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0:00
would you like to be an expert in Accounting in less than five hours well if that's the case then just watch this video a little bit every day and you will be an expert in accounting by the time you finish just sit back and relax and enjoy learning like you're watching your favorite education Channel and by the time you finish you will have everything you need my name is Mark smolen I'm the founder and CEO of worldwide QuickBooks I personally guarantee
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you the clearest possible explanation for every important accounting idea that a small business owner could need or an accounting student could want to learn I answer all questions immediately if you leave them in the comments section below and I promise to get back to you quickly and give you the best answer I can I love hearing from all of you and I know you'll enjoy this video [Music]
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let's start off by saying that everybody learns differently and everybody listens differently too that's why YouTube gives you the ability to change the volume right here in front of the video and you should also know you can click on the Cog wheel and adjust the playback speed to your listening pleasure this way you can make it faster if you think I'm speaking too slowly or you could slow it down if you think I'm speaking too quickly and most importantly you need to
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know how to navigate this video the description field has the table of contents and you can get to the table of contents by clicking the show more button that's right under the video at the end of the description field if you click show more the rest of the description field will open up and it will reveal the table of contents that'll give you the ability to click on the time index of the chapter you want and this way the video will jump right to the place that you want to watch
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so I thank you very much for watching and I hope you will click like And subscribe and without further delay I now present an introduction to accounting part one has only one chapter introduction to accounting chapter one what is accounting what is accounting if you can answer that question right at the beginning then everything we do here will make perfect sense accounting is the way that companies record summarize organize and present financial
3:11
information let's look at that again it's the way companies record summarize organize and present financial information now to explain this clearly let's first focus on the recording part we record transactions right now into the computer the same way that we recorded them on paper spreadsheets in the days before the computer and then once all of the transactions are properly recorded we would simply Summarize each area of accounting and financial data
3:52
obviously the summary numbers were very important we would then have to organize these totals onto meaningful documents that would reveal how well the company is operating this is an example of a profit and loss it shows how well the business is operating during a particular period of time
4:15
of course we would have to organize all the financial information and this is an example of another financial statement called the balance sheet it shows what a company has compared to what a company owes this is a very abbreviated version of a balance sheet but it does give you an example of the financial position of a company at a specific Moment In Time so then the question is why do we do accounting that's where the presenting comes in
4:51
we do accounting so that we can present our financial statements to people or organizations who need to know what's going on with this business and you may well ask who needs to see that information well obviously the owners and the managers of the company need to see how well the company is doing and need to see the financial position at different periods of time and of course everybody in this country needs to report their numbers at some point to the IRS so
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to summarize accounting is recording summarizing organizing and presenting financial information
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and exactly how do we get there well we get there by learning the ideas of debits and credits now come on it's easy and fun if you try this video a little bit every day just patiently watch a little bit each day and you will be amazed how easy and fun it is to learn accounting part two the story of debits and credits chapter 2 what are assets
6:19
the only reason why people think that the accounting words sound complicated is because the words are used in everyday life but when we use these words we're not using them the same way that we use them in accounting we're using them as a metaphor for the way we would use it normally in accounting for example the word asset we all know the metaphor it means something good or helpful for example you might say she's an asset to the team however the real meaning of the word asset
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is anything a business owns that has value now most assets are tangible assets because you can physically touch them like a car or a Furniture item or a bank account but there are other types of assets that a company could own like copyrights and patents and things that you can't physically touch but things the company did pay for that they own that has value that will help the company earn
7:34
money into the future so you see asset is an idea it's something you can own that has value whether you can touch the item or not chapter three what are liabilities we even have the same issue with the word liability the word liability is usually used as a metaphor it usually means something that's a hindrance or something that would work against you but the real meaning of the word liability is money or some kind of obligation the company must pay give or do in the future
8:18
so if the company took a small business loan that would be an example of a liability that you would have to record in the company books and Records if the company had a mortgage for a house that the company owned or a building that the company owned that would also be a liability of the company
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what if the company took a car loan well we know the car would be the asset but the loan would be the liability and of course if the company had a company credit card or let's say the owner had a company credit card the company credit card would be on the books and records as a liability just like the bank account would be on the books and records as an asset
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but remember a liability can also be a future obligation to do something for example if a customer paid in advance before getting a product or a service between the moment we got the money and the moment we give the product or service our company books and records must reflect that we have this liability a future obligation to pay give or do something
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you probably already know that the three most important accounting words that we learn at the beginning are assets liabilities and owner's equity but I think owner's equity deserves its own special video because all the other ideas of accounting come from the idea of owner's equity so don't forget to tune in to the next video what is owner's equity a conceptual overview I thank you for listening to my definition of these words I know they're going to help you
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chapter 4 what is owner's equity the textbook definition of owner's equity is the amount of ownership rights or ownership claim that someone has in an asset or even an entire business in accounting we can measure this in dollar amounts the ideas are common sense and we deal with them all the time every day any object or business can be owned by one or more people and the idea is that there must be fairness or equality regarding the ownership
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the textbook definition of owner's equity is the amount of ownership rights or ownership claim that someone has in an asset or even an entire business in accounting we can measure this in dollar amounts the ideas are common sense and we deal with them all the time every day
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any object or business can be owned by one or more people and the idea is that there must be fairness or equality regarding the ownership
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the idea is to share the value in a fair and equal way when there's more than one person that owns something so the accounting equation was derived by measuring the value of something like a car or a house or a company all the assets of a company together have a value that you can measure and the accounting equation created the idea of owner's equity when we assert that the value of these assets must be equal to who has a claim to the assets so if there's only one owner the
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owner owns the entire ownership equity and owns the entire asset but if there are several owners we need a fair way to measure how much ownership claim or ownership rights is in the asset and how much each owner is entitled to have or use so let's start with a simple example let's imagine that Sharon and Sally buy a car together now if the car costs a thousand dollars and Sally only gives 600 towards the purchase price and Sharon pays the other 400 what would the ownership
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structure look like well very simply put Sally has 60 percent ownership claim or ownership rights in the car and Sharon has 40 percent ownership claim or ownership rights in that very same car so we could say that the car is equal to the value of who owns the car Sally owns 60 Sharon owns 40 and we could say that Sally has 60 owner's equity in the car and Sharon only has 40 percent owner's equity in the car and you will notice that you know more about owner's equity than you
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realize for example question one can Sally tell Sharon that Sharon cannot use the car of course not you know from your life experience that if you bought 40 of something and someone else owns sixty percent you can still use it and the person who paid more can't tell you that you could never use it so that idea of owner's equity you already have but what about this question if they agree that
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they must paint the car only one color they're not going to paint 60 percent of the car one color and forty percent of the car or the other color they've already agreed they have to paint it only one color should it be the color that Sharon wants or should it be the color that Sally wants well common sense says from your own life experience if it's an either or question about an asset that you share the one that sacrificed more contributed more and paid more
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is the one that gets the either or question settled in their favor so when it comes to painting the car one color Sally would get the color that she wants we all feel that's fair
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now the car in that previous example was a metaphor for an entire company in other words all the assets together of one business can be owned jointly in the same way that Sally and Sharon share the car Sally could be a 60 owner of an entire business Sharon could be a 40 owner of that very same business but when it comes to an either or question Sally would get what she wants but Sally can't tell Sharon that she cannot participate so these ideas about owner's
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equity come from common sense and fairness and we experience them in our everyday life
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now this second example will make it clear how owner's equity relates to the fundamental accounting equation let's imagine you want to buy a house and the value of the house costs a hundred thousand dollars and of course we all know the house is an asset well in order to buy the house you would have to come up with a certain down payment from your own personal pocket and you would have to take a mortgage for the rest of the money to buy the house so you could say the value
16:33
of the house which is the asset is equal to the liability that you owe for the house which is the mortgage and the down payment that you put in from your pocket which is the equity that you invested yourself so this is the same equation as it was with Sharon and Sally but in this case we have another type of claim against the value of the house the mortgage is a debt claim not an ownership claim like owner's equity the way we were talking about Sharon and Sally before
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but a debt claim is a certain type of claim against the rights and the usage and the ownership of the asset so we know very well that if you had a restrictive mortgage the bank has the right to tell you certain things but the bank does not have the right to have their administrators come to your house at two o'clock in the morning and have a party because that's not the type of ownership claim that they have and we've experienced both of
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these types of claims in our lives so we already have some sense on how they work
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now clearly in this example the house is a metaphor for an entire business and what we've just derived right here in this video is the fundamental accounting equation the assets of a house or an entire business must always be equal to the liabilities plus the owner's equity of that business and in this case the hundred thousand dollar house is equal to the eighty thousand dollar mortgage plus the twenty thousand dollar down payment that came from the owner's pocket
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so we're going to put it up here as the fundamental accounting equation and what you're going to see is that the accounting equation will always stay equal after each transaction
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for example let's imagine we pay five thousand dollars towards the mortgage for the purposes of decreasing the mortgage well if we pay five thousand towards the mortgage the mortgage will decrease by five thousand but that 5000 did not come out of thin air that 5000 came from the owner's pocket it means the owner took more of their personal money and put it into the house if you take your personal money and you put it into an asset by investing in that asset or that
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business you then have more owner's equity in that asset or that business so if we pay the mortgage five thousand the mortgage balance goes down but the owner's equity which is the amount we put in from our personal pocket will increase so the value of the house stays the same it's still equal to a hundred thousand but now the balance of the mortgage has decreased to 75 000 but on the other hand the total that we've invested in the house is now 25 000. the 20 000 was the down
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payment and the additional five thousand went to pay the mortgage so that we could keep the house
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now I've updated the balances and let's try a second example let's imagine that we invest ten thousand dollars to add a room to the house well if you pay ten thousand more for physically more house than the value of the house is going to increase by ten thousand but of course that money did not come from the bank that money is more money that we took from our personal pocket and put into the house therefore the amount of owner's equity that we put into the house increases
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the new value of the house is about a hundred and ten thousand dollars because we bought it for a hundred thousand and added a ten thousand dollar room but the amount prior to this that we had put into the house was twenty five thousand we now put another ten thousand dollars of our personal money into the house so the total that we've taken from our personal pocket and put into the house at this
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point is now thirty five thousand dollars and because we paid for the room the balance of the mortgage didn't change which means the accounting equation stays equal after each transaction
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now let's apply this idea to an entire company we're going to imagine that the house was a metaphor for all the assets together of a company and let's imagine we're going to measure these transactions and record them in the fundamental accounting equation let's imagine that this company is starting out with ten thousand dollars in cash starting out with twenty thousand dollars of equipment that they paid for and starting out with
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five thousand dollars worth of cars now let's also Imagine That in order to own some of these assets the company had to take a small bank loan and if the bank loan only covered some of the cost of the assets that means that the rest of the money for the assets must have come from the owner's pocket so we're starting our little exercise with the assets on the left being equal to the liabilities and owner's equity on the right and this company's accounting
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equation is equal at the beginning and it will stay equal after each transaction
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let's imagine the company buys another car for three thousand dollars cash well if we paid cash then the amount of cash the company has goes down but if we bought a car the amount of car or the money value of the cars the company has will increase so in this case the new balance of cash after this transaction is seven thousand but the new balance of the cars that we have is now 8 000 and of course all the other numbers in the equation
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did not change from this first transaction so those balances will stay the same and you will notice the equation stays equal after this transaction now here's an interesting one let's imagine the owner takes five thousand dollars of equipment that they were only using at home and brings that to the business to be used only for the business well in that case the business will have five thousand dollars more worth of equipment but on the other hand the business or the owner
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has five thousand dollars more of owner's equity in the business because the owner just took more asset value from their personal pocket and put it into the business the new value or the new balance of the equipment is now twenty five thousand and now the new Total that the owner invested is twenty five thousand and of course because none of the other numbers changed for this particular transaction the accounting equation stays equal after each transaction
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now let's do one more for good measure let's pay 2 000 to decrease the bank loan well of course if we pay to decrease the bank loan we're paying money so our cash will go down by two thousand but because the reason we're paying the money is to decrease a bank loan the bank loan will also go down by two thousand the new amount of cash we have is only five thousand but the new amount that we owe to the bank is down to thirteen thousand and again because
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none of the other numbers changed during this transaction the accounting equation stays equal
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after five the origin of debits and credits we learned in the previous video that the assets of a company must be equal to the liabilities plus the owner's equity of that company and we also learned that after each transaction the equation must stay equal but in the previous video we recorded the transactions directly under the item name as if we were adding them up and down in one column the correct way to record transactions when we study accounting at the beginning is put
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them in things that look like this these are the same numbers and the same asset balance is on the left these are the same liabilities and owner's equity balances on the right and it is still the case that the assets equal the liabilities except now the numbers are in their proper position inside something called a t account now a t account looks like the letter T hence the term and like everything else in the physical Universe a t account has a left side and a right side now
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here's where the word debit and credit come into play the word debit simply means left side the original meaning of the word debit comes from Latin and all it means is left or left side and of course the original meaning of the word credit comes from Latin and it means right side or right hand side or whatever you want to call it that's all it means all the other times you have used or heard those words spoken they were being used as a metaphor from the original meaning
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from basic accounting now here's what makes it challenging sometimes we put the positive numbers on the debit side but if it's a different type of account in a different accounting category then instead we're going to put the positive numbers on the right side the credit side and of course depending on the type of account we might need to put the negative numbers on the debit side which is the left side but again a different type of account in a different
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category would have the num negative numbers listed on the right side the credit side so
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we're going to record the same transactions as before and they're going to be recorded in the same items with the same positive and negative numbers that we put before the only difference is the numbers will be on the debit side and credit side instead of having a plus or minus in front of them the most helpful way to think of the relationship between our fundamental accounting equation and the idea of debits and credits is as follows assets were presented in
