. It could be from another city or another town in your city. That still comes at a cost. So carriage inwards is a very important cost. It's added to the purchases to the cost of sales. It's the cost of shipping or transporting the goods. So it costs $100 to have the 500 bags of flour delivered, okay? This is also added to the cost of sale a very, very important component. Guys, do you honestly think a business had opening inventory. They had 100 bags. They bought 500 more bags. Now they have 600 bags. They returned 50. They have 550 bags. Do you honestly think a business can sell all of its inventory? That is likely, but that's not so likely. This is possible, but it's very difficult, especially for a new business. A business cannot sell all of its inventory. They would be leftovers, okay? So those leftovers are called closing inventory. Closing inventory represents the value of goods that are unsold, okay? So, like, for example, at the end of the year, you have 200 bags of flour left. Worth $1,000. So this would be subtracted from the cost of sale. The reason is what does cost of sale mean? The cost of the items you are selling. So closing inventory is unsold. So why would I add this cost? I would subtract this. Secondly, the unsold items would be transferred to the next period. If they're not sold today, they would be sold tomorrow. So the closing inventory wouldn't be added in the cost of sale. It would become the opening inventory of the next period, and it would be sold in the next period, okay? Right. Now, based on this, let's prepare the formula for cost of sales. Right. We start with our opening inventory, as I explained earlier, which was $500. We add purchases, we subtract purchases returns. We add carriage inwards, we subtract closing inventory, and the answer we get, this is our direct costs or cost of sales. Okay? Now, we only subtract returns and closing inventory. We subtract returns because this is not a cost. We are returning the product to the supplier. So why is this included in purchases? If I return some products, I have to subtract or adjust the cost. And closing inventory, the unsold products, they wouldn't ever be part of the cost of sale. As I said, they would be transferred to the next period. So closing inventory of this period would be the opening inventory of the next period, okay? Right. I'm slowly slowly building a picture of the two statements we prepare, statement of profit and loss and statement of financial position. So let's see what is the statement of profit and loss. So previously, this was known as income statement, and I would refer this as income statement. Whenever I teach you, I'm sure you heard income statement from my mouth many times, especially when we were preparing the ledges, T accounts. So it's okay. This is shorter and easier to understand. But in your exam, you would always call it statement of profit and loss, right? So this statement summarizes all the incomes and expenses of a business. It shows how profitable are you. The main purpose is to calculate the profit. How much profit are you generating from your core activities? So remember, statement of profit and loss is made for one year only. I won't include the previous year's expenses in this income statement. I won't include the next year's expenses in this income statement. We only focus on one year only, right? Okay, so this is how the statement of profit and loss looks like. We take our sales, subtract our sale returns. We get this value. It's called the net sales. We subtract cost of sales, what I just taught you. So when I subtract the sales and cost of sales, we get the gross profit. We add our other income. If you go to my very first videos on important definitions, I told you there are two type of incomes, your main income and your secondary source of income. Like a school. Their main source of revenue would be the school fees. But if there's a canteen, giving them rent, if they sold some extra furniture, they earned income. So these are all the secondary sources, the side hustles. So we add that separately, which we call other income. We subtract all our expenses, then we get our ultimate profit for the year. How much profit we made in the year. This is called your net profit. This is your first statement. Now, the second statement is called the statement of financial position. Now, this was previously known as the balance sheet, and this is what I would call it. Whenever I teach you guys, it's easier. I mean, how can I write statement of financial position so many times? So we would refer to it as balance sheet. In your exam, you'll always refer it as statement of financial position. So this provides a snapshot of a company's financial position at a specific point in time. If I'm talking about 20:10, up till 2010, how many non current assets do they have? How many liabilities do they own? So it provides a snapshot of the financial position at a specific point in time. It shows what the company owns, assets, what it owes, liabilities, and equity. It shows these three items. Now, do you guys remember once upon a time, I taught you something called the accounting equation. And I told you the accounting equation applies in the balance sheet. The entire balance sheet is made in line with the accounting equation. That same formula, assets is equal to equity plus liabilities. That same concept, I taught you, that it's an equation. It must balance the assets amount must be same with the equity plus liabilities amount. So that same concept applies here as well. Now, let's have a look at the balance sheet. This is the balance sheet. We take the total of assets, total assets, equity. I taught you the formula of equity capital plus profit minus drawings and liability. So this value of total assets must be the same with total equity and liabilities. And by the way, this net profit comes from the income statement. This is why both statements are in line with each other. They are dependent on each other, okay? It must balance. If it doesn't balance, there's a problem in you, not the question. Remember that? So, guys, I hope you understood the sole trader financial reporting, the basic financial reporting. Now, in the advanced financial reporting, there are some year end adjustments like depreciation, bad debts, inventory, errors, interest. So I would first cover all these five chapters, then we'll come again to this financial reporting of sole traders. So in the next video, we'll do an exercise on the income statement and balance sheet. So I'll see you then. Thank you very much. 51. The Statement of Profit & Loss: Hello, my genius accountants. Welcome back. In this video, we would be solving a question on the preparation of a statement of profit and loss. So let's dig right it. As you can see, in the left side of the screen, there's a trial balance given. From the trial balance, we extract balances and prepare the statement of profit and loss and financial position as well. So we can see sales given 150,000. There's opening inventory, land and buildings, motor vehicles, capital, receivables, discounts. Why are they two discounts given over here? One on the debit side, one on the credit side. Why? Well, guys, one is discount allowed and the other is discount received. Now it's up to you to identify which is which. Now, if we follow the dead click rule I taught you, discount allowed is an expense, okay? So this $3,000 is on the debit side. For sure, this is discount allowed. Discount received is an income on the credit side. So the $1,000 on the credit side is your discount received. There's carriage outwards, which is an expense. There's distribution expenses, long term loan of $20,000 drawings, payable, rent, bank, electricity, salaries, returns. Notice there are two returns here as well. One on the debit side and one on the credit side. Well, one is your purchasers returns outwards, and one is your sale return, return inwards. So if sales is on the credit side, obviously, the sale return would be on the debit side. So this is the sale return. If purchases is on the debit side, then obviously purchase returns would be on the credit side. So the $15,000 is your purchase return. There's purchases given, cash, loan interest paid, commission received, charie intuits and administration expenses. Let's prepare the statement of profit and loss. So let me open my calculator because I'll need that as well. Okay. So okay. Now remember, there are two columns over here. It's not debit and credit. The left column is used for the calculations. Okay? All the additions and subtractions would be in the left column. The final answers would be written on the credit side. Okay, as simple as that. So let's begin. We'll start with sales 150000. Sale return on the debit side, 20,000. So let's subtract that. So we are left with 130,000. Okay. Now, let's extract our cost of sale, so less cost of sales. Now, there'll be a formula over here. We start with our opening inventory. So add opening inventory. $20,000 is our opening inventory. So we'll add that over here. We add our purchases then. So waste purchases, 30,000 over there. Any returns? Yes, they are returns, so less purchases returns. So the purchase returns, guys, is on the credit side. Okay, 15,000, we subtract that. We add our carriage inwards because obviously the goods we bought came at a cost. So add carriage inwards, $5,000. Less closing inventory. We subtract this. Okay? We subtract our closing inventory. It's not given in the question. Okay? I don't see it in the question. So I'll just leave it as null because I don't see it. Okay. Now let's total the cost of sales. Opening inventory 20,000 plus purchases 30,000 -15,000 plus 5,000. So 40,000 is our cost of sale. So I'll subtract the 40,000 from 130000, we'll get our gross profit. So 30,000 -40,000 is 90,000. This 90,000 is our gross profit, okay? After this, we add our other income. Wherever the word received is mentioned, that's your income. So see there are two discounts over here. The $1,000 discount received is your income. So let's write that year. There's commission received, as well. This $1,000 commission received is also your income. I don't see any other income over here. So we'll add this 2000 to our gross profit. Okay? Right. Now, less expenses. We'll add that later. Now, first, let's list down all the expenses, okay? So we're going in order. The first is discount allowed. So let's write discount allowed. 3,000. After discount allowed, guys, this carriage outwards. That's also your expense of 2000. Let's write that after carriage outwards, our next expense is distribution expenses of 4,000. Okay. After this, there's rent, 5,000. After rents electricity and salaries, 3,008 thousand. Electricity and salaries. Okay. After this, there's loan interest paid and admin expenses. So loan interest paid of $2,000. And lastly, admin expenses of 5,000. These are OOO expenses. Now, let's total them. 3,000 plus 2000 plus 4,000 plus 5,000 plus 3,000 plus 8,000 plus 2000 plus 5,000. So 32,000 our total expenses. This would be subtracted. So now what would we do? $90,000 gross profit plus $2,000 other income -32,000 expenses, okay? There you'll get your net profit or profit for the year. So 90,000 plus 2000 -32,000. $60,000, guys, this is our net profit. Okay? So this is the final answer of our statement of profit and loss. We made a profit of $60,000. Now we'll make the statement of financial position, but in the next video. So see you guys in the next video. Thank you very much. 52. The Statement of Financial Position: Welcome back, my genius accountants. This is a continuation of the previous video. In the previous video, we made the statement of profit and loss and calculated $60,000 net profit. Now, in this video, we are preparing the statement of financial position. So let's begin. This is based on the accounting equation. What was the accounting equation? Assets equals to capital, equity plus liabilities. So let's do that. We'll give the heading of assets and we'll begin with our non current assets. Okay, now let's see. We have two non current assets over here. You can see land and buildings and motor vehicles. So let's write that. Land and Buildings, 45,000 and motor vehicles of $15,000, our non current assets. Okay? So the total of this would be 60, I guess, yeah, $60,000. This is our non current assets. Now, let's give the other heading current assets. Normally, we start with closing inventory, but there's no closing inventory in this question, but I'm going to write it so you guys know this comes over here. Okay, then our receivables Receivables is 7,500. Let's write that 7,500. After receivables, we have bank and cash. Okay? We have bank. Our bank is 15,500 and we have our cash. Cash is $7,000. Yeah. Now, let's total our current assets. 7,500 plus 15 500 plus 7,000. So $30,000 is the total of our current assets. Okay? So our total assets are worth $90,000. Okay? This is our total assets, a very important value, okay? Our first answer. We got the first answer. So equity and liabilities must be 90,000. So let's shade this. Yeah. Next. Now we'll give the heading equity and liabilities. Let's start with equity. Okay. What's the formula for equity? Capital. Add profit, your net profit, subtract your drawings. So capital value is $20,000. We add 60,000 net profit what we calculated. We subtract our drawings of 40,000. Okay, so 80 -40 total equity is 40,000. Now, let's give the heading of liabilities. We start with our non current liabilities. There's only one, which is your long term loan. Offer 20,000, so let's just put that over here. Now give the heading of current liabilities. Right. In current liabilities, we have our accounts payable of 30,000. And anything else? No, nothing else. I don't see anything else. So let's write our payable of 30,000. Now this value must be the same with my total assets. So let's see, equity of 40,000 plus 20,000 current liabilities, sorry, non current plus 30,000 current liabilities. 90,000. It has balanced. So whatever I told you guys is perfection. You can see that our statement of financial position has balanced. So whatever we did was absolutely spot on and perfect. Sometimes you have to give yourself a pat on the back. Well done, Danish, well done. See you all in the next video. Thank you very much. 53. Capital Expenditure: Welcome back my genius accountants. In this video, you would be beginning a very, very important chapter, which is called capital and revenue expenditure. In this video, we would be covering capital expenditure. Now, you all know my technique of teaching. Whenever I teach a definition, I break down the points into smaller, smaller sub points. So I've broken down the definition into four different points. Now, these are not just points. These can be used as a checklist as well. To identify an expense, whether it's capital or revenue, you have to follow this checklist. So let's dig right in. Point number one, capital expenditures are associated with the purchase of non current assets. I'm sure all my genius accountants know what are non current assets now. I hope so. For example, if a business buys a delivery van, this is capital expenditure. They're buying a non current asset. If they buy a building, that's capital expenditure. If they buy machinery, that's capital expenditure. If they buy inventory, that's not capital expenditure. I wrote, associated with the purchase of non current assets only, inventory is your current asset. So this is not a capital expenditure. Moving on to point number two. That's