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this equation on the left side so you could think of them as normally being on the left side which means they would normally have a debit side balance and in the less frequent occasion where you have to put a minus to an asset you would put that on the credit side of that asset's t account and of course for liabilities and Equity the idea is the same but the exact opposite since they're listed on the right side of our accounting equation we could say that
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they normally have credit side balances and in the rare occasion where we have to put a minus to one of these we would put that on the debit side of that liability or that Equity account
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and this system will work perfectly so that after each transaction the accounting equation will stay equal but only if after each transaction the debits equal the credits that's the reason why you have to make sure that debits equal the credits because in the system that you're looking at in this diagram it will make it so that the fundamental accounting equation stays equal after each transaction
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now we'll do the same transactions as before except every transaction will change two accounts one will be debit the other will be credit and the result will be exactly as it was before
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now just like before we're starting with a total of 35 000 in debit and starting with a total of 35 000 in credit because the assets on the left are thirty five thousand and the liabilities plus Equity are a total of thirty five thousand just like they were at the beginning of the previous videos transaction set now transaction a paid 3 000 cash for a new car now which two accounts do you think would change well if we paid cash cash will change and we probably have less
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cash if we paid so cash will be minus and since cash is an asset the diagram tells us that we have to put that 3000 as a minus to cash on the credit side the right side of the cash account but you can't make a credit without a debit now the transaction says the other account is the car and Carr is an asset and we have more car as a result so if car is an asset and we have more the diagram says we put the Plus on the debit side so for transaction a the answer is cash
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credit and card debit three thousand and the fundamental accounting equation stays equal
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now let's try transaction B the owner invested five thousand of equipment from his home to his business well we did this exact transaction in the previous video where equipment went up and the amount that this t account measures as the owner's investment in the company also went up because the owner invested more we know that equipment is an asset and if we have plus to an asset the diagram tells us that we put that on the debit side and if equipment is debit and the transaction
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says the owner's investment is the other account then the other account must be credit
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the owner's investment is credit because the owner has more equity in the company because she or he invested more value in the form of the asset equipment
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transaction C is one that we also did in the previous video paid two thousand dollars to decrease the bank loan well of course if we paid cash cash has less and of course if we paid down the bank loan the bank loan has less well cash is an asset and the diagram says if the asset has less we put that money amount on the credit side so therefore bank loan must be debit in this transaction and you can see that bank loan is a liability and we know if we pay
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to decrease the bank loan that the liability should be debit the way that we just put here
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transaction d sold four thousand of equipment for cash now of course this type of transaction is rare because we're not really in the business of selling equipment but if we sold equipment and we got cash it seems to me that equipment would go down because we sold some and cash would go up because we just got some cash they are both assets so if cash goes up cash should be debit and if
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equipment goes down equipment should be credit so just to see that again in slow motion the answer to D is equipment credit because we have less equipment and cash debit because we have more cash
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transaction e owner took home a car that costs one thousand well we had something like this in the previous video or at least I think we did first of all if we took home a car this t account is representing the businesses money amount of car not the owner the business is a separate entity and it is the businesses T accounts that we're looking at so the business has less car and car is an asset and it's decreasing and if the owner is taking asset value out of the company that means
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they invested less so car must be credit because the business has less car and car is an asset and car is minus so car will be credit and if car is credit the other account owner's investment must be debit because the owner has less investment in the company because they took out some asset
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transaction F borrowed seven thousand more from the bank seven thousand more cash that is so cash will go up because we have more cash but on the other hand we owe more to the bank and this t account represents what we owe so
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cash is an asset and because we have more cash and cash is plus cash is debit if cash is debit then the other account in the transaction the bank loan must be Credit Now does it make sense to credit bank loan well the bank loan is increasing and a liability that's increasing gets a credit so bank loan must be credit for transaction f for the seven thousand therefore cash must be debit
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and finally transaction G borrowed six thousand more from the bank to buy a new car well we know from a moment ago if the bank loan goes up that's a liability that's plus so bank loan will be credit and if we have more car and car is an asset car will be debit so six thousand credit the bank loan because we borrowed six thousand more from the bank and debit card six thousand because we just got six thousand dollars more of a car this is the idea of
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debits and credits it comes from the fundamental accounting equation and now that we're done we're supposed to do what's called foot every account that means take all the positive and negative numbers in each account and put them together and whatever remains shows up as the ending balance if the positive numbers for assets are more that means you had more debit than credit and you wind
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up with a debit balance so if you did the math yourself you will see cash has a debit balance of Sixteen thousand if you take the equipment account and put all the positive and numbers together put positive and negative numbers together you will see that they are left over with positive twenty one thousand and since equipment is an asset a positive balance goes on the debit side same thing with car if you put everything together you'll see that during this exercise Carr had 13
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000 more debits than it did credits so it finishes with a thirteen thousand dollar balance how much do we owe the bank at the end well we started with fit with fifteen thousand and twice borrowed more and that was listed on the credit side and during this exercise we only paid back two thousand so if we tried to find out how much is left on the bank loan we would see that we still owe
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twenty six thousand and because we still owe that money to the bank it's listed on the credit side
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now the owner's investment transactions are not really done exactly the way we showed it here we only showed it for the main idea but you can put together everything the owner put in and took out during the exercise to get the net result so the net result of what the owner put into the business was twenty four thousand and now that we're finished you could probably do a little bit more Elementary School math and you can see the ending total debits equal 50 000 and
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therefore the ending total credits must also be fifty thousand that means the total assets are 50 000 and the total liabilities and Equity are also fifty thousand and we did everything right [Music]
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chapter six a simplified three-step plan for debits and credits presented by Serena May Jackson
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to be working with five simple accounts we're going to be working with cash car owner's investment bank loan and equipment if it's an asset then debit is plus and credit is minus if it's a liability decent Equity it's debit for minus and plus for credit
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every transaction changes two accounts One account has to be debit and the other account is credit
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total damaging credits must be equal after every single transaction
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three-step plan one which two accounts change two is a plus or minus
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three look at the chart decide which ones are debit and which ones are credit
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transaction a pay if you paid 3 000 for a new car the accounts that will change are cash and car
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cash will be minus because you're giving away cash and car will be plus because you're getting another car so the they're both assets so car would be debit and cash will be credit
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transaction B owner invested five thousand dollars of equipment from his home into his business so equipment will change and owner's investment owner so the owner invested more more into
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the job so there's it's plus and equipment is plus because the job's getting more
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equipment is an asset and it's and it's plus so it has to be debit and owner's investment is
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um inequity so it has to be credit
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transaction C paid two thousand dollars to decrease the bank loan
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so cash will change and bank loan will change they're both minus because cash you have less cash but you have but you decrease the bank loan too cash is an asset and if it's minus it has to be credit bank loan is a liability so it has to be minus and it's credit yes it's done it
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and action D sold four thousand dollars of equipment for cash cash will go up and Equipment will also change so cash you're getting more cash and your equipment is minus cash is an asset so it has to be debit if it's plus equipment is also an asset and if it's mindless it has to be a credit
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production e I want to take home a car that cost one thousand dollars it's owner's investment and car the company has less cars so it's minus and all their investment is also minus
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so car is an asset so it has and it's minus so it has to be it has to be on the credit side owner's investment is an equity so it has to be on the debit side if it's a minus
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transaction f borrowed seven thousand dollars more from the bank bank loan will go up and cash will go up because you have more of a bank loan because you're getting you have more so you have to eventually you have to pay back the money and cash goes up because you have more attached
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cash is an asset and it's plus so it has to be a debit bank loan is also a plus and it's a liability so it has to be credit
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action G borrowed six thousand dollars more from the bank to buy a new car car and bank loan will change because we have more of the bank loan because you you borrowed more so you had to pay back the bank even more and car it's also plus because you have another car
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um car is an asset and it's plus so it has to be a so it has to be debit bank loan is a liability so if it's plus it has to be credit by the way folks Serena really does know her debits and credits and if you would like to see the footage of Serena learning her debits and credits you can vote Yes in the survey that's coming at the end of the video You could also leave a comment or send me a message on this very website
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and by the way please mention if you think this is a good intro to the videos hi I'm Uncle Mark
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okay and this and this is the debits and crowded show learn your debits and your credits learn your debits and your credits today
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chapter 7 empowering definitions knowing the crucial words that will help you really understand accounting first definition we will learn is income from service it's a t account that we use to record each event when we earned income from a service
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a service income is money you earn for doing what you normally do in business of course you don't only have to have a service business you could have a merchandise business and you would earn income in a merchandise business at the moment you deliver the merchandise to the customer you earn income in a service business at the moment you deliver the service there's one t account that you should record all the income which means all the money that comes in from that particular
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service and it's very easy to record it in the t account income will only be credit never debit that means if you are recording income and you record each event where you've done a service and earned income you should see transactions listed only on the right side the credit side because that's the way it goes and I'm going to show you the reason for that a little later in this video
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and now I will introduce you to a very important account when we study accounting this account is called accounts receivable accounts receivable is the total money that all customers owe you for selling them stuff or doing stuff for them like the income that we mentioned a moment ago
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if Alan owes you thirty dollars for delivering a service in the past and Betty owes you forty dollars and another customer candy owes you fifty dollars then in that case the balance of accounts receivable the t account at this moment should equal a hundred and twenty dollars that's the reason for it it equals the total balances of all customers at any given moment so accounts receivable is an asset because it represents money that you will receive in the future and
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as you know assets are Plus for debit and minus for credit that means if a transaction requires that you write down you will receive more in the future you'll put that on the debit side but if you will receive Less in the future as a result of a specific transaction then that transaction would be listed on the credit side so if we take a look at an example if Alan did a service or excuse
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me if we did a service and Alan promised to pay in the future well that means you will receive more in the future so the account receivable account will be debit because it's plus you will receive more in the future and of course the other account will be credit and in this case like usual it'll always be income credit now what about this we did a service for a different customer even though we did a service for a different customer it should still be debit for accounts receivable
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because that customer promised to pay in the future so the total money that we will receive from all customers in the future will be more as a result of transaction B so transaction B is debit however if we have a transaction that requires that we decrease accounts receivable because the transaction means that we will receive Less in the future as a result of that transaction then we would have to make a credit so if one of the previous customers who owed money pays some
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of the money that would be accounts receivable credit because we will receive Less in the future
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so even if a different customer paid any customer who pays we have to make a credit to accounts receivable and a debit to the other account involved in the transaction usually cash because we got more cash but this is how accounts receivable behaves and it will be matched to each individual customer's balance so that the total of each individual customer's balance will always equal the balance of this t account accounts receivable
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now most people already know the definition of this next word expenses you could think of them as the opposite of the first definition that we learned in this video expenses are like the opposite of income income is money that we earn for performing a service expenses are money or monies that we must pay to be able to earn the income if we don't need to pay the money in order to be able to earn income then it's not a valid business expense
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and of course we would not write down all the expenses in only one t account if we needed to pay for delivery in order to earn income from our customer we would record all of the deliveries and only the deliveries in a t account called delivery expense if we had to pay for repair in order to serve as a customer we would record all of the repairs or rather each time that we paid for a repair we would record that instead into this account repair expense and expenses are only debit
52:58
never credit so if you are recording your expenses and you look at any of your expense T accounts in your general ledger or your chart of accounts you will see only transactions listed on the left side never on the right side because expenses are only debit never credit remember expenses are like the opposite of income and earlier we learned that income is only credit never debit so expenses are only debit never credit and I'm going to explain why at the end of this video
53:39
and just like expenses are the opposite of income accounts payable is the mirror opposite of accounts receivable accounts payable is a t account it is a liability and it represents the total money that your business owes to people or companies who did a service for you for example if you owe Rex repair shop thirty dollars for a repair service or you owe FedEx forty dollars for a delivery service then that means the balance in the t account accounts payable should equal
54:19
seventy dollars it represents the total money that you owe to all vendors at any given moment accounts payable is a liability that means that it's minus for debit and plus for credit so if we have a transaction that requires us to increase what we will pay in the future then we will make a credit to account payable even if that transaction is from a different vendor we will still make a credit to account payable and a debit to the other account usually an expense
55:00
like a service that we received from a vendor of course if we record a transaction that reflects the fact that we owe less to our vendors in the future then for that transaction we would make a debit because we would pay less in the future as a result of that transaction of course the other account involved would be a credit usually cash if we're paying off some of our vendors so that's the
55:30
way accounts payable would behave in the general ledger when you record your debits and credits
55:39
and finally I will clarify the proper way that owner's equity transactions should be recorded they should not be recorded the way I demonstrated in previous videos of course we don't have only one t account to represent the entire category of owner's equity I only showed it that way before just for you to get the idea the real truth is that there are two separate owner's equity accounts one is called owner's capital and the other is called owner's
56:14
withdrawals owner's capital is the t account where we record the owner's equity transaction when the owner invests any asset cash or equipment or anything when the owner invests any asset we record that only in the t account capital and we always make a credit because capital is always plus to owner's equity because all it represents is what the owner put into the business from his or her personal pocket so that's why capital is always a credit never a debit
56:57
now the exact opposite of that account is the one right here on the left withdrawals this account will record anytime the owner takes out any asset from the business whether the owner withdraws cash equipment or anything the owner removes from the business to be used for non-business reasons would get recorded in this account on the left owners withdrawals and every time the owner withdraws any asset from the business the owner has less owner's equity
57:34
so withdrawals is always minus to owner's equity and therefore you have to make a debit every time the owner withdraws money or asset from the business in fact you could even say that withdrawals is always debit never credit now in closing you should know that owner's capital and owner's withdrawals are not the only accounts under the category of owner's equity the other two accounts under the category of owner's equity are the two accounts that we learned about right here
58:16