very, very interesting. So associated with bringing the non current assets to the desired location of the business and putting them into operational use. Now, this definition is covered under the accounting standard called IAS 16, property plant and equipment. Okay? So it says, bringing the non current asset to the location of the business and putting it into operational use, installing it, running it, okay? So let's have a look at an example. Let's say you own a bookstore in Central London, UK. Now you are in dire need of a generator. So you decided to source it from China, okay? And the generator itself costs $100. That's the price of the generator. Now my question is the distance from China to UK is humongous. Will this generator cost me $1,000? No. What does it say? Bringing the asset to the desired location, all costs involved in bringing the generator from China to UK and installing it. All that is your capital expenditure. All that becomes part of the cost of the generator. Okay? For example, the list price before discount off the generator was $100. Okay? Trade discount offered to me was 10%. So if I multiply 1,000 by 90%. Okay? O, multiply 100 by 10%, subtract the answer from 1,000, you'll get $900. So my net price is 900. A very important cost is the A freight to London Heathrow Airport. This is very important. $600 I have to pay. The transit fees, $100 I have to pay, nonrefundable taxes, very, very important and crucial. I have to pay the UK government. Now, once the generator lands at London Heathrow airport, I have to transport it to my premises in Central London. So that will cost me $50. Now, all this from the list price right till the local transport. This is bringing the asset to the location. But if you remember, I said, it's not just bringing it to the location, it's putting it into operational use. So I invited Ingenious and I installed the generator for $100. So add everything up. Add everything up. 900, the net price plus 600 Aright, 100 transit fee, the taxes, the local transport, the installation, you'll get one $950. This is the total capital expenditure. When I mean capital expenditure, I mean the cost of the generator. Capital expenditures go to non current assets. So when I debit the generator in my books, I won't debit it with 1,000. I would debit 1,950, okay? So this is my capital expenditure. There are so many things. It's not just the price of the generator, bringing it to my premises and installing it, okay? Moving on to point number three, any expenses which increase the life of the non current assets increase its efficiency and capacity very, very important. So let's have a look at an example. Let's say you own this beautiful Ferrari. You decide to paint the car. Now think for a moment. Does painting your car increase the life of the asset? Does it increase the efficiency? Does it increase the capacity? No, no, no, no. It only gives a better appearance. It has nothing to do with the life or efficiency or capacity of the assets. So this is not a capital expense. If you change the tires, does this improve the life? No, it does not. Okay? Now, tires, if you change the ties of the car, it won't increase the life of the acid. It won't increase the efficiency because every car has limitations. When you bought the car, you were told that this car can travel at this speed at this point in time, okay? So changing the tires does nothing to the overall capacity or overall performance of the car. So this is not a capital expenditure. However, if you do a engine overhaul, you improve the engine. This would increase the horsepower. So definitely, this would increase the efficiency. So this is a capital expenditure. If you convert your car to a hybrid model, your fuel economy would get better. So this improves the efficiency. So this is a capital expense. If you install equipment in your car, which could increase the capacity. For example, if you have a motorbike, you installed a compartment at the back seat where you could bring more inventory. So that increases the capacity. That's a capital expenditure. Some people, they add a cabin behind the car used for holding inventory. That also increases the capacity. So that's your capital expenditure. Moving on to point number four, any expenses of a one off nature, that's your capital expense. Now, one off means something that happens once in a while, something that's very rare, something that's infrequent, okay? Because these capital expenses are so expensive, you can't do them all the time. You will do them once in a while. For example, if you do a major renovation, let's say you own a restaurant in a busy area, you change the entire seating area. You made the kitchen to open kitchen where the customers could have a look at what's being made, okay? You decided to add television, so the customers don't get bored. You decided to add a gym. So while the customers are waiting, they can do the time before the crime. So all these are once in a while. It's too expensive. So this is your capital expenditure. Number two, purchase of intangible assets. When you move on to your accounting studies, you'll study an accounting standard called IAS 38, intangible assets. So, let's say you own a business. Now, it's very important to make sure that someone else does not steal your name, so you will buy a legal copyright. You would buy patents. These are all intangible assets. They don't have a physical existence, yet they are something very, very crucial for your assets. So these are also capital expenditures. Number three, legal settlements. If you're facing a court case with someone, you had to pay legal charges. That's very rare. You won't have court cases every day, right? So all one off expenses are your capital expenditures, okay? Final and most important point before I conclude the class. Remember, capital expenditures are only recorded in the balance sheet. They are not recorded in the income statement. They go in the non current asset category of the balance sheet. Always remember that. From now on, if I say that a balance has been capitalized, it means it's a capital expenditure recorded in the non current assets section. It goes nowhere else, okay? I hope you understand this video. In the next video, we would have a look at revenue expenditure. Thank you very much. Have a wonderful. 54. Revenue Expenditure: Welcome back my genius. In this video, we would be covering revenue expenditure. Now, I hope you understood my previous video. In the previous video, we covered capital expenditure, so let's dig right here. This is just the vice versa, the opposite, the reverse of capital expenditure. If you remember the four points I taught you, ok? What were the four points pause the video and think point number one, associated with the purchase of non current assets. Point number two, which increased the life capacity and efficiency of the non current asset. Point number three, bringing the asset to the location of the business and installing it. Point number four, one of nature expenses. Reverse all those points, then you will come to the revenue expenditure. So let's move on to the first point. Day to day and recurring expenses, they happen frequently. They happen countless of times during the ongoing operations of a business. For example, rent rent is paid monthly, electricity paid monthly, salaries could be paid monthly or paid like quarterly, gas paid monthly, advertising, paid monthly, depreciation annually. Okay? So these are all your revenue expenditures. They happen frequently, okay? As your business is operating, doing operations, you incur expenses. So all those operating expenses are your revenue expenditures. Point number two, they do not improve or extend the life or capacity of non current assets. They are simply used for maintaining ongoing operations. For example, you own a car. In order to run the car, you have to add fuel. So this is an ongoing car used for ongoing operations. Sorry, ongoing expense used for ongoing operations. So this is revenue expenditure. Maintenance, very important. Otherwise, how would you run your car smoothly? Washing your car. So these are all expenses used for maintaining ongoing operations. These are revenue expenditures, okay? Moving on. They are short term. They're not long term like capital expenditures, okay? So they are normally incurred and consumed within a single accounting period. For example, you took services of your employees, then you paid them after the period. You use the office space, you paid rent for that. You consumed the electricity, so you paid electricity bill. You consumed gas, so you paid the government a gas bill. So all these expenditures are incurred and consumed within a single accounting period. In other words, we are incurred to support the day to day operations of a business and don't offer any long term benefits, okay? Beyond the current period. The benefits attained are very short, for example, the skills and services of your employees. That's a very short term aspect, like for a month, then you pay them for the month. So these are not long term benefits. Most important point before I conclude, Revenue expenditures are recorded in the income statement. These are all operating expenses, so they're subtracted from the gross profit before you get the net profit. All right? They don't go in the balance sheet. I hope you understood this video. I'll see you in the next video. Thank you very much. 55. Capital & Revenue Receipts: Welcome back my genius accountants. In this video, we would be covering capital and revenue receipts, not expenditure receipts. Now, understand what the word receipt means. I'm sure it's pretty obvious. Now, receipt means received. These are inflows. Expenditures are outflows. Now, I'm sure you're getting some idea. So let's dig right. So capital receipts and revenue receipts, what's the difference? We would begin with capital receipts. For example, selling non current assets. Whenever you sell a non current asset, the inflow, the cash you receive, that's a capital receipt. Oh, borrowing loans. Now, why do I say borrowing loans, borrowing liabilities? Well, they are inflows as well. When you borrow a loan, you get cash. So it's either a capital receipt or revenue receipt. Now, why is that not a revenue receipt? Because when you borrow a loan, that does not affect your profit. When you borrow a loan, your liabilities increase. They go in the balance sheet, right? That's the first reason. The second reason is loans are borrowed for long term purposes. For example, buying non current assets, investments. So they are capital receipts. Loans increase your existing resources, okay? So right. Moving on to the next point, they are not earned through the regular business operations. They are one off items, okay? They are not earned through the sale of goods. They are earned through selling your assets, okay? They are non recurring and infrequent, as I just mentioned, most important point, they affect the balance sheet. If you sell a non current asset, that decreases your non current assets. If you borrow loans, they increase your liabilities. So capital receipts do not go in your income statement, they go in the balance. Now let's have a look at the revenue receipts. For example, selling of goods. Now, this is your main source of income, something you'll do all the time, okay? The purpose of existence of your business. Why did you open your business? You sell mobile phones. So whenever you sell a mobile phone, that's your revenue receipt, okay? They are earned through the day to day operations of the business. Whenever they sell goods, that's revenue receipts. This is completely frequent. It happens all the time. It's recurring in nature. This affects the income statement. It goes in the income category under sales in the income statement. So my genius accountants, I hope you understood the difference between capital and revenue receipts. I'll see you in the next video. Thank you so much. 56. Distinguishing between Capital & Revenue Expenditure: Welcome back my genius accountants. In this video, we're going to cover something very interesting, the importance of distinguishing between capital and revenue expenditures. In other words, why is it important to treat them separately, record them separately? Very, very important. So let's have a look. Number one, the impact on profitability. Now, obviously, if you treat a capital expenditure, for example, you bought a building and you put that in the income statement, your expenses would increase drastically, and as a result, your profit would go down. Understood. On the other hand, if you treat a revenue expenditure as capital expenditure, that would inflate your profit because of the understatement of expenses. So it's very important to treat them separately so your profits are accurate. Second point, accurate forecasting. Okay? Now, if you accurately classify expenditures, this could help you in creating realistic budgets and forecasts for the future. And obviously, accurate forecasting is very, very important for accurate results. Okay? Next point, tax implications. Now, it's pretty obvious that if you treat your capital expenditure as revenue, your expenses would go up, your profit would go down, so your tax would reduce. But I'm not focusing on that. I want you to know one thing in case you didn't know before. Depreciation is a deductible allowance. Now, deductible allowance means that this reduces your tax liability, okay? Now, if a capital expenditure is treated as revenue expenditure, this means that you did not record the non current assets. You did not charge depreciation, so you wouldn't get advantage of this deductible allowance. So no benefit for this deductible allowance. Next point, investment decisions. Now, capital expenditures are extremely expensive. A business wouldn't buy that without planning. They would do extensive research. They would cover techniques such as appraisals, net present value, discounted cash flows, payback period, okay? So if you treat these expenses correctly, then all the projections that you're doing, they would be more fruitful than the other option. I hope you understood this video. See you all in the next video. Thank you very much. 57. Introduction to Accounting Concepts: Hi, guys. Welcome back. My genius accountants. In this video, we are starting a new chapter, very, very interesting and fun, very, very crucial, and it's one of the foundation stones of the entire realm of accounting. This chapter is called accounting concepts and accounting ethics. Okay? Now, there's a difference between accounting concepts and accounting ethics. Accounting concepts is the basic framework, the guidelines, how to prepare the financial statements of a business, how to report accounting to the intended parties. Okay? It provides the rules and principles how to do accounting. Ethics are the moral principles that should be abided by the accountants, okay? What type of practice should accountants do? They should be honest. They should be unbiased. And there are many moral principles what we would cover. So this is the difference between concepts and ethics. Now, let's have a look at what are the core accounting concepts. The dual aspect concept, dual aspect concept, that there are two aspects to every transaction, debit and credit. There's the business entity concept that the business and owner are two different entities, treat them separately. The money measurement concept that only monetary items would be recorded in the accounting world. Non montary