in this video both expenses and income are also technically under the category of owner's equity that's because expenses always make owner's equity go down because the person responsible for the expense is the owner and income always makes owner's equity go up because if a customer gives money to the business it's the owner's money that the customer is giving after the sale or after the service so these four accounts are technically under the category of owner's equity and they
58:59
make debits and credits very easy I hope that you will use your accounting textbook to understand a little bit better why these accounts are under the category of owner's equity but if you have a transaction with any of them you should always know what to debit and what to credit if one of the two accounts in your transaction is either withdrawals or an expense you will have to debit the withdrawals or expense and credit the other account
59:33
if your transaction requires that you use the owner's Capital account or the income account then you know for sure you're going to make a credit to either income or capital and the other account in the transaction should be debit so now your adventure of debits and credits should actually be easier by understanding the meaning of these four items under owner's equity chapter 8 it's time for more advanced debits and credits with our friend Serena May Jackson
1:00:13
these are the accounts that we used in last video we are going to be adding video income accounts receivable delivery expense repair expense accounts payable honors capital and withdrawals
1:00:34
if it says no Then you cannot record a transaction on that side
1:00:44
transaction a we did a service for customer Allen for a hundred dollars he promised to pay in the future accounts receivable changes because we're because we can receive money and video income changes because we did a service if there's a no X on the debit side it has to be credit and if video income is credit accounts receivable is debit
1:01:15
transaction B Rex repair shop did a repair service for us we promised to pay him 85. so it's accounts payable and repair expense repair expense has a no X on the credit side so it has to be debit and if repair expense is debit accounts payable has to be credit
1:01:46
action C did a service for Betty and she paid us immediately with cash 95 so um
1:01:57
service income changes and cash because cash changes because she immediately paid us so we're getting more cash and service income because we did a service for her if service income cannot be debit and it has an x on the debit it has to be credit and if service income is credit cash is debited boom
1:02:28
action D paid FedEx immediately with seven day 75 cash for a delivery today so delivery expense and cash delivery expense has a low X on the credit side so it has to be debit and if delivery spends is debit cash has to be credit
1:02:55
transaction eat owner withdrew 28 cash from the business so um cash will change and I think withdrawals correct because so cash well um well withdrawals has an x on the credit so it can't be credit
1:03:22
so what draws is dead if withdrawals is that big then cash must be credit
1:03:39
it's an F Alan paid us half of what he orders from transaction a so um so cash will go up because we got more cash and accounts receivable because we received half of what was in transaction a so um
1:04:05
this so accounts receivable and cash neither of them have an X so we don't know immediately which one is which which one is debit and which one's credit so cash you're getting more cash so if you would get plus and it's an asset so Plus is this side and it has receivable it's it's you have only 50 left to go and you um you you got you got half of what was in transaction a so accounts receivable it is an old asset too and it's minus so it has to be credit
1:05:01
we pay Rex repair shop only 65 of what we owe for transaction
1:05:11
oh I meant to still uh B I meant to say well if if it was five dollars
1:05:22
paid 65. we still have a little bit left over and payable and um cash will change
1:05:35
neither of these have an x on either on any side so again we don't know immediately
1:05:47
so cash we have less cash and it's an asset so it has and it's minus so it has to be on the credit side accounts payable is a liability and if it's minus it has to be a debit
1:06:12
transaction H owner brought seven hundred dollars worth of equipment from his home into the business equipment will change and owner's Capital will change appointment will change because the company has more equipment and owner's Capital will change because the the company well the owner is giving more equipment
1:06:39
so equipment is an asset and it's plus so it has to be debit owners capital is also plus but it's in equity so it has to be credit
1:06:55
section j instead of paying cash we gave the bank 300 of equipment to decrease the bank loan so bank loan will change and Equipment will change okay so bank loan will change because you're decreasing the bank loan and Equipment will change because you have less equipment
1:07:17
so bank loan is minus and it's a liability so it has to be debit equipment is also minus and it's an asset so it has to be credit it doesn't have to be one account debit and the other account is credit as long as total numbers and credits equal each other after each transaction
1:07:46
okay in service for customer candy was all 200 she paid 50 cash and promised to pay 150 later so service income is 200 cash is 50 is 50 and accounts receivable is 150
1:08:05
and what are the debits and credits so the um service income has a no on the it has no X on the debit so it has to be credit accounts receivable is is plus because it's an asset and plus is debit so so it's debit and cash is also plus and it's also an asset so it has to be debit also
1:08:38
there's action l did red stripes did a repair service for us was a hundred thirty dollars we paid only thirty dollars now and promised to pay the rest later so it's accounts payable repair and expense and cash so cash changes because we paid 30 dollars so we're giving away money
1:09:06
accounts payable because we can pay a hundred dollars later in repair expense because we have to pay so an amount of money by the way folks Serena really does know her debits and credits and if you would like to see the footage of Serena learning her debits and credits you can vote Yes in the survey that's coming at the end of the video You could also leave a comment or send me a message on
1:09:36
this very website and by the way please mention if you think this is a good intro to the videos
1:09:45
hi I'm Uncle Mark [Music] seven credits show learn your debits and your credits learn your debits and your credits learn your debits on your credits today because today
1:10:05
chapter nine the full accounting cycle
1:10:12
do you remember from the prior video how we found the results of each of these accounts we got the total debits and total credits and put them together and the result we put on only one side well what was that process and how is it done that process is called footing the accounts and footing the accounts means find the total debits find the total credits put them together and find the ending balance for example let's imagine we have a t account for cash or some
1:10:50
asset and every time you had a plus to cash you put it on the debit side and every time you had a minus the cash you put it on the credit side then during the month you accumulated transactions well how could you know your result at the end what you would do is you would take the total of the credits and then you would take the total of the debits and then you would combine them for example this account has a total of 25 dollars in credits and it has a total
1:11:24
of sixty dollars in debits so the debits in this case are more than the credits so the account will finish with a debit balance When you subtract the two that debit balance is the ending balance and that's the number that would begin the balance of the account starting in the next month
1:11:49
you would use the same procedures to foot an account that has the opposite Behavior like a liability we all know that the bank loan is minus for debit and plus for credit so if you borrowed money you'd put it on the credit side if you paid off money you put it on the debit side and so on at the end of the month the t account bank loan would have a balance that you would have to find out you would do the exact same procedure you would find the total credits you
1:12:22
would find the total debits and in this case the credits are slightly more than the debits so that when you combine the debits and credits the resulting number goes on the side of the higher one so in this case the bank loan is going to finish with a five dollar credit balance and that will be the number that the t account begins with at the beginning of the next month now in the days before the computer we did not use accounts that look like a t
1:12:53
in real life Accounting in the old days this is the way the accounts looked the t account would not show you the balance after each transaction and it didn't really have a space to put in all the information across the row about each transaction so the accounts really looked like this and if you had a transaction that made the balance go up you would simply add it if you had a transaction that made the balance go down you would simply subtract this way you would know
1:13:25
the balance after each transaction and you would also know the balance at any given moment in time for example you can see that September 17th we owed 75 dollars but if I asked you how much did we owe exactly on September 12 well September 12th is not listed in the date column so you would go back to the last transaction before September 12th find that balance and then you would know the balance on a particular day and time using the accounts like this helped
1:14:02
bookkeepers record more detail and keep more accurate track of the balance and when the accountant would come in to find the results at the end of the month the accountant would simply know bank loan is a liability and this five dollars is a credit balance
1:14:21
now footing the accounts was only the first step in the process of finding the results at the end of each month after you found the results you would put the ending balance of each account in a report called the trial balance the trial balance is a report that shows the results of all accounts and if the account had a debit balance it would be listed on the debit side of the trial balance
1:14:53
and if an account had a credit balance it would be listed on the credit side of the trial balance and as you can see the trial balance would give you some information about how your business is operating but this data when it's in the trial balance is in its raw form you were not finished when you made a trial balance but one of the reasons you made the trial balance is to make sure
1:15:23
that the debits equal the credits after the entire process of recording the transactions putting them in the T accounts finding the balances and putting the balances up in the trial balance we came up with this system of debits and credits thousands of years ago to make sure that we did not make any mistakes when recording transactions or doing the math to find the results remember accounting procedures were derived in the days before the computer and although you can see
1:15:59
some things about the business operation simply by looking at the trial balance you would gain better insights into what is happening with the business if you took the numbers from the trial balance and reorganized them into documents called financial statements and I'm sure you've all heard the names of the typical common financial statements these are the documents that we look at in order
1:16:28
to make a judgment about how well the business is doing and to make certain business decisions by taking the numbers from the trial balance and organizing them into these financial statements the numbers present a more clear picture of what's going on in the business
1:16:51
now in the days before the computer the T accounts were not the original books of Entry instead you had something called the general journal and if you wanted to record transactions here you needed to know your debits and your credits that's because the transactions would first be recorded in the journal and when you record transactions in the journal you would write down which account will be debit and which account will be credit
1:17:24
then later you would do what's called posting that means copying each transaction from the journal to its appropriate t account and putting in the appropriate debit and credit you would not post after each transaction the whole point of the journal would be to record everything on one paper to save time then at the end of the time period when you wanted to assess your results you would post all the debits and credits into the T accounts and if you did that correctly the results
1:18:03
and the T accounts would be the same as if you put the numbers in there directly like we did earlier then of course you would foot the results of the T accounts and then again take the ending balance of each account and put it in the trial balance so now you know the accounting cycle perfectly we start with transactions that we would record in the general journal then we would post from the journal to the T accounts that we have been working with
1:18:39
then we would foot the T accounts and put those results in a report called the trial balance and then of course we would take the numbers from the trial balance and put them on financial statements so people can look at those documents and understand what's going on with that business
1:19:02
chapter 10. now let's see some example of journal entries and how it looks when we use the computer we remember the accounting cycle in the days before the computer involves several steps before we could find our accumulated totals in the trial balance now with the computer we can go directly from the journal and it will automatically post the transactions foot the accounts and copy the results to the trial balance in a Split Second
1:19:39
so all those previous steps we learned about in the prior video happen immediately so all we have to do is record the transaction in the journal and the results change and the trial balance like that so if you are using QuickBooks Online this is the window that you would enter the transaction in and then the accounts would change immediately in your QuickBooks Online trial balance and I'm going to demonstrate this in QuickBooks Online if you're using QuickBooks
1:20:16
desktop this would be the window that you would record the debits and credits of a journal entry and again in QuickBooks desktop the results in the trial balance would be updated immediately
1:20:33
so first we will do these transactions with QuickBooks desktop and we will do the same transactions as before let's get prepared I have my Quickbooks desktop with a blank General Company open and for those of you who are new to QuickBooks you would open the trial balance by clicking reports accountant and taxes trial balance and for those of you who are new to my class we always change the date range to all transactions regardless of date
1:21:10
and I'm going to change the shape so we can put it here and put next to this window the window that we actually record the journal entries in from the main menu click company make journal entry and then this little pop-up don't worry about assigning numbers just click the don't bother me box and click ok now you can't see much of this window unless you double click the words in the ribbon to collapse the ribbon now the top half looks a little bit more like the general
1:21:47
journal that we learned about and let's read our transactions and remember as soon as we record the transaction in the journal it will automatically post the accumulated results to the trial balance
1:22:04
now let's do the same transactions that we did earlier in the course except now we'll do them on QuickBooks let's imagine on January 1 of 2025 the owner invested fifty thousand dollars cash into the business if you learn your debits and credits properly you would know that that would be fifty thousand dollars cash debit and fifty thousand dollars owner's Capital Credit
1:22:36
first we put in the correct date by clicking the date box and going forward or backward or even typing it in manually you should remove this check mark because this is not an adjusting entry we will talk about those a little bit later
1:22:54
to record a journal entry in QuickBooks desktop click directly under the word account then click the pull down arrow and choose the account you want to debit I choose cash and Chase Bank and on the same row as that account I click under the word debit and type in the fifty thousand dollars
1:23:23
if I keep clicking tab or pushing the Tab Key you will see that most software finishes the journal entry for you by trying to balance it out in other words QuickBooks knows that there has to be a fifty thousand dollar credit somewhere and that account is owner's Capital so this is the way that debit and credit would look like in the general journal cash and bank debit owner's Capital Credit now before we save it the trial balance is blank but when I click save and close you can
1:24:02
see the numbers show up for the first time on the trial balance cash and Chase Bank 50 000 and owner's Capital fifty thousand now let's imagine that on January 5th we pay twenty thousand more for more equipment if you studied your debits and credits properly that would be equipment debit and cash credit so company make general journal entry
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okay the date is January 5th of 2025. this is our second entry it's not an adjusting entry and the account that will be debit will be equipment and the amount will be twenty thousand
1:24:53
keep pushing the Tab Key and the credit or in the row of credit the other account is Cash because we know that if we pay cash and get equipment it's equipment debit cash credit now here's the question what will the results be after I save this transaction well cash right now is 50 000. so if I make a credit of twenty thousand what do you think the result would be that's right the result
1:25:27
would be thirty thousand what about this what do you think the equipment would be well equipment is starting at zero so if I save this equipment should show up for the first time as twenty thousand save and close and don't worry about this just click the don't bother me box click OK aha cash went down to 30 000 exactly as we expected and Equipment showed up in the trial balance for the first time as twenty thousand what about this one January 10 the owner took home equipment worth
1:26:09
five thousand dollars and he's not using it for business anymore well if you studied your debits and credits you would know that that would be equipment credit and owners withdrawals a debit again we click company make general journal entry in this case the date is on the 10th and this is our third such journal entry I'm going to double click here so we can see it nicely
1:26:40
and now I'm going to choose owners withdrawals debit and put in the row of debit 5000.
1:26:50
and I'm going to tab over until it puts a credit of 5000 and I'm going to credit equipment now here's the question can you predict the results what will equipment become well equipment right now is twenty thousand so if we're decreasing it by 5000 it should become fifteen thousand if we did this right and what will withdrawals become well withdrawals will show up for the first time here as five thousand save and close aha equipment is down to fifteen thousand and owner's
1:27:29
withdrawals is five thousand on the debit side it means we recorded the transaction correctly
1:27:37
what about this one January 15th we borrowed thirty five thousand from the bank what will Cash become well right now cash is only thirty thousand so if we borrow more from the bank will have more cash so if we record this transaction properly cash and bank will become 65 000 and bank loan will show up for the first time in the trial balance so we change the date to the 15th and we make a debit to cash and bank for the 35
1:28:17
000 because we learned that when cash increases it's a debit and the balancing credit is here bank loan and when I click save and close the numbers are exactly as we expected cash becomes 65 000 and bank loan shows up for the first time as 35 000. now we'll do a transaction that would absolutely require a journal entry what if on January 20 the owner invested a vehicle worth 25 000 into the business what would be debit and what would be credit well we know Capital would
1:29:00
be credit because the owner invested an asset and capital right now has a credit balance of fifty thousand so if the owner invests another twenty five thousand an asset that's right Capital will become 75 000 and vehicle will show up for the first time in the trial balance
1:29:26
so from the main menu company make journal entry this time the date is January 20. and the account that's debit is the new asset that we are getting vehicle and we said that the vehicles are 25 000 or at least they're worth 25 000 at the moment the owner invests it into the company and because the asset came from the owner the owner now has more capital and we make a credit to Capital to increase the owner's Capital when we click save and close Capital became
1:30:09
the number that we expected it to become and therefore we recorded the journal entry properly
1:30:18
now here's one that you might not need to make a journal entry for but it is one we learned before three thousand to decrease the bank loan well if this account represents what the bank loan is now and what we owe if we decrease it what will it become if we record this properly it should become thirty two thousand and what will Cash become well if we pay to decrease the bank loan cash will decrease by three thousand and it will become sixty two thousand
1:30:57
so we're up to January 25th and we know that it will be cash credit because we are giving cash
1:31:10
so cash and Chase Bank credit by the three thousand
1:31:16
and we know that we're decreasing the bank loan and the bank loan is a liability so it will be bank loan debit now when we click save and close the results are exactly as what we expected the bank loan became thirty two thousand and cash in Bank became 62 000. let's finish with a transaction that you would definitely need to make a journal entry for let's imagine on January 27th we borrowed seventeen thousand more from the bank and
1:31:55
bought equipment that would be the same thing as just taking the equipment and assuming alone in that case you have more equipment but you also have a higher balance or more of a bank loan so we know that would be equipment debit and bank loan credit so company make journal entry and this one is on January 30th and it will be equipment debit for the 17 000.
1:32:37
and it will be bank loan credit can you predict what the results will be well let's see if equipment goes up if bank loan goes up by 17 000 bank loans should become forty nine thousand because bank loan is thirty two thousand right now and if equipment goes up by 17 000 equipment should become thirty two thousand because these are the numbers for equipment and bank loan before I click save and when I click save and close you can see the numbers are exactly
1:33:16
as what we predicted bank loan is forty nine thousand and equipment is thirty two thousand don't forget to watch the QuickBooks online version of this video chapter 11. now let's practice what we've learned about journal entries debits and credits this service business transaction practice set is literally just like an Accounting 101 textbook practice exercise you have to set up the T accounts on something you can write on in the old days we would use a paper
1:33:59
or and a pen or pencil but of course you could use word or Excel or anything else what you will do is after you make the T accounts you'll record the transactions that I give you and you'll compare your results to mine if they're different you will use logic to find and fix mistakes and I'm going to give you some logical tips that will always help you find and fix mistakes after you're done
1:34:28
recording transactions in accounting so what are The Specific Instructions of this project first create a t account for each of the accounts on the account list in the given chart of accounts two record all transactions from the transaction list to the T accounts that I have provided for you three find the balance of each account after you're done recording all the transactions and then make a list of all the account balances and that list is something called the trial balance
1:35:09
then once you have your trial balance you can compare your results to mine and use logic to find and fix mistakes and don't worry about a thing because everything you physically need to do this project is inside the downloadable Excel file that I have put in the resource tab of this video just download it open it up and follow the steps you can easily access the files for all of these projects by clicking show more just like you did before to reveal the table of contents but if
1:35:51
you look all the way down at the very bottom of the description field you will see that there are links to each of the project sheets for each of the projects and if you just click on any one of the links to download them all you have to do is Click where the link is for this particular exercise and you should be given an option to choose which folder to download the file to
1:36:21
in this Excel spreadsheet that you will use for this project there is one particular sheet with a t account for every account in this list of accounts which is also called the chart of accounts and it is those T accounts that you will record the transactions into now also in the sheet is this list of transactions you should record every debit and every Credit in proper order using this list go slowly and record it exactly as you saw us record each of these transactions
1:37:01
in the lectures where I gave you similar examples and record them in the T accounts that you either draw on a pencil and piece of paper or record them in the T accounts that are provided in the Excel sheet now in order to use this Excel sheet you don't need to know any excel at all just type in the numbers you want and Excel will automatically add them for you it's just a simple convenience
1:37:34
but if you're having any trouble at all just use a pen and paper so if you download the file and you open it up you would click down here to get the different sheets and if you can't see all the sheets you would scroll right and scroll left the leftmost sheet are the general instructions the next sheet is the list of transactions that you will record the net sheet are the T accounts and
1:38:03
if you don't know Excel watch carefully how they work if you're going to make a debit to an account you should click in the top left and put just the date and hit enter and Excel will record the date then click next to it just like we showed in the video and put the money amount type it in and to save it in the field push enter and notice Excel will add it for you if you want to make a credit
1:38:35
put the date in the rightmost column hit enter then on the inside put the type the money amount hit enter and Excel will add it for you if you need to make a second transaction go to the next line and do the same thing as soon as you hit enter it will automatically add the column so that you don't have to do any math and the numbers will stay nice and neat and you will save huge amounts
1:39:08
of time putting in your debits and credits when you finish putting in your debits and credits you will see that there is a sheet provided for you to make a list of every remaining debit balance and credit balance for each of the T accounts that you were using during the transaction set try to put the list of the final balances into that sheet and make it look like this Excel will add and do the math for you now the name of this report that you're constructing when
1:39:45
you finish putting in all the ending balances which are the results of all transactions this report is called the trial balance and the trial balance was a very important report for both the bookkeepers and the accountants in the days before the computer you see the trial balance is a list of ending balances of the chart of accounts after a specific period of time usually some accounting
1:40:15
period like after one month or after one fiscal quarter where you would stop and assess everything
1:40:22
the account balances must be separated into debit and credit columns so that you can see if it's a debit balance at the end or a credit balance at the end while reading the accounts from the list so the reason to make this is to be sure that you have not made any mathematical mistake before putting these numbers on your formal financial statements if the debits equal the credits then there is no mathematical mistake so if there's still a mistake even though there's not a
1:41:00
mathematical mistake you have to use logic and use the logical steps and The Logical thinking that you're about to learn here to fix the differences and to make your final numbers the same as mine first you have to ask yourself if you finished with any number that's different than what it shows in the answer ask yourself what specific account balances are different just by isolating those two you'll be able to also hone in on how much they are different by
1:41:37
and by thinking of which specific accounts are different and how much they're different by you should then also consider which account is too high and which account is too low thinking about all these things will help you focus on what were the only transactions that were recorded in only those accounts the mistake must be from one of those transactions so if you know which specific transactions change these specific accounts or which specific transactions
1:42:17
are the money amount of the amount that's too high or too low or which specific transactions are of the money amount that the wrong accounts are different by you can use logic to fix the mistake check any transactions you put into only those accounts or maybe should have put into those accounts when considering what mistakes you could have made for example if cash in the bank is too high and accounts receivable is too low what could be the only reasons that those would be
1:42:54
the only two accounts that are different well if you give yourself a moment to think about it it could be that if you recorded receiving cash for a service of a sale rather than recording it an account receivable that's something that might make cash too high and accounts receivable too low so you might want to double check any transaction where you were doing a service for a customer or what if you recorded receiving a payment from a past service twice if you duplicated
1:43:30
an entry and you duplicated both the debit and the credit they would still balance in the trial balance but the individual numbers of the accounts would be different find out which specific accounts are different and see if they have any duplicate entries in them also look at the money amounts to determine the mistakes it's very rare that you would have two mistakes in one account so if you know how much a difference is in one particular account you
1:44:02
know that you can look back on the transaction list and find the transaction with that specific money amount and there's your mistake so have confidence that you will find whatever mistake you might have made don't peek at the answers until you absolutely must good luck doing the exercise and please stay in touch and give me feedback about how well you did and how you felt it might have helped you learn thank you again and I'll see you in the next video
1:44:36
thank you so much for learning this with us there's more great stuff to come and remember you have the benefit of a live teacher if you ask me your questions in the comments section below and don't forget to click like And subscribe to help support the free channel that helps everyone part three end of cycle procedures chapter 12 end of period accounting adjustments
1:45:10
adjustments are journal entries that we make periodically to correct our financial records for the passage of time it also helps us prepare for financial reporting by acknowledging the cutoff dates of certain amounts we also make adjustments to correct for mistakes and we usually make them monthly or immediately before reporting our financial statements to someone because we want to adjust our general ledger to make sure our financial statements are accurate
1:45:46
the idea behind this is that assets and expenses are really the same thing think about the definition of expense it's when you pay for something after you use the value of whatever service that you're paying for
1:46:06
things like salary expense repair expense utilities expense delivery expense usually you pay for them before you use them and of course we always think of them as expenses but assets are something you pay for before you use the value for example a car usually you buy the car before you can drive it and use the value of the car so we always think of car as an asset what about furniture usually you buy the furniture you don't sit on it for five years and then when
1:46:47
it breaks you pay the person you took it from usually you pay for it first which means assets are paid for before you use up the value of whatever you need them for but what about things like rent insurance and supplies we usually think of these things as expenses and they are but these things we usually pay for them before we use them so even though we think of them as expenses technically at the moment we pay for them they are assets and they become expenses as we use them so
1:47:32
therefore if at the moment you pay for something it still has value you can use into the future you just paid for an asset but if at the moment you pay for something you have already used the value or you could say you have already expended the value then at that moment you have an expense and if it was an asset don't worry wait a little while and you will finish using the value and the amount you use let's say the amount you expend will become the amount you record as the expense
1:48:10
for example supplies you always pay for them before you finish using them then over time you use some supplies and the amount of supplies you have used the amount of supplies you have expended then gets recorded as supplies expense now this idea is also the same for paying office rent you usually pay office rent in advance of staying in the office so technically at the moment you pay the rent you have an asset you have something of value
1:48:48
that you can use into the future you have the ability to stay in the office but over time as you stay in the office the amount of time that you've used or expended becomes your real rent expense and that's the amount you record on your income statement for that month as rent expense
1:49:11
insurance is the same thing you always pay insurance in advance of the time in which they protect you then over time you're using the coverage and your coverage is elapsing after you've used a certain amount of time during the policy the amount of time of the policy that has elapsed is your insurance expense and the remaining amount still stays on your books as an asset so let's see how this would work let's imagine on January 1 Holden the owner of the
1:49:50
company paid Staples seven hundred dollars for supplies well on January 1 we did not finish using the supplies so we cannot record this into supplies expense on January 1 we have a new asset and just like we did in previous videos we make a debit to the asset for the amount that we paid of course cash is credit if we paid cash but we're not really focusing on cash right now we're just focusing on the asset that we bought that we will use into the future now the most important
1:50:31
date is January 31. let's imagine it's one month later and we physically count the supplies and we see we only have three hundred dollars worth of supplies left well the first question is how much of supplies did we use obviously we used 400 you could also say we expended four hundred dollars worth of supplies during January and that means supplies expense should be debited four hundred dollars for the amount that we actually used during January and that four hundred dollars
1:51:17
will go on the income statement profit and loss as supplies expense for the month of January
1:51:25
now of course if we made a debit to supplies for 400 we have to make a credit of 400. we credit the asset if the value is going down and of course it is correct to credit supplies for the 400 so that the ending balance of supplies at the end of the month truly reflects what we physically have we physically have three hundred dollars worth of supplies and as you can see that's the new
1:51:58
ending balance the supplies expense account is an expense so that will get closed at the end of the month so that you can measure more uh starting from zero how much supplies you used in the next month so you will see in the following videos expenses become zero after each period so that you can start counting fresh what you used in the next month but this 300 remaining in supplies goes up top as the beginning balance on February 1 for the asset account supplies
1:52:36
now that idea will help you understand a special type of asset called prepaid expenses these are time-based expenses things that we use just because of the passage of time
1:52:52
-based expenses are things like rent when we pay office rent or Insurance something we pay that we will use in the future but we would normally consider it an expense for example let's imagine on January 1 Holden the owner paid Farmers Insurance one thousand two hundred dollars for the whole Year's office insurance now we know that the office insurance is only really a hundred dollars per month
1:53:26
we're really only using the value of what we paid at the rate of a hundred dollars per month now you can put the whole 1200 into the insurance expense account if you only report once a year so if you don't need to show anyone your financial records until December 31 it really wouldn't matter if you put this into Insurance expense at the beginning however if you need to report monthly financial statements you must put the 1200 into an asset called prepaid insurance and
1:54:06
then adjusted each month just the way you saw in the previous example with supplies prepaid insurance is another current asset type of account so what's the difference why can't I just put insurance and insurance expense when I pay or rent into rent expense when I pay well let's think about it if you recorded this the wrong way and it all goes into Insurance expense when you write the check that means January's income statement is going to list Insurance expense
1:54:45
as one thousand two hundred dollars because that's what you paid in insurance for January in February you didn't pay anything for insurance so on February's income statement Insurance expense will be listed as zero March's income statement Insurance expense will be listed as zero and so on do you think you can fairly and reasonably compare your operations between January and February by comparing January's income statement to February's income statement of
1:55:22
course not you cannot compare them in a fair way because you recorded all of the year's insurance as an expense for January and none for February so January and February's profit and loss statement cannot be compared in an accurate and Fair Way but if you do it the right way and adjust it the way I'm about to show you the then January's Insurance expense will be only what you used during January and February's Insurance expense will be only what you used during February and
1:56:04
so on this way you can properly compare January's income statement to February's income statement and make a fair and clear judgment about the difference in how well you did each month because now it shows the real amount of insurance expense that your company is using each month
1:56:26
so how do you actually do this so it comes out correct well when you pay the insurance put the money into the account called prepaid insurance which is another current asset like supplies then make a journal entry to adjust at the end of each month decrease the prepaid insurance for what you did use and put it into Insurance expense to reflect that it was used during that month so it's going to look very similar to what we did a moment ago with supplies
1:57:07
let's imagine on January 1 Holden paid Farmers Insurance 1200 for the whole Year's office Insurance well we did not use the value or we did not finish using the value on January 1 so we do not have an expense on January 1. on January 1 we have an asset debit the asset and of course credit cash but we're not examining cash so just believe me cash will be credit now the interesting part happens at the end of the month what should the numbers be well you know that this 1200 is not
1:57:47
accurate as of January 31. it was accurate back on January 1 before the insurance company protected and covered US during January but on January 31 they are finished protecting us they are finished covering us for January so we have actually used a hundred dollars worth of insurance during the month how do we record this in our records to reflect this well Insurance expenses debit for the
1:58:20
amount that we actually used during January and of course we have to credit a hundred dollars the asset to bring the value down to what it really is as of January 31. there are only 11 months left on the policy so on January 31 the balance of this asset is eleven hundred dollars now of course the hundred dollars in Insurance expense will go on January's income statement to show that during
1:58:51
January we used a hundred dollars of insurance and then of course that gets closed and becomes zero so we can start measuring March's Insurance expense fresh at the beginning of the next month