items would be ignored. Materiality concept only record the important elements in accounting. Ignore the irrelevant items. There's the substance over form that the non current assets, they are more important than the legal form there's the matching concept. This is about expenses and incomes. When to record expenses and when to record incomes? How are they interrelated? The historical cost concept that when a business buys a non current asset, it would record in the cost value. What items come in the cost we would see in this concept. Consistency concept. Whatever accounting method or principle or rule is followed by the business, they should use it consistently at least for a period of time. Going concern concept that the business would continue indefinitely in the foreseeable future. Those were all the accounting concepts. Now, let's have a look at the moral principles. What are the moral principles? There's integrity, being honest and straightforward. There's confidentiality that keep all the information of accounting a secret. Don't leak them to third parties. Sorry. There's objectivity. There's professional behavior, that the accountant should maintain professionalism. There's professional competence. The accountant must possess the relevant knowledge and skills to do accounting in the most effective manner. So this was an introduction. I've made videos on all the concepts, so let's dig right in. Thank you very much. 58. The Dual Aspect Concept: Hello, and welcome back my Gene's accountants. We are starting a new playlist of accounting concepts. And in this video, we would commence the first accounting concept, which is called the dual aspect concept. And this is the basis for the double entry system. We studied this many, many, many, many, many times, so I won't spend so much time with this concept. So dual means multiple, two, and aspect means perspective or sides. So the dual aspect concept states that every transaction has at least two accounts that would be affected. One would be debited and the other would be credited. This is what the dual aspect concept states that every transaction has two equal and opposite effects on the business accounts. For each debit recorded, there is a corresponding credit of the same amount. We covered this in detail. I would suggest to go watch my dead click video that we would understand. Easily I tote the entire double entry system in steps. Then go and watch that video if you're still having problems in debit and credit. So this ensures that the accounting equation would always remain balanced. Let's look at an example, paid rent of $500 in cash. This is a transaction. Now we can see two accounts being affected. There's rent and cash. The cash is going out. The cash is going out. It's decreasing. It's an outflow. And my rent expense is increasing. So if we follow the dead clique rule, rent would go on the debit side, and cash would go on the credit side because that's decreasing. Okay? So the increase in rent expense signifies the cost that was incurred. The bull of the business increased, the costs increased while the decrease in cash represents the outflow of funds, which is why that went on the credit side. So this was the dual aspect concept. See you in the next video. Thank you very much. 59. The Business Entity Concept: Hello. Welcome back, my genius accountants. In this video, we'll be talking about the second accounting concept, which is called the business entity concept. In this concept, we would draw the line between personal and professional. So let's dig right in. Now, this is XYZ Limited. I always mention the name of this company. And this is Jack, the owner of the business. Now, as you know, a business incurs countless of transactions, for example, paid electricity, paid salaries, sold goods, bought goods, borrowed alone, okay? These are some very common transactions, and there are many, many more. Now, the owner, in his personal life, even he has countless of transactions. All my students watching this video every day, even you guys incur transactions. He had a birthday party for his son, so he paid some expenses over there. He went to the cinema with his family. He paid some bills over there. He bought a house, a very big expense. He bought a new car for his wife. Wow, what a husband and paid his personal income tax. Now my question is, these are countless of transactions. Do all these transactions go in the accounting records? That's my question. Pause the video and think about it. Would we record only the business transactions, jack transactions or both transactions? The answer to the question is very simple. We do not record the personal transactions of the owner. We only record the business transactions. Always remember, okay? This is the business entity concept. Now, the business entity concept is a fundamental principle that states a business and the owner are separate entities. They are separate individuals. Now, because they are separate, we should treat them separate as well. We should completely ignore the transactions of the owner. We only care about the business. Accounting is only about the business, okay? So this means that the financial transactions of the business must be kept separate from the personal transactions of the owner. This helps in accurate financial reporting and decision making. I hope you guys understood the business entity concept. See you in the next video. Thank you very much. 60. The Money Measurement Concept: Hello, and welcome back my genius accountants. In this video, we will be talking about the third accounting concept, which is called the money measurement concept. Which means cash is king. Now let's have a look at this example. XYZ Limited, a business. Now, a business, they incur countless of financial transactions. Whatever we studied so far, you saw so many financial transactions. There's so many financial aspects that affect the success of a business. There's so many transactions like cash sales, cash purchases, paid rent with cash, paid salaries with cash, port assets with cash, paid off assets with cash. These are all financial transactions. But what if I tell you? There are also so many non financial items that could affect the success of a business. For instance, the employee morale, customer satisfaction, skills of employees, leadership qualities. These are all so, so important aspects that cannot be measured in money. They're non monetary but my question to you guys is, have you ever seen all these items in the income statement and balance sheet? Have you ever seen these anywhere in the realm of accounting? No. That's because the money measurement concept states that a business should only record transactions that can be expressed in monetary terms. We'll completely ignore non financial or non monetary items. Accounting is only about the financial aspect of a business. We don't care about the non financial aspect, because that cannot be measured in money. So how can we put them in our accounting records? Okay? In other words, it focuses on quantifiable financial information, excluding all qualitative or non monetary aspects. So, guys, this was the money measurement concept. See you in the next video. Thank you very much. 61. The Materiality Concept: Hello, and welcome back my genius accountants. In this video, we would shed light on another concept, a very important concept, which is called materiality concept. This concept is so, so important in your later accounting studies. If you pursue audit as a career, materiality is so important. So what's materiality, size does matter. Now, let's have a look at a small example I prepared for you, XYZ Limited. Let's say you approached XYZ Limited because you want to invest your money. You want to buy shares or stocks in this company. So