1:59:06
and of course the eleven hundred dollars goes as the balance on the balance sheet as of January 31 to show what we had in prepaid insurance going forward at the end of January
1:59:23
chapter 13 closing entries and partnership distribution we all know that every account in your chart of accounts has a debit side and a credit side and depending on the type of account sometimes the transactions are listed on the debit side for certain types of accounts and on the credit side for other types of accounts the most important owner's equity account is the owner's Capital this is an account in your chart of accounts that reflects or shows the total money or
1:59:58
value that the owner took from his or her personal funds or personal assets and put into the business and of course every chart of account should have a separate account for each separate asset so you can account for how much value of that asset is in the business in this example let's imagine that the company has ten thousand dollars in cash and the company has twenty thousand dollars worth of equipment well if that's the case when the company starts that means
2:00:33
that the owner of the company has invested thirty thousand dollars worth of assets into the business and the account that keeps track of how much the owner has invested in the business should say thirty thousand dollars now of course the owner should also have a separate account called withdrawals the reason for that account is to keep track of and take a total of all the money or all the assets that the owner took out of the business for personal non-business use
2:01:06
for example if the owner takes two thousand dollars of company cash out of the business for non-business use that means that he or she would have to record that two thousand dollars in withdrawals and the new amount of cash that the company has would be eight thousand dollars
2:01:25
the owner could also take home any other asset like equipment for example if the owner took home five thousand dollars worth of equipment you would still have to record a withdrawal of asset from that owner of five thousand dollars that means the new value of equipment would go down to 15 000 and the new balance of the withdrawals account is seven thousand dollars so as you can see the owner invested thirty thousand from his or her personal funds into the
2:01:59
business but withdrew seven thousand dollars of cash and other assets from the business and obviously you would have to net out these two accounts to know that the actual amount of owner's equity that the owner has in this company is twenty three thousand dollars
2:02:18
so then you might ask how do you distribute the net income from the income and expenses accounts to the owner's equity accounts well we will use the same two owner's equity accounts we used a minute ago except now we're showing other accounts in the chart of accounts let's imagine at the end of the quarter or the end of the fiscal year the service income is twenty thousand and let's imagine in this example company there are only two expenses six thousand and four thousand here
2:02:51
now this example is showing you how to distribute the income when the company is a sole proprietorship that means there's only one owner in order to find out what the net income is as well as distribute it or give to the owner or put into the owner's equity account the net income we use a special account in the chart of accounts called income summary this is a temporary account that begins with xero and also ends with zero when we're finished
2:03:23
we make a series of debits and credits in order to move the income to the income summary account and make all our income accounts zero we also move all of our expenses to the income summary account and make the balance of all of our expenses zero and the days before the computer this would help make sure that the income and expenses do not accumulate into the next accounting period and they begin with zero at the beginning of this uh fiscal year or this accounting period with
2:03:58
the computer it's not necessary to do it this way anymore but at least we know in the income summary account that we can calculate the net income as ten thousand dollars that's because we moved 20 000 to the credit side and that was the income we moved ten thousand worth of expenses to the debit side and the net difference shows ten thousand more on the credit side than on the debit side
2:04:24
so we know the ten thousand is the net income as I mentioned a moment ago income summary also becomes zero we take the ending balance of income summary and we bring it to the owner's Capital account this makes sure that the owner's Capital reflects not only what they invested from their own personal pocket but what they earned as their share of the net income and of course the last step in the closing process is to move the owner's withdrawals also to the owner's Capital account
2:04:59
this way withdrawals also starts with zero for the next accounting period so you can clearly identify the withdrawals just for that time period and when you find the end result of the owner's Capital we can see in this situation the owner is left with twenty three thousand dollars of owner's equity all of which will be in the owner's capital account when you finish doing the closing entries
2:05:30
if you need to know how to make debits and credits you can watch the supplementary videos about journal entries included in this course but the end result is that we now know the ending period capital for this fiscal year which is also the amount of capital that will begin as the beginning balance in the next fiscal year now let's see what it's like to distribute the net income in a partnership here we have a situation where the company has two owners Holden and Gary
2:06:08
and as you would imagine each individual partner has to have their own Capital account which keeps track of the amount that they physically invested into the business and each partner should have their own withdrawals account that keeps track of how much money or asset that particular partner took out of the business so these numbers for Holden are left over from the previous example Holden invested a total 30 of 30 000 of cash or other assets from
2:06:40
his personal funds and he withdrew seven thousand from the business for non-business reasons whereas Holden's partner Gary only invested 20 000 from his personal funds and he withdrew a total of three thousand from the business so far this fiscal year now let's imagine in this example Holden and Gary share the profits sixty percent Holden and forty percent Gary so just like in our previous example income summary is the account where all the income and expenses get close to
2:07:15
so we can determine the net income and distribute the net income to the partners but in this example we see that the the net income is the same as the net income in the previous example except sixty percent of it belongs to Holden and the other 40 percent of it belongs to Gary that means that Holden will have an increase of six thousand in his capital and Gary will have an increase of
2:07:43
four thousand in his Capital when we finally make income summary zero to distribute the net income now of course both owners have to net out their own withdrawals into their own Capital account so the seven thousand of Holden's withdrawals gets close to Holden's capital and the three thousand of Gary's withdrawals gets close to Gary's capital and Holden's capital or total owner's equity at the end of this fiscal year is 29
2:08:15
000 up here and Gary's owner's equity at the end of this fiscal period is twenty one thousand
2:08:25
foreign something about our new friend income summary we all know income summary is where we move all of the accumulated income for the fiscal year and all of the accumulated expenses of the fiscal year this way the income and expense accounts don't accumulate into the next period and we can isolate exactly how much income and expense came in and out during a particular time period and the income summary will give us our net income but you should know that income
2:09:00
summary is a temporary account the account that we actually use as a permanent account to show the difference between income and expense and a prior accounting period is called retained earnings so retained earnings will still show the difference between income and expense in but only in a prior period and that's how QuickBooks works so for example if you look at reports dated in the current period you will see the income and expense and you will not see them in retained earnings
2:09:37
however if you look at a report dated after the fiscal year end you will not see any income or expense accounts listed instead you will see the net amount as net income or at least the accumulated net income in the retained earnings account
2:09:56
for example if Holden's fiscal year ends on June 30. any report dated before June 30 will show this the income in the income accounts the expense and the expense accounts and nothing in retained earnings however any report dated after June 30 will show that you have zero income and expenses and the net amount of net income has been moved to retained earnings now let's check how well we understand all of the end of month procedures by doing this Hands-On end of month project
2:10:43
the end of month procedures that we just learned were adjusting entries after all the transactions have been recorded during the accounting cycle and then after the adjusting entries we learn how to make closing entries and after the closing entries were mostly done we then were able as part of the closing entries to distribute the partnership income now you only saw a brief overview of these three steps in the end of the month procedures but let's see if you can figure
2:11:20
out what to do and finish with the correct numbers and the project you're about to try you see The Specific Instructions start with asking you to download the Excel file that's in the resource tab of this video and everything you need is in the downloadable you can easily access the files for all of these projects by clicking show more just like you did before to reveal the table of contents but if you look all the way down at the very bottom of the description field you will see
2:11:57
that there are links to each of the project sheets for each of the projects and if you just click on any one of the links to download them all you have to do is Click where the link is for this particular exercise and you should be given an option to choose which folder to download the file too so what are The Specific Instructions of this project well first use the end of the month information that's given in the Excel file to make the adjustment in the T accounts that are given
2:12:33
then record the closing entries in the accounts make a post-closing trial balance when you're done and then compare your results to mine see if you finish with the same numbers by doing all the correct steps that we learned about in the end of the month procedures now what do I mean by using this file well if you download the Excel file says end of the month project you see that first you use the end of the month information and make the adjustments in the
2:13:08
t account now you can see there are different tabs across the bottom if I click here I get a clear description of what the end of the month procedures are I should probably get rid of this so if it fits in a little better here so this is the information you need for the adjustments and this is the information you need for the closing entries and you can even pause the video here because there's not that much to remember and then just go ahead and enter them now you will enter
2:13:40
them here oh excuse me this is the trial balance actually before you do the exercise this is where what all the beginning balance numbers are in the general ledger that you're given so then you will read this information and record the appropriate debits and credits in this tab called the general ledger now it's zoomed out a bit but if you zoom in you can see that it's set up like the previous
2:14:12
one where all you have to do is enter a number and it will do the math for you so you don't have to stress or do any work so again you can zoom in and out here from the bottom if you click the bottom right you can zoom in and zoom out and I left the view zoomed out so you can better see the you know most of your accounts but if you scroll down a bit by using the scroll bar here you can see
2:14:43
I've provided every account in the trial balance that I just showed you every account including the income summary account that we learned about in a prior video so you physically have everything you need to record all the debits and credits and all of the beginning balances are already input from the trial balance that you're given to set up with and when you finished compare your trial balance to mine and I gave you a special sheet for you to put in the results
2:15:16
in your trial balance to tell me what you think the ending numbers are good luck and stay in touch
2:15:38
[Music] part four have some appreciation for depreciation chapter 15 what is depreciation now you may well ask what is depreciation well the word depreciation is a noun and it means the amount of decrease in value of an asset that happens over time the verb to depreciate is what we are doing when we record the decrease in value of an asset over time you see there's two kinds of depreciation there's the type of depreciation that happens when an asset is no longer needed
2:16:29
or desired and that's not the type of depreciation that we account for when we keep books and records of a company we are instead talking about the type of decrease in value that happens to the asset as you use it or use up the resource that the asset represents you see when an asset is no longer needed or desired that condition is called obsolescence or the asset has become Obsolete and that means that an asset is less desired and therefore less valuable for example you can
2:17:09
buy a beautiful house worth a lot of money and rest assure that if a week after you purchase the house they open up a nuclear power plant just two blocks down the road you can be sure that the asset value will decrease but that's not the type of decrease we're talking about you can't control a nuclear power plant being built next to the house that you lived in for 20 years you can't predict it regardless of how you actually use the house or the asset and that's the reason why we
2:17:46
do not use this thing called market value you see the market value of an asset is what people would be willing to pay for it at any given moment and we know that it's volatile so we do not use the market value of the asset when we record things in our accounting records you see the market value changes but not related to the business operations and if there's no relationship between using the
2:18:16
asset and using up the value then we really can't record the depreciation in our records because then when we look at the resulting financial statements it won't really be a reflection of how much of the asset we used it'll only be a reflection of how much people are willing to pay and that won't really help a person when judging how well a company is doing and utilizing their assets to run the company and that's why that type of depreciation is not what we're talking about
2:18:50
when we record depreciating assets we instead use something called historical cost only record what you actually paid for the asset or to extend the life of the asset that's what it means to record assets under historical cost that does reflect a change in value as you use the asset and it's the only legitimate way to compare financial statements between two different time periods so let's explore using the idea of historical cost together
2:19:31
you see when an asset value is being used up you can picture the asset diminishing as you use it and the amount of the asset you use over time becomes the expense just like we learned in the prior video for example supplies are an asset at the moment you buy them because at the moment you buy them you have something of value you can use into the future then as you use the supplies the amount of supplies that gets used up becomes the amount of supplies expense that you record
2:20:09
same thing with Prepaid rent like we learned in the prior video when you first pay rent you have something of value that you can use into the future you have the right to use the space that you rented But as time goes by the amount of time that you rent it for is being used up and the amount that's used up becomes the rent expense that you report on your profit and loss
2:20:37
now of the three examples here the clearest one is when supplies becomes supplies expense you see at the moment you purchase the office supplies like pens and paper clips and so on you have them you own them they are assets at the moment you buy them because you can use them into the future then as you use the supplies the money you paid for the specific supplies that you use is the amount that becomes supplies expense on the next monthly profit and loss
2:21:16
you see the remaining supplies still have value as of the balance sheet date so whatever the money value is of what you paid for for the supplies that you still have should be the balance of the asset account supplies at the end of the month and the amount that you report as supplies expense is the amount you actually used during the time period of the profit and loss or income statement
2:21:45
and it's the actual amount expended or used and that makes for accurate financial statements that give a true picture of what's happening in the business and how well it runs now this is the same idea for fixed assets a fixed asset is an asset that you expect to have for more than one year it could be things like a company car or a company truck or it can be the office furniture that you buy and expect to use in the office for many years it can even be a restaurant that owns a big
2:22:27
freezer that they're going to use over many years to operate the restaurant the idea is all the same it's the idea of an asset being used up over time and becoming an expense and the example asset or should I say the example fixed asset that we're going to use in this case is a car you see we know that a car only has a certain number of drivable miles that you can actually drive or use during
2:23:03
the life of the car and we all know that the more miles you drive in the car the more you use up or depreciate the value and the expense that represents a fixed asset decreasing over time is depreciation expense so it's still the same idea of an asset losing value over time as you use it
2:23:31
and the important part that we learned in Prior video chapters is that we record these in the T accounts in the chart of accounts we know that the asset supplies represents the physical supplies that we still have on hand and we know that as we use the supplies over time only the specific supplies that we use become the supplies expense and the money amount of what we used gets recorded
2:24:02
as a debit to the supplies expense and a credit to the asset supplies you see we have less of the asset supplies and that's why we make a credit to decrease the value and therefore the value is lower on the next balance sheet and only reflects what we paid for the remaining supplies we then of course debit the supplies expense account only for the amount that was actually used or used up
2:24:32
during the time period that the income statement or profit and loss is reporting on and that's the amount that will show on the income statement or profit and loss and since the idea is the same we can make t accounts that represent the car and depreciation expense except in this case what's being used over time is the drivable miles of the car at the moment that you buy the car you see a
2:25:06
car only comes with a certain number of drivable miles that you can physically drive as you use the car in the future to run the business and as you drive the miles over time whatever miles you drive or let's say the cost associated with whatever miles you drive will decrease the value of the car in your books and records and those miles or the cost associated with those miles will become
2:25:39
the depreciation expense that you report on your profit and loss during the time period that you actually drove those miles using the car and of course as you drive the car over time there are fewer miles available in the future to drive the car and that's why you would credit the asset to lower the value exactly the way that we learned in the prior example and the prior video that makes a lower balance on the balance sheet to represent what the car is worth when someone
2:26:17
looks at the value of the car on the balance sheet and of course the actual miles expended or used up or let's say the cost associated with the miles that were expended or used up go as a debit to the depreciation expense account to show the amount that you will put on the profit and loss as the amount of expense associated with lowering the value of the car but then the question is how do you record it in your books and records at the end of each period
2:26:57
Well the idea is exactly the same as what it was when we used supplies in our previous example we would make a normal monthly adjustment to adjust for the decrease in value of the asset and to acknowledge the amount that was expended during this period we would have to make a credit to the asset account to lower the value and we would make a debit to the depreciation expense to show how much was used or the cost associated with whatever was used up during that accounting period
2:27:37
chapter 16 how much to depreciate if you want to know how much depreciation to record you first ask yourself how much of the car did you use and when we asked that question we're talking about the money value of the amount of car you used regarding the miles that you're able to drive so how do you calculate and
2:28:07
credit adjustment for depreciation well the first important new phrase that we will learn regarding finding out how much to debit and credit for the depreciation adjustment is the phrase useful life you see useful life means how many years will the asset give service and produce value that we can use in our business and in the case of the car it means how many miles will the car be drivable
2:28:44
and produce valuable services that the business can use now how do you calculate and find useful life well first you have to figure out how much of the car did you use now what does that mean well you have to use a logical comparison to determine during any period of Time how much of the car you actually used and logically the way we do this is We compare how many miles you actually drove this particular accounting period whether it's a month a fiscal quarter or a year
2:29:28
and we compare that many miles that we actually used to how many miles you could have driven if you completely used up all of the useful miles in the car by logically comparing this you can figure out how much of the car you used and then mathematically what's the money amount of the car that you used during the period that's your depreciation adjustment so useful life you should know is always an estimate based on past data and past statistics if you buy a car it's not going
2:30:08
to be exactly the numbers in miles they predict but based on past services and past information about that car you should be able to estimate the useful life in Miles pretty accurately for example
2:30:26
for example let's imagine on January 1 of 2025 we purchased a car for ten thousand dollars and let's imagine that the estimated useful life on this car is ten thousand drivable miles in its lifetime well how would we record the purchase we already learned how to do that in Prior videos with simple debits and credits if we paid cash then we would credit cash ten thousand because the asset cash decreases and we would debit the car ten thousand for the amount that we paid
2:31:09
for the car and that would reflect the value of the car in our books now continuing in the same example let's discuss the difference between how much we could drive and how much we did Drive how do we find that out well we know we paid ten thousand dollars for the car and we know that there's ten thousand drivable miles that we can drive during the life of this car before we have to scrap it therefore we could consider the money value of every mile driven to
2:31:49
be one dollar per mile that means that the value of the car from the point of view of someone who's using the car not planning on selling it the value of the car decreases one dollar every time a mile is driven that's in theory that's the idea of depreciation based on usage so in theory each mile you drive you would use or expend one dollar of the value from the original purchase that means
2:32:24
that we have to then use that one dollar per mile to figure out the monthly adjustment amount and if we know that we lose one dollar in value every time a mile is driven then what we need to do is look on the odometer and see how many miles have been driven since the last accounting period so let's imagine on January 31 the odometer on the car shows 500 Miles have been driven during the first month of using the car and if it's one dollar per mile that we figured out a moment
2:33:05
ago that means in theory you expended or used up five hundred dollars worth of car or let's say accumulated five hundred dollars worth of depreciation on the car for driving at 500 miles so then what would we do we would have to debit depreciation expense car for the monthly adjustment amount and that's the expense that would show up on the profit and loss to show how much of the car's value was used during that period and of course the balancing
2:33:42
credit would go towards the asset so that the net amount would show up on the balance sheet as the actual value of the car reflected in drivable miles in other words there would be 9500 remaining drivable miles in money value as of the date of the balance sheet and of course five hundred dollars of depreciation expense is the money value of the actual driven miles and that would show on that particular periods in this case January's profit and loss as depreciation expense
2:34:22
now let's do a different example so the numbers are not as round for example let's imagine instead on January 1 we purchased a car for fifteen thousand and in this case the estimated useful life is 30 000 drivable miles in its lifetime so therefore the first thing we need to do is calculate the cost per mile in theory regarding the purchase cost and how many miles we can use so if we paid fifteen thousand dollars to be able to drive 30 000 miles that means in theory each
2:35:05
time we drive a mile we are using up 50 cents out of the fifteen thousand that we paid for the car because the reason that we paid fifteen thousand is to be able to drive thirty thousand miles to use the car for our business but what would be the monthly adjustment amount in this case we know the car in this example would start off with a thirty thousand dollar debit balance but in order to know the monthly adjustment amount we would have to again look on the odometer and see
2:35:45
how many miles were driven during the specific month that we are preparing our financial statements for and we see in this example that we drove the car 1450 miles during January and if it costs us 50 cents in value every time we drive the car it means we have expended or used up 725 dollars of what we paid for the car during January so that's the amount of depreciation expense that we would record and again we always debit depreciation expense for the value that was
2:36:26
expended or used up and we always in theory credit the asset so that when we get the net value of the asset we can see that the remaining drivable miles in money value as of the balance sheet date shows up as the balance of the car and of course only the money value of the miles that were driven or expended and used during the period will show up as depreciation expense for that particular month's profit and loss chapter 17 depreciation methods you see we actually learned
2:37:08
one way already our first example with the car is the example of the unit of production method you see this method is depreciation based on usage you would first divide the total Purchase cost of the asset by how many units in the useful life this will give you the depreciation amount per unit like we did with the car when we divided the total Purchase cost of the car by the estimated
2:37:41
number of miles that the car could be driven in its useful life that gave us the cost per mile but if it's another asset it's cost per unit you then multiply the unit amount by how many units were used or in the case of the car driven during this specific accounting period and that would give you the money amount of the adjustment to debit the depreciation expense and lower the value of the
2:38:11
asset that's the one that we already did and you can go back and look at that and apply that to any kind of asset whether it's a car or a piece of manufacturing equipment or anything you needed the second common method of calculating the amount of depreciation expense is called the straight line method and it's called the straight line method because every year has the same amount of depreciation for the asset this method is based on the time that you spent using the asset
2:38:48
you divide the purchase cost of what you paid by the total number of years in its useful life that's the amount of depreciation each year if you make an annual depreciation adjustment and if you report monthly then you divide the annual amount you found by 12.
2:39:12
and the third method of calculating depreciation is called accelerated depreciation it's when you record more depreciation expense in the early years of the asset and less in the later years in Accounting 101 we learned some number trick patterns that we use to calculate more depreciation in the early years of the asset's useful life and less depreciation expense in the later years of the assets youthful life
2:39:46
and for taxes it helps us deduct more depreciation expense in the early years if we choose to and then this will help the business save on taxes and until until it can grow and get strong
2:40:02
now let's do an example of straight line depreciation let's imagine on January 1 we purchased a fifty thousand dollar truck with the estimated useful life of 10 years of course the truck will have a fifty thousand dollar debit balance in the asset account after you purchased it but what's the annual adjustment amount that you have to record well if you paid fifty thousand dollars for a truck that you're able to use for ten years then
2:40:38
in theory you're using up five thousand dollars of the fifty thousand that you paid every year that you continue to drive the truck so then how do you record the annual adjustment well of course it would be debit depreciation expense five thousand and credit the truck five thousand just like we learned in the prior example however that's not the proper way to record and display the depreciation adjustment or the depreciation against the truck
2:41:17
you see of course we have to debit the depreciation expense account five thousand because this shows the value that was used during the period and that expense will go with the rest of the expenses on the profit and loss but the balancing credit does not go directly to the asset account instead the balancing five thousand dollar credit goes to another account that's connected to the truck account and instead of putting the credit directly to the truck we put a credit to
2:41:54
this account here and it's called accumulated depreciation an accumulated depreciation is a t account in the chart of accounts that only exists to be able to hold the amount of depreciation that has accumulated on any asset so you can compare it to the actual asset cost
2:42:20
now this is your first introduction to the idea of something called a contra account you see a contra account is an account that exists only to decrease another existing account so these two accounts go together they must be shown together on the financial statements or they mean nothing you can think of them like conjoined accounts where you can't have one without the other and you must present both of them together so someone looking at the financial
2:43:00
statements can see how much you paid compared to the theoretical value of the amount that was used
2:43:09
so if you look at the fixed assets section of a balance sheet you will see three numbers for every asset that you have to depreciate because looking at only one number is not really enough information for people looking at your financial position to really understand the value of the truck as it relates to how the company uses the truck for business but if you display all three numbers together that will give the reader of the financial statements a whole picture of
2:43:47
the value of the truck as an asset in the company and you may well ask what happens the second year that you depreciate well we know that each Year's depreciation amount is five thousand so no matter what at the end of each year even the second year we have to make a debit to depreciation expense to show the value of the truck that was used up during only the second year but after you make the debit to depreciation expense again the balance and credit goes to the conjoined account
2:44:24
accumulated depreciation on the truck and that's why they call it accumulated depreciation because now a second Year's depreciation has accumulated and that means the total decrease in value since we purchased the truck was 10 000 against the fifty thousand that we purchased and at the end of the second year the amount of accumulated depreciation in the account would show up in the fifth fixed asset section as ten thousand and therefore if the depreciation was five thousand
2:45:00
more that means the second year the book value would be five thousand less so this shows the reader we purchased the truck at 50 000 but ten thousand out of the fifty thousand has been used as we use the truck in business and therefore the real value of the truck is forty thousand dollars
2:45:24
so simply put more accumulated depreciation means a lower Book value for the truck shown on the next periods balance sheet and this was a pretty simple example because each Year's depreciation was the same amount but what about accelerated depreciation how would you handle it in that case well accelerated depreciation means that you record more depreciation in early years and less depreciation in later years you notice the overall amount of depreciation is the same but
2:46:03
you get to deduct more expense in earlier years when your business might need the deduction more so there are two common methods of accelerated depreciation one is called some of the year's digits and the other one is called double declining balance and they're both under generally accepted accounting principles when you report your financial statements they're both very simply number patterns that give us a depreciation table that tells us how
2:46:34
much depreciation to deduct each year where the numbers at the beginning of the table for the earlier years are higher and the numbers at the end of the table for the later years or lower and this makes the more depreciation expense in the earlier years and less in the later years there's no point in getting into them now they're simply Elementary School number tricks that you can find from your textbook chapter 18. depreciation for taxes the IRS explains everything
2:47:11
the Internal Revenue Service makes available publication number 946 which explains everything about how to depreciate property and in this publication they give charts and tables that break down different type of fixed assets into categories and these categories are called class life and if you can look up the type of asset you have and find what class life the asset belongs to then you can use these columns and rows to make a separate depreciation schedule for each asset
2:47:53
you see the way it works is that some property falls under three-year property in that category things like some cars but then there's other property that's considered five-year property like farm equipment and so on so you would First Look up in the tables which category or how many years it would take to depreciate that specific asset then once you do that you would then make a separate depreciation schedule based on the category of that asset for example if the company
2:48:35
car was three-year property then you would use the three-year column numbers to make the full schedule and the only reason for the full schedule is to be able to see how much depreciation you will deduct for that specific asset for each of the years of the assets life so the numbers for each individual tax Schedule for each asset come from the tables in the publication from the IRS this is an example of three-year property and this is what this schedule would look like if
2:49:14
it were five-year property like some farm equipment then again the schedule for that piece of equipment would come from the column of five-year property and that's what that would look like if it cost ten thousand to purchase and here are two separate depreciation schedules for two separate example fixed assets and the way to find Total depreciation expense for the year would be to use the amount of depreciation for the specific year for each asset for example
2:49:51
let's imagine that this is the second year of using the equipment so we would look on the second row and deduct the amount that the schedule indicates as the depreciation expense for the second year for this specific fixed asset but let us also Imagine in this same year that it's actually the third year using the company car so we would look in the row of the third year of depreciation to determine how much depreciation expense we should have for the car
2:50:30
and if these were the only two fixed Assets in this example company that means you would add them together and total depreciation expense in this example would be 7242.