if you're investing in a company, you have to see or assess the report card. What is the report card? Their report card is cool financial statements. Now, when he was scrutinizing the financial statements, you noticed their sales were $10 million. Wow. Clown away. Their gross profit was $4 million. Wow. However, you noticed something peculiar. Coke of $1 was also mentioned in the financial statement. Now, I want to ask you a question. Will this coke of $1 will this affect your investment decision? Would you decide to withdraw your investment because of this value because of this transaction? No. So this is what the materiality concept is all about. It's about recording the important transactions only. Okay? In this case, the $1 coke is an extremely irrelevant item. It should be ignored completely. Okay? Now, you guys might be wondering something very important. I told you to record the important transactions only. So you might be wondering, how do we know what is important and what's unimportant? How do we know that? Well, the answer to this question is very simple. Okay? Materiality means that only information that's significant enough to influence the decisions of someone using the financial statements. This is what material means. This is what important is. Okay? If you think there's a value which could significantly affect someone's economic decision, someone's investment decision in the company, that's material. In this case, the $1 coke was irrelevant that wouldn't affect someone's decision to invest in the company. Okay? It's about focusing on the big picture, the items that truly matter, the items that truly impact the company's financial health and performance. Okay? So this is what materiality was. See you in the next video. Thank you very much. 62. The Matching Concept: Hello, my genius accountants. Welcome back to our next video. In this video, we would cover the most complicated accounting concept, which is called the matching concept. Now, students find this concept the most troublesome and the most difficult. So I will try to ease all complexity, so don't worry. Now, if I could summarize the matching concept in one sentence, so that would be that timing is everything. Timing is the most essential component of this concept. Let's dig right in. There are two crucial elements expenses and revenue. So expenses are the costs to run the business, for example, electricity, salaries, gas. Okay, those are old expenses to run the business. Revenues are the incomes earned from the business, from the co activity of the business. Now, there's a relation between both these elements. Expenses are incurred to earn revenue. The only purpose of paying expenses is to earn income. If you own a school, why do you pay your teachers? Because you love them? No, you pay your teachers so that students could come. You can earn school fees or earn income. So expenses are incurred to earn revenue and revenues are earned to pay expenses. All the expenses, how are they managed from the revenues from the income of the business? So expenses and revenues are interrelated. They are interlinked, okay? So it's very, very important to make sure that expenses are recorded in the same period as the revenues they help generate. Okay, that is very, very important. This is the matching concept. The timing of the expenses must match with the income it helps to generate. So let's have a look at some examples I prepared for you all. Number one, commissions, okay? So commissions are given to salespersons. When they generate a sale, they are given a bonus. So that is called a commission. So a company pays its sales staff a commission of 10% on sales. If a salesperson makes a sale worth $10,000 in December, and if the commission is paid in January, that would be recorded in December because the sale was generated in December, so the related expense must also be recorded in December. We don't care when we pay the expense. The expense must match with the income. Okay? This is the matching concept. Next, advertising. Now, a company launches a six month advertising campaign commencing from December 2023, costing $20,000. So December 23, January 24, March 24, April 24, May 24, up to June 2024. These are six months. This is a marketing campaign. Now, even though some of these expenses, they are paid from January, February, March, April. But these expenses would be recorded in December because that is the revenue period, okay? So we have to make sure that whatever expenses are paid, they must relate with the income period, okay, regardless of the fact that whenever the expenses are paid, we don't care about that. We don't mind. What is that when does the income cycle begin? That's where the expense must be recorded. Let's have a look at a more technical example, depreciation. We will study this later on, okay? We'll cover this in detail. So consider a company buys machinery for $100,000 expected to last ten years. So if I calculate the depreciation from the straight line method, we could divide 100,000 by ten. So the machinery will lose value by $10,000 every year. Okay. Now, what the business could do, they could record this entire depreciation expense of $100,000 10,000 times ten, the entire depreciation expense in the current year. But that's not what they're going to do. They will spread the cost over ten years because this machinery would generate revenue for ten years. So the depreciation should be recorded in each year separately. I can't write all of that together in the first year because the machinery will generate revenue in the consecutive years. This is the matching concept. Okay, next example, bad debt. Now, we'll cover this chapter in more detail in our successive chapters after this playlist. So suppose XYZ Limited sold goods on credit to Mark on 1 December 23 with an agreement to pay within 60 days. So the sale was done on first of December and XYZ Limited expected to receive payment on 1 February, okay? On 1 February. However, this person, Mark, he ran away. He fled the country, okay? Mark fled the country and failed to repay us. So this bad debt occurred on 1 February. Now, even though this expense incurred on 1 February, the bad debt would be recorded at the time of the sale, which is 2023. Okay? This is the matching concept that we don't care when expenses are paid. They must be recorded in that period where the income was generated. As I told you at the beginning of this video, that expenses and incomes are interrelated, right? So the closing remarks before I move to the closing remarks, there's one more example of rent. Let's have a look at this example. John paid the rent of December on 2 February. Now, even though he paid this rent on 2 February, this rental expense relates to the period of December 2023. So this rental expense would not be recorded on 2 February, rather, it would be recorded in December 2023, because that's when the income was supposed to be generated. This rent expense was of December, okay? John paid us in February, even though he was supposed to pay us in December. So this rent would be recorded for the month of December. Okay? Expenses and incomes are related. They must be recorded in the same period. Now, the closing remarks, expenses are recorded in the same period as the related revenues, regardless when the payment was actually made. We don't care when the payment was made. What we care about the revenue period. So that's the matching concept, see you in the next video. Thank you very much. 63. The Prudence Concept: Hello, my genius accountants. Welcome back to the next video. In this video, we would be covering another very interesting accounting concept, which is known as the Prudence concept, which means better safe than sorry. Now, in life, what our parents always