2:50:46
many companies only have one fixed asset account for all their assets and for all their depreciation and if that were the case then the 7242 would go as a debit to one specific account depreciation expense and the balancing credit would go to one specific account accumulated depreciation on all fixed assets you could have a separate set of uh T accounts for each individual fixed asset but many companies lump them together and use the separate depreciation
2:51:26
schedules to keep track of them separately from year t part five all about merchandise inventory Chapter 20 The Perpetual inventory system we have already learned how to record an income from a service it's just one t account that represents the total money that came in from what we earned in previous cases it was just one number the service fee and it represented the price of the service so you previously made a credit to this income account for exactly what the customer
2:52:12
gave you however when we have merchandise that we're selling we still have an income account that represents the total money that came in from the customer for merchandise sales but in a case of a merchandise company we're not dealing with one number in the income section we're really dealing with three numbers the sales price of the merchandise which will get recorded as a credit to this income account the same way the income from a service got
2:52:48
recorded to the service income account but with merchandise we also have to consider how much did the merchandise cost you when you bought it because the difference between the price that you record as income and the cost that you pay for the merchandise will be your profit
2:53:10
now the most important words in this video are the words cost and the words price and you have to make sure you know the difference between the word cost and the word price
2:53:25
cost means the amount that we paid to purchase the merchandise from the vendor but for that very same merchandise the word price means the amount we received from the customer when selling the merchandise and of course the difference is your profit
2:53:48
price Minus cost equals profit and we all know that but only if the goods are sold so we therefore have to clarify our definition we should really say the price of the goods that were sold minus the purchase cost of the goods that were sold is what really equals our profit the price of the goods that are sold is the value that the customer gives us the cost of the goods that are sold is the value of what we gave to the customer it's what we paid for the goods that went out
2:54:34
the word Perpetual means continuously changing that means if we're using the Perpetual inventory method to record the sale the account inventory asset changes after each transaction that means it changes after we buy the merchandise and it also changes after we sell the merchandise
2:55:00
now of course in the top right here we have our sales income account this is very similar to the service income account that we were using in previous videos you record a credit for what the customer gives you because that's the income that you earned so previously we made a credit for the price of the service when the customer paid us or when we earned the service income so now when we
2:55:29
deliver the goods we make a credit to sales income for the price of the goods that are sold because that's the income that we earned and that's a t account just like service income however the interesting stuff happens down here in the cost of goods sold account this is not technically an expense even though it behaves like an expense and even though it has the same effect on income it
2:56:00
would go in the income section as a contra income account not an expense account because it's part of the income cycle you have to buy then sell then you can subtract your expenses to find your net income so that explains a little bit about this new account in the bottom right cost of goods sold
2:56:23
and now let's see how to use these accounts when we purchase and sell merchandise first let's give cash a beginning balance that's not a transaction we're just pretending that we're starting off with ten thousand dollars cash now here's our first transaction paid 300 to purchase merchandise well we know if we pay cash is minus cash is credit and just like purchasing any other asset exactly what we paid for the asset becomes a debit to that asset for that date so this purchase
2:57:05
transaction is no different than the ones we've learned before when we purchased other assets but the interesting part comes here when we sell with Perpetual we record it twice once for the cost and once for the price now that's a lovely little rhyme so let's say it again when we sell with Perpetual we record it twice once for the cost and once for the price let's take a look at an example
2:57:40
let's imagine on January 8 we sold the specific merchandise that we purchased on January 1 but we sold them for one thousand two hundred dollars so you can see this is the merchandise that we purchased back on January 1. this is the merchandise sitting here waiting to be sold now if we sold it for twelve hundred dollars it means that the customer gave us twelve hundred dollars and it also means we've earned twelve hundred dollars worth of income for selling
2:58:18
the merchandise so what would be the debits and the credits well if we've earned twelve hundred dollars worth of income for sales and we know that income is credit on January 8th we would have to credit the sales income account for the one thousand two hundred dollars that we earned on the other hand the customer gave us one thousand two hundred dollars so we have no choice but to debit cash on January 8th for the one thousand two hundred dollars
2:58:53
so this first step in credit looks just like it looked when we sold the service credit the income and debit the cash however there is now an extra step for this same January 8th sale for this January 8th sale we also have to credit inventory because this three hundred dollars of inventory is no longer here it went out so we have to remove it from inventory by making a credit of 300. so then what would we debit 300 and obviously the
2:59:32
answer is cost of goods sold credit inventory for the merchandise that went out and debit cost of goods sold for the purchase cost of the specific merchandise that we gave to the customer
2:59:50
can you guess the profit from this particular sale of course the profit is nine hundred dollars anybody could figure that out because it was only one sale watch another one let's imagine on January 20 we purchased 500 more of inventory again that's the easy one we have 500 more of this asset and on the other hand we have 500 less of cash so we know purchasing under the Perpetual system is very easy debit the inventory that you got and credit the cash now again the interesting
3:00:35
part is when you actually sell let's imagine on January 31 we sold the specific merchandise that we previously purchased on January 20. and we sold it for three thousand three hundred dollars well here's the merchandise that we purchased back on January 20 so we know that has to come out of inventory but what should we do first well we've actually earned three thousand three hundred dollars by receiving that from the customer for giving them the merchandise so always income is
3:01:14
credit for what we earned and if the customer gave us 3 300 in cash we have to debit cash so the debit and the credit for the price of the January 31 sale is credit sales income and debit cash but we're not finished this specific five hundred dollars of inventory went out on January Thirty One so we credit inventory 500 then what do we debit 500 well 500 was the purchase cost of the goods that we gave the customer on January Thirty One the specific Goods so here we have
3:01:57
the debit and the credit for the cost so we have four accounts changing when we make a sale credit sales income and debit cash for the price and the income we earned credit inventory for the cost of the goods that are sold and debit cost of goods sold now obviously at the end of the month or the end of the period we would get the total of the sales income and the total of the cost of goods
3:02:25
sold and we would eventually put them together to find the profit from our merchandise operation
3:02:33
in this case the profit is three thousand seven hundred but when you're an accountant you're not finished when you calculate the profit the profit is the result of the income section of our operation we then have to subtract out all the other expenses that we learned about in previous videos to get the final number the net income in fact sales income and cost of goods sold are together in the income section of the income statement and the expenses are at the bottom
3:03:10
they're both in the income section because both buying and selling are part of the revenue cycle and if you have a merchandise business the gross profit is the result of the income section
3:03:27
you then simply record all your other expenses and subtract them the way you did when you had a service business to find your final net income chapter 21 the Perpetual inventory system project
3:03:47
let's check your knowledge and skill regarding merchandise transactions and will also check your knowledge and skill regarding the income statement of a merchandise business so The Specific Instructions in this project are to download the Excel files in the resource tab of this video everything you need is in the downloadable Excel you can easily access the files for all of these projects by clicking show more just like you did before
3:04:21
to reveal the table of contents but if you look all the way down at the very bottom of the description field you will see that there are links to each of the project sheets for each of the projects and if you just click on any one of the links to download them all you have to do is Click where the link is for this particular exercise and you should be given an option to choose which folder to download the file to you see The Specific Instructions are
3:04:56
record all transactions into the general ledger provided find the results of each account and make a trial balance with the ending numbers of the general ledger and then from those numbers make an income statement of a merchandise company from the resulting numbers in the trial balance
3:05:19
when you click to open the file you this is what the file will look like it'll say the name of it up here and you'll have the general instructions in the first tab the second tab gives you the starting trial balance the third tab gives you the list of transactions that you need to read and remind you that the purchase what the purchase cost and the sales price of each item is now here's the blank general ledger for you to physically put the debits and credits you can zoom
3:05:52
in or zoom out if you want to see more of them at once and if you click and put in a number like a debit or a credit you will see it automatically adds it for you so that will save you time rather than using a pencil and piece of paper when you finish make your own numbers in the final trial balance and then from those numbers here we have a blank sheet for you to make your profit and loss
3:06:19
don't pick peek at the general ledger results or the final trial balance or profit and loss unless you've really exhausted every ounce of energy that you have trying to get the final numbers correct I wish you good luck and I'm here if you have any questions chapter 22 the periodic inventory system
3:06:47
the periodic inventory method is appropriate if you cannot keep records of specific quantities on hand after each transaction if that's the case then you must use the periodic inventory method of recording your transactions the you see with this method you can only Calculate cost of goods sold when you are ready to report your profit and loss and the rest of your financial statements you don't calculate it in the accounts like we learned with the Perpetual method you instead
3:07:25
calculate the cost of goods sold right on the income statement now what am I talking about well the profit and loss of a merchandise company has sections and subsections the numbers are in a relationship to each other and cost of goods sold still means the same thing but you can only find it at the end of the month or the end of the accounting cycle when you're ready to report your numbers so what did we already learn about the profit and loss of a merchandise company well
3:08:02
we know that we first calculate how much money came in from the customers for the merchandise we gave them and common sense says we then subtract what we paid for the merchandise that we gave the customer and the amount that we paid for the merchandise we gave the customer is the cost of the goods that were sold and if we subtract them out then we get our real profit from buying and selling the merchandise now most of you remember this from your elementary school
3:08:41
days but when you find your gross profit from the merchandise you're not really finished you still have to subtract out operating expenses and any other service you needed to pay for in order to be able to buy and sell to get your real final result which is the net income and hopefully you've seen this before in your accounting class or in your travels and hopefully this structure makes sense to you and should be very simple however you should know that when you use the
3:09:17
periodic method of inventory cost of goods sold is comprised of four separate elements you see you can't have a t account for the cost of goods sold if you have too many products to keep track of so you do a series of logical steps to find and calculate the cost of goods sold first you start with beginning inventory which is a t account in the general ledger that doesn't change as you
3:09:47
purchase merchandise if you are using the periodic method instead when you purchase merchandise all of your purchases gets recorded in a t account called purchases and then of course logic suggests if you add what you had in the beginning inventory plus your purchases you would then get a number that represents the goods that were available for sale and the last logical step to back into finding what the cost of goods sold is is to subtract out your ending inventory and then
3:10:27
once you get that result then you have the cost of goods sold to put into your income statement subtract from your sales income to find your gross profit and these are the four elements of the logical steps that you would do at the end of the month and show on the income statement in order to show that you have an accurate cost of goods sold and therefore an accurate gross profit and so on
3:10:55
but why is it that the cost of goods sold steps seem a little challenging it's only because you're using the words in accounting instead of using Common Sense words think about what cost of goods sold is it's what we paid for what went out it's what we paid for what we gave the customer so all we have to do is use different words and it will be clear and Common Sense exactly what cost of
3:11:26
goods sold is instead of using the words beginning inventory let's just say we had some because whatever your beginning balance of inventory is recognize uh you know represents what you had at the beginning you had some but that during the month when you record your purchases you bought more so instead of calling it purchases call it how much more you bought and logic dictates if you add what you had at the beginning plus what you bought then you get a number that represents
3:12:05
what you could have sold so Goods available for sale is the total that you had the ability to sell we then subtract what we did not sell and logic dictates if you subtract from what you could have sold the amount you did not sell then the number that remains is what you did sell so logically speaking Goods available for sale which is what you could have sold minus ending inventory which is what you did not sell equals what you did sell and what you paid for what
3:12:48
you sold is the cost of goods sold so here's a practical example from an Amazon online store keeping in mind that any company with too many different types of products and large volumes can cannot keep track of the cost of goods sold for each sale and just like a supermarket they must count the inventory after each period that they want to report their numbers and use the periodic system so here's the Practical example you cannot know your profit unless you know how
3:13:25
many items were sold during the month and how much money of item costs were sold during the month in other words how much you paid specifically for the products that you gave the customers most Amazon sellers do not keep count of the quantity of items after each sale or after each purchase
3:13:50
so how do you know how many items and how much money of inventory was sold during the month the solution is to use old school elementary steps to basically back into the amount of cost of goods sold during the month so what does that mean well let's think of it from an elementary school's point of view let's imagine at the beginning of the month you had some inventory for example you had 10 items then let's imagine during the month you bought more and
3:14:32
you kept track of how many you bought during the month and that was 20 items now you don't know exactly how many you sold because you did not keep quantities of that which were sold but what you can do is physically count the ones that remain and are with you at the end of the month and if you count the amount at the end of the month in this example and you have five items left over how would you find out how many actually were sold and went out well
3:15:08
in order to know that you would have to be able to add the first two numbers together in other words you would have to find out how many you were able to sell and then of course you would subtract out the amount that you did not sell which is the amount left over so if we were able to sell 30 and we did not sell five then how many did we actually sell and of course the answer is 25. logically if we had some for example in this example we had 15 at the beginning of the month
3:15:54
then during the month we bought 45 more well we don't know how many were sold but we know we can physically count the ones that are left over at the end of the month and in this example there were 25 left over so remember in order to find out how many you did sell the first step is finding out how many you were able to sell and in this example you were able to sell 60 and had 25 left
3:16:28
over so in this example how many did you sell well you sold 35 because 60 that you were able to sell minus 25 that you did not sell because 25 was left over logically equals the 35 that you did sell
3:16:52
and now we will do the same thing we just did but we will do it with money amounts instead of counted quantities for example let's imagine at the beginning of the month we knew we had 250 dollars worth of merchandise inventory that means we paid 250 dollars for the items that were sitting here at the beginning of the month then during the month we kept track of how much we paid to buy more inventory
3:17:28
and therefore we know the money amount that we were able to sell we could also check the amount left over in ending inventory and figure out what we paid for that so we know the money amount of what remains and logically we could figure out the money amount of the goods that were sold and we know in this example it was 300 because eight hundred dollars worth of inventory that we were able to sell minus five hundred dollars worth of inventory that we did not sell equals
3:18:10
three hundred dollars worth of inventory that we did sell and since we paid the cost for that 300 that we did sell the three hundred dollars in this example is the cost of goods sold and now we will do the same thing we've been doing but using the proper accounting words for example instead of saying we had some we're going to say beginning inventory was 250 dollars worth of merchandise
3:18:46
and instead of saying we bought more we'll call the amount that we bought more the very important word purchases so these are the words that we would use when doing accounting and calculating our cost of goods sold now the word able is in the phrase able to sell so instead of saying the amount we were able to sell the official word for this number is Goods available for sale and of course instead of saying the amount left over we call the amount left over ending inventory
3:19:31
so what's the proper word for the result well the result is what you paid for the goods that you sold and went out so if in this example three hundred dollars worth of merchandise went out then that's what we call the cost of goods sold because three hundred dollars is what we paid for what went out because in this example eight hundred dollars worth of merchandise is what we were able to sell that was the goods available for sale 500 is what we did not sell that was the ending
3:20:14
inventory so logically we sold three hundred dollars worth of merchandise and 300 is the cost of goods sold now let's do another example with the proper words beginning inventory was 400. then during the month we purchased 350 dollars more worth of inventory
3:20:38
and when we physically count the inventory at the end we know we have a hundred and fifty dollars worth of inventory still sitting here so of course the next step is to find out how much money worth of inventory we were able to sell and that's the goods available for sale so beginning inventory plus purchases equals Goods available for sale and goods available for sale minus ending inventory equals the cost of goods sold and in this example it is six hundred dollars because
3:21:14
seven hundred and fifty dollars were the goods available for sale a hundred and fifty dollars was the ending inventory therefore the cost of goods sold in this example was six hundred dollars
3:21:32