taught us, our coaches, our mentors, our elder brothers. What were we always taught? That you know what always be positive in life, okay? Always be optimistic in life. But you guys might be very shocked to hear what accounting teaches us. Accounting tells us that always be negative in life. Assume the worst, prepare for the worst. Okay? This is the prudence concept in a nutshell. Now, Pruden concept is a fundamental accounting principle that guides how businesses should approach uncertainty, okay? And how to approach potential anticipated losses when preparing the financial statements. So all future anticipated losses, they must be recorded. They must be accounted for as soon as they're foreseeable. If the business is expecting to incur a loss in the near future, they must record it now. Don't wait for the loss to happen. Record it now in the present. Okay? This is the prudence concept. It only applies to losses. Gains, however, they should only be recorded when they are certain, okay? When it's actually incurred. So the Prudence concept only applies to losses, not gains. Now, let's have a look at some examples like provision for doubtful debts, okay? So when a business sells goods on credit, it should anticipate that not all customers will be able to pay back their debts. There's always a margin for error. Some receivables might struggle to pay back due to unforeseen circumstances, due to calamities, maybe communication problems or maybe due to their past record, okay? So what the business should do, create a provision for doubtful debt. Assume the worst, okay? Like, create a percentage. How much percent do you think that your receivables would not pay you? That's called the provision for doubtful debts, and this is in line with the Prudence concept, okay? Moving on provision for depreciation. This is also a very important concept and in line with the prudence concept. So the prudence concept advises that businesses should not overstate their assets. They will create a provision for depreciation, okay? Because as a business consumes non current assets, they lose their value, okay? They lose their function ability. So that loss in value, that reduction is called depreciation. So a business should anticipate those losses, record it now in their financial statements, okay? So that the non current assets, they're not inflated, they're not overstated, okay? Another example is the valuation of inventory. We'll study this in detail, okay? So inventory is supposed to be valued at the lower of two items, the cost and the net utilizable value. Okay? We'll cover this in detail. Don't worry. So when a business discovers that, you know, the inventory is going to fall below the cost, they should immediately make an adjustment, record the inventory to the net realizable value. We'll cover this in detail. I'm repeating it. Do not worry, okay? So these were examples of the Prudence concept. I'll see you in the next video. Thank you very much. 64. The Substance over Form Concept: Come back my genius accountants. In this video, we would shed light on a very interesting concept, which is called the substance over form concept. Now, remember, don't judge a book by its cover. Now, let's have a look at this concept with an example I prepared for you, a small scenario. So XYZ Limited wants to buy a car. Now here's something different. They approach a bank, okay? They're interested in car finance, or, which is also known as leasing or hire purchase. So in this concept of lease, what normally happens that the business would pay a very small down payment to the bank, and every month they'll pay installments for whatever number of years agreed by the bank. Upon the last installment, that's when the bank would transfer the ownership to the company. So this is the entire policy of car financing. So the bank eventually agreed, fine. Now, what was their policy? It's a five year installment plan, which is going to cost XYZ $100 per month. Okay? So that's about 60 payments, $100 per month for five years, and the ownership would be transferred on the last payment, okay? So this is the entire policy of car financing. Now, I want to ask a small question to you guys. Who owns the car? Okay? Who actually owns the car? And who will charge the depreciation of the car. These are very, very important questions. Now, when XYZ Limited is paying installments, technically, the ownership of the car is with the bank. They only have the possession of the car. However, the substance over form concept states that the substance is greater than the legal form. The substance is the actual tangible physical, non current asset, the car, and the legal form is the legal paperwork, which belongs to the bank. But accounting says the substance over form concept says we don't care about that. If we have the substance with us, we have the car with us, so that's greater than the legalities. So we'll assume the company owns the car. Okay? Now, this is a pretty reasonable concept. Later on, we'll discuss depreciation. Now, if the company is consuming using the car roughly, why should the bank charge depreciation? Isn't it? The company is using the car, so they should charge depreciation. So, in this case, the company XYZ Limited, they own the car. Okay. Now, let's have a look at the theory. The substance over form concept states that financial statements should reflect the true economic substance, even if it differs from the legal structure. The legal structure, the legalities are completely different technically, and it's true. The bank owns the car. Only on the last installment, XYZ limited would own the car. But accounting says we don't care. The substance is greater than the form. In simpler terms, it's about looking beyond the legal paperwork to understand the actual impact of a transaction. Okay. I hope you understand this concept. See you in the next video. Thank 65. The Consistency Concept: Hello, my genius accountant, so I'll come back to the next video. In this video, we would discuss a concept which is called the consistency concept. Remember, uniformity, consistency is the key. Okay. Let's dig right in. So consistency concept is a fundamental accounting principle that requires a business to use the same accounting methods and procedures for at least one period, okay? Now, it's very, very important for business to use principles consistently. Otherwise, this could create inaccurate accounting records, create confusion, create disorder. So it's very, very important to use the same accounting principles for at least one accounting period, okay? This ensures that financial statements of different periods are comparable like 2021, financial statements could be compared with 2022. If I change everything after every two months, it would be very difficult to maintain and to compare, okay? Let's have a look at some examples, inventory valuation. Now, there are different methods of inventory valuation. There's the first in first out method, the last in first out method, the weighted average method. So if a business uses one method, stick to that method. If it's 54, stick with 54. If it's weighted average, stick with the weighted average method. Depreciation. Even in depreciation, there are many methods we'll discuss the straight line method, the reducing balance method. So if a business uses straight line, stick with straight line. Do not change your method, okay? So, guys, this was the consistency concept. Now, you might be wondering, what if there are some special circumstances where the business has to change their policies? If there's a takeover, another company took over your company. If there's a change in the accounting standards or even if the management seems that it's necessary. We have to change the counting methods due to some technical reasons. The business can do that, but it should maintain proper disclosures. The nature of the circumstances must be disclosed properly and effectively, okay? Right. See you all in the next video. Thank you very much. 66. The Going Concern Concept: Come back, my genius accountants. We are now on the last accounting concept, which is called the Going concern concept, which means born to last. The business is born to last. Now, the Going concern concept is a fundamental accounting principle that assumes a business will continue to operate for the rest of its life. Or at least 12 months, the foreseeable future. It will operate indefinitely. Oh, for a long time. The business has sufficient resources to survive. The business has the capacity to do well, to survive, to fulfill all its financial obligations without the threat of liquidation, okay? So this is the going concern concept. Now, let's look at an example of depreciation. Let's assume in 2010, the business had a car, and depreciation would be $1,000 for seven years, meaning from 2010 right up till 2016, that's seven years. Now, what the business could do they could charge $7,000 in 2010. All the depreciation in the first year. But remember, this is not in line with the matching concept as well because this car would generate revenues for the next seven years. So the depreciation expense should be recorded in each year separately. That's the matching concept. But even as per the going concern concept, they say that the depreciation expense should be spread out for the next seven years. The business will survive. The business will be there for a very long time. They can pay this depreciation for the next seven years, which is why record this in each year separately, okay? The business is not going anywhere. It will stay there forever, so don't worry. So instead of expensing the entire cost of an asset in the S purchased, it's spread throughout several years. This is the matching concept what we saw in the previous videos. Now, this makes sense, okay? That the cost of the asset, the depreciation would be spread throughout the useful life, okay? Because it would generate revenue for many, many, many years. The business will survive for many, many, many years, okay? So, this was one example. Let's have a look at another example. Why do we segregate liabilities between current and non current? Current liabilities are payable up to 12 months and non current liabilities are payable after more than 12 months. And the payment deadline could be five years, ten years or 15 years. This segregation between current and non current is also in line with the going concern concept, okay? Now, let's have a look at the segregation. This segregation shows that a business, they can easily meet their short term obligations, their current liabilities. They can do that easily. They have the resources to cover all their short term debt. So at least they can operate for a year. This is the going concern concept. Secondly, it also shows long term stability. When a business borrows a long term loan, the deadline is massive, five years, ten years, 15 years. And if they borrow debenches from their shareholders, the time frame is even longer up to 20 years or even more. So this shows that the business will survive for all these years. They can easily meet their obligations for a very, very long time. Interest obligations. This is very similar with the second point. When the business borrows loans, a long term loan, what I told you for up to 20 years, they have to pay interest for 20 years, okay? But the very fact that they can pay the interest for many, many years, they have the sufficient income to meet all the interest obligations. This is the going concern concept that the business will survive forever for an indefinite period of time, they have the resources, they have the capacity to meet all their short term obligations, the interest obligations, and even long term obligations. Next, accrued rent. Now, accrued rent refers to that portion of your expense that you have not yet paid. So that's getting accumulated. That's getting accrued. You owe this expense to your landlord. Now, let's have a look at an example. Now, let's assume in January 2021, XYZ Limited took this building on rent from Christopher. So Christopher is the landlord, and the tenant is XYZ Limited. And the policy was $100 per month. So this would be 12 payments from January right till December. But the business made a mistake. They only managed to pay the rent till September. So October, November, December, $3,000 was unpaid. This is the accrued portion. Now, when did the business pay the $3,000 in March 2022. So almost after six months, they paid the remaining rent. Now, even though this rent was paid in the month of March, the business would record this in 2021, okay? Because the Guin concern concept says that this is not a problem at all. The business will pay the accrued rent. It's not a problem for them. They have all the capacity to pay. They have the ability to pay. It's not a problem. So this accrued rent would be recorded in 2021, okay, instead of 2022. This is also in line with the matching concept because this rent of $3,000 does not relate to 2022. It's for the period 2021. So this is where this accrued rent would be recorded. I hope you guys understood the going consent concept. See you in the next video. Thank you very much. 67. Accounting Ethics: Welcome back genius accountants. In this video, we would be covering accounting ethics, okay? Balancing profit with principles. Okay? So accounting ethics refer to the model guidelines. The model principles, the accountant must follow when doing the accounting of the business. So let's see what are all these principles. Number one is integrity. Now, integrity means being honest, straightforward in all your business and professional relationships, okay? And don't even associate yourself with any information that's false or misleading. For example, an accountant discovers an error in the financial statement that overstates the company's revenue. Now, acting with integrity, the accountant must report the error to the management. He mustn't override this important matter, okay? The second principle is confidentiality, respecting the privacy of the business information, not disclosing it to third parties or family and friends, okay? An accountant works for a company, he learns about a potential merger. Now, he must not share this information with others. This is confidentiality. Objectivity means not allowing biasness, conflict of interest or undue influence to override the professional or business judgments. Okay, for example, an accountant is asked to audit the financial statements of a company where close friend is the CFO. So to maintain objectivity, the accountant should disclose this, and he should withdraw himself from the audit. This is very, very important. Otherwise, the judgment he makes would not be professional. It would be with biasness. He could protect the interest of his friend's company. Okay? Next, professional behavior, the accountant must always maintain professionalism. He must not engage himself with any action that could discredit the accounting profession. For example, an accountant is offered a bribe. Now, upholding the professional behavior, he must refuse the bride straightaway and report this to the management. Lastly, professional competence and UK. The accountant must have you must possess the required skills and competencies and continuously upgrade his skill set. For example, an accountant regularly attends training sessions and courses to stay up to date with all the latest accounting standards and practices, okay? So these were all the accounting ethics. See you in the next video. Thank you so much.