now we need to know the cost of goods sold so that we can subtract it from the money that came in in sales income to calculate the gross profit because Common Sense dictates the money that came in from sales minus the cost of goods sold which is what we paid equals the profit on the sales of the merchandise so how was this done in the old days in the chart of accounts well the sales were recorded this way we had a separate account in the chart of accounts just to record
3:22:11
all the money that came in from sales and only the money amounts that the customers paid us got recorded in the sales income account because that was recorded at the same time in the cash and bank account that we used in our general ledger to keep track of how much money we had in the bank so we knew if it came in and it was a plus to the bank account that it was also sales income and each individual sale was recorded on the credit side of the sales account to
3:22:46
keep track of the income and the debit side of the cash and bank account to keep track of how much money was in the bank or came into the bank account then of course at the end of the month we would total the money that came in from the sale and that amount would be the sales income that we would subtract out the cost of goods sold to fine the profit
3:23:13
so then you may ask how were purchases recorded well we had a separate account to record the money amount each time we purchased inventory and of course that was matched to the deduction of the bank account every time we paid for the purchase and in the purchases account we only put the purchase cost we only put what we paid for the merchandise that we purchased and every time we did that we put a of the money amount on the debit side of purchases to keep track of everything we
3:23:54
paid and the credit side of the cash and bank to keep track of each reduction to the bank account and after each purchase was recorded in the purchases account during the month at the end of the month we would get the total purchases and the total purchases would help us find the cost of goods sold to be able to subtract from the sales income to be able to determine our profit but we know that what we paid for the purchases is not exactly equal to what we pay to what the cost of
3:24:34
goods sold is so how did we actually find the cost of goods sold well we had our purchases account and we had another account to keep track of the inventory which is an asset and that account kept track of what's physically here at the end of one month and the beginning of another
3:24:58
and then of course we had a separate t account just to show us the amount of cost of goods sold and what would we do well we would start with the beginning inventory that means that if we looked at the inventory asset account in our chart of accounts at any given moment it would only show the amount of inventory we had at the beginning of the month now let's just remind ourselves what the calculation was beginning inventory plus purchases equals Goods available for sale
3:25:40
Goods available for sale minus ending inventory equals cost of goods sold so the first thing we would do is remove the beginning balance from inventory asset and move it to cost of goods sold we would do that by making a credit to the inventory asset to wipe it out because that's no longer the inventory amount that was the amount at the beginning so since the number at the end of the month is not the same we make a credit to wipe it out and the balancing debit goes into the
3:26:19
account cost of goods sold now the inventory asset is zero after step one now what would be step two move the purchases to cost of goods sold purchases normally had a debit balance so we made a credit to wipe it out and make purchases zero so that we could account for only the purchases in each individual month and purchases will become zero as a fresh balance to record the purchases in
3:26:54
the next month and the balancing debit of course goes to cost of goods sold now cost of goods sold now has this final third step the ending inventory will go as a decrease to cost of goods sold and we know the amount that we physically count at the end which is the amount left over gets subtracted in our little calculation so that's why it goes on the credit side of cost of goods sold because
3:27:31
it gets subtracted and of course the balancing debit goes into the asset account inventory so that now is the ending inventory of this month and now going into the next month the inventory account reflects what's the beginning inventory in the new month and now our cost of goods sold account in the chart of accounts has every part of the calculation on the left left it has the beginning inventory and the purchases so the total on the left is the goods available for sale and
3:28:12
we know that on the right side it has what's left over that we subtract out as the ending inventory so when we take the total debit side of cost of goods sold minus the total credit side of cost of goods sold we get the actual balance of cost of goods sold and in this example that's eight thousand dollars and that's how we found out the cost of goods sold by managing the chart of accounts in the days before the computer and that cost of goods sold is what we would subtract
3:28:50
from the sales income to get the gross profit from buying and selling merchandise after that we would subtract our general administrative expenses to get the net taxability
3:29:05
chapter 23 the periodic inventory system project the profit and loss of a merchandise company has sections and subsections the numbers on the profit and loss are all in a relationship to each other and it's remembering and understanding this relationship that will help you learn and remember the merchandise accounting that you studied in this course you see The Specific Instructions to this puzzle are as follows download the two Excel files in the resource tab of this video
3:29:49
then use the Excel file to fill in the missing numbers by using your knowledge of the different parts of an income statement of a merchandise business and everything you need is in the downloadable you can easily access the files for all of these projects by clicking show more just like you did before to reveal the table of contents but if you look all the way down at the very bottom of the description field you will see that there are links to each of the project
3:30:26
sheets for each of the projects and if you just click on any one of the links to download them all you have to do is Click where the link is for this particular exercise and you should be given an option to choose which folder to download the file to
3:30:46
we know that sales income is the money the customers give you for the merchandise that you give them and we subtract from that the cost of goods sold and we know that the cost of goods sold is what we paid for the merchandise that we just gave the customer so logically if you subtract the money the customer gave us in sales minus what we paid for the cost of goods sold for the merchandise that we gave the customer that difference we all
3:31:24
know is your gross profit and we all know what profit from a sale means but of course we're not finished with the income statement once you get the gross profit because that only accounts for buying and selling the merchandise we know very well that if you buy and sell merchandise there are additional expenses that you have to subtract from the profit of the sale of the merchandise to finally arrive at the true amount of money that you actually made called the net income
3:32:02
and most of you remember this from your elementary school days when you did practical simple projects however what you learned in Accounting 101 is that cost of goods sold actually is comprised of four elements to get the cost of goods sold you need to have your beginning inventory counted last month you have to add the amount that you that you paid for all the merchandise that you purchased during
3:32:32
the month or the period and that would give you a number called Goods available for sale and what you were able to sell minus what you did not sell because it remains an ending inventory then you will know your cost of goods sold then you will know the amount that you paid specifically for only the items that went out to the customer so since these are the elements and this is the math relationship you should be able to do this exercise so let's take a look at
3:33:11
what the sheet looks like you'll notice there are one two three four five six seven little puzzles
3:33:20
across seven little sheets in this Excel exercise and all you have to do is find the missing numbers by using the math relationship you learned about a moment ago okay now most of them should seem easy but if purchases is the number that's missing how do you figure that out how do you figure out what purchases is when you're usually given beginning inventory and purchases and you have to find the goods available for sale but in this case you're given the goods available for
3:33:58
sale and beginning inventory and you have to find the purchases so how do you do that well we know that beginning inventory plus purchases is equal to Goods available for sale and if you think about that for just a couple of minutes you'll remember from elementary school that it follows therefore that Goods available for sale minus beginning inventory equals the purchases just think about the math relationship and some of the puzzles you did in elementary school and
3:34:40
you will understand why this is true so if we know beginning inventory and goods available we can find purchases purchases is equal to the goods available minus the beginning inventory
3:34:58
now again you don't have to use Excel and you don't have to use math formulas if you don't know Excel just use a calculator and type in the number in the empty space so we used this logic going backwards in order to find out the missing number now to find the remaining three missing numbers that's easy we just go back to the math relationship that we learned about a moment ago and we can finish putting in the rest of the numbers for example what's the cost of goods sold
3:35:34
well we know that it says here Goods available for sale minus ending inventory equals cost of goods sold no problem Goods equal to Goods available for sale minus the ending inventory
3:35:55
equals cost of goods sold just like it says in the layout of the diagram of the income statement of the merchandise business now how to find gross profit well it says it right here income Minus cost of goods sold is equal to gross profit so that's what we put we put equal sales minus the cost of goods sold which is in B8 and now that's your gross profit and then of course we look One Last Time gross profit minus total expenses equals the net income so gross profit
3:36:37
this one minus total expenses which is in B10 equals the net income so that's how you do it you don't need to use Excel just click in the field and type in the number and hit enter and just by doing these little puzzles you will be an expert by the time you finish try the rest of the sheets yourself I know you'll be an expert if you give yourself time to finish each sheet stay in touch good luck and if you have any questions please reach out to me immediately
3:37:18
chapter 24 the weighted average inventory system changing purchase costs can be a challenge when you're trying to track your cost of goods sold to subtract it from your sales income to determine your profit Purchase cost of items sold as you know get recorded in the cost of goods sold account QuickBooks needs to know the purchase cost of the items that were sold in order to be able to calculate the amount of cost of goods sold for that particular sale
3:37:59
if all purchase costs always stay the same then QuickBooks will always know how much to put into the cost of goods sold account when you sell your merchandise unfortunately if purchase costs change on new items purchased then you have different purchase costs for the same item in inventory and that's the problem the problem is if you have different costs for the same item the question is how does QuickBooks know which costs to use when you sell an item and need to find the
3:38:40
cost of goods sold for the items that were in that sale for example let's imagine on April 1 you have three apples in your inventory that you previously purchased for ten dollars each
3:38:57
now let's imagine on April 2nd you purchased two more apples each for twelve dollars now here's where the interesting part comes in on April 3rd you sold three of them which three did you sell they all look alike when they're sitting in the bunch
3:39:20
and then if you don't know which particular three apples you sold then what costs get assigned to those apples for you to determine the cost of goods sold to subtract from your sales for that particular sale that's the issue well QuickBooks desktop uses a special accounting method called the weighted average method it's the average of all of the different costs that you paid for the item with consideration to the quantity of the item after each step so let's first discuss
3:40:01
what a normal average is let's imagine you have one apple for ten dollars one apple for twelve dollars and one apple for fourteen dollars if these were the three apples sitting in your inventory then you know you paid a total of thirty six dollars for each of those three apples and you know that the normal average cost for those three separate costs would be twelve dollars and then you could use twelve dollars as the cost of goods sold for the apples that went out
3:40:35
however you would not normally use the normal average because that only considers the different costs without considering the quantity purchased at each cost the weighted average method considers quantity in the average so let's imagine we have one apple for fourteen dollars one apple for twelve dollars and we have three other apples that we previously paid ten dollars each now we have way more of the ten dollar apples so you can't just add 10 plus 12 plus 14 and
3:41:18
divide by 3 because you're not considering that most of the apples were purchased for ten dollars so you have to factor this into your average and we still have three different prices but we have more of the apples that were purchased for ten dollars so you can't just add them up and divide by three and use the number 12 as your cost of goods sold because the real average would have to
3:41:46
be closer to 10 because you have way more at the ten dollar cost so here are the steps to finding the weighted average so that you can assign a cost of goods sold to the items when you sell step one find the total quantity well that's pretty easy especially if you're using a computer
3:42:11
step two add all the costs of all the items together to get the total cost and of course step three divide by a used division divide cost by quantity and then you will have come up with a weighted average for each individual apple that you could then use as the cost of goods sold the very next time you sell so if this were the situation and we sold three apples the cost of goods sold for that sale would be three times the eleven dollars and twenty cents
3:42:52
notice it's a little bit closer to ten dollars than the original Twelve dollar regular average that we had because if we have more at the lower cost that tends to pull down the weighted average
3:43:07
now let's try a second example just to make sure you got it before we go over to QuickBooks let's imagine an inventory right now we have five apples at 13 each eight apples at eighteen dollars each and three apples at sixteen dollars each now we know that the weighted average should be a little closer to 18 than anything else because you have eight apples at the 18 Purchase cost each so the total quantity is easy to calculate and the computer will give you that
3:43:46
but this is displayed a little differently so how would you get the total cost five apples well what you would have to do is find the cost of each separate purchase and add it together so for the five apples that you purchased at thirteen dollars you would multiply and find those five apples cost you sixty five dollars to buy for the eight apples that you purchased at eighteen dollars each those eight apples cost you a hundred and forty four dollars and for
3:44:22
the three apples that you purchased at sixteen dollars each they cost you forty eight dollars so these apples together in total cost you two hundred and fifty Seven dollars and there's only 16 of them so then when you divide you come up with a result that's sixteen dollars and six cents and that is the weighted cost of each unit the weighted average of each cost and it would be that number sixteen dollars and six cents that you would multiply by
3:44:56
the quantity whenever you sold to find the cost of goods sold for that particular sale
3:45:06
now let's see this in action in our QuickBooks file right now in our inventory if you've been following along properly you should have 273 apples physically available for sale and your report should show that you paid ten dollars to purchase each of those 273 apples worth 2730 altogether so what if we purchased a hundred more apples but we purchased them at twelve dollars each what would happen well what would be the new cost per Apple that QuickBooks would give us
3:45:51
right now we have 273 apples at ten dollars each making 27.30 for the money amount of our Apple inventory if we bought another hundred apples at twelve dollars each that means we'd be paying 1 200 more for those hundred additional apples and we know the total quantity after that purchase would be 373 and we know the total Purchase cost of all apples after that purchase would be 3930 therefore the weighted average per Apple would be 10.54 so if we recorded this purchase QuickBooks
3:46:40
would then show us the new unit cost per Apple in the report that we just show showed a moment ago but it would not say ten dollars it would say 10.54 cents and that means that any subsequent sale would have 10.54 cents assigned to the cost of the apples to calculate the cost of goods sold for that particular sale so let's record that purchase let's imagine on May 2nd 2019 we paid Sam's Farm twelve hundred dollars for ten Apples uh basically 100 apples twelve dollars each well
3:47:22
it's very simple banking write a check and we said that was May 2nd of we're doing 2019.
3:47:33
might as well do it right we bought it from Sam's Farm and no we're not using a past purchase order and yes we're still writing a check don't worry about those two pop-ups but do not fill in the money amount go to the items choose apples and the quantity is a hundred
3:47:58
however we are changing the purchase cost from 10 to 12. now it's going to ask you should we update with the new cost no because this might just be a fluke who knows or you might want to say yes if you really feel that it's a permanent change but the point is we're buying a hundred apples for 12 each and we're paying Sam's Farm one thousand two hundred dollars now after we click save and close
3:48:27
we're going to open the inventory valuation detail haha the new cost for apple as of May 2nd is now 10.54 that means when we sell apples right now the amount of apples or the quantity of apples that we sell will be multiplied by 10.54 in order to calculate the cost of goods sold so let's sell with the new cost on May the 4th we sold 10 apples to candy and received cash let's talk about this
3:49:09
the sales income will still be 500 because the sales price each apple is 50 and we're selling 10 of them so 500 is coming in how much will be the cost of goods sold how much did how much does QuickBooks say that we paid for the apples that for the 10 apples that we just gave candy well QuickBooks is going to tell us that we pay 10.54 for each of the 10 apples that we just gave candy and therefore if we're selling 10 of them that means 105.40 is the amount of cost of goods sold
3:49:52
for that sale let's see if that's what QuickBooks does we click sale receipt and change the date to May the 4th be with you now we're selling to candy and we're selling her apples now the sales price certainly didn't change so if we're selling 10 apples we know that's 500 in income but after I click save and close I can open the trial balance and I can see if I go to sales and double click the sales number yes 500 in income for sales however
3:50:34
if I go to the cost of goods sold account and double click and go down to the most recent sale receipt here on May the 4th you can see that the amount of cost of goods sold for that sale that we just recorded is exactly the number we expected a hundred and five dollars and 36 Cents [Music] thank you foreign
3:51:13
the first in first out inventory system also known as fifo in order to know the gross profit and net income of our merchandise business you must have an accurate calculation of the cost of goods sold
3:51:32
you must properly track your purchase cost of all items that were sold as well as items still on hand there are three acceptable accounting methods to track your perch uh products changing Purchase cost the accounting method that QuickBooks Online uses to track changing Purchase cost is called First in first out also known by the acronym fifo
3:52:04
first in first out assumes the items of the same type are sometimes purchased at different costs when selling the items the accountant or the bookkeeper does not know which specific items were physically given to the customer in that sale as you know all apples look alike even though we paid a different Purchase cost for the different apples that are sitting in our inventory
3:52:35
some of the apples you gave to the customer were purchased at one cost and the rest of the apples that you gave the customer were purchased at a different cost and you don't know which ones were purchased at which costs all you did was grab the apples and give a bunch to the customer for the sale therefore you cannot know for sure the purchase cost of the goods that were sold because you don't know which cost you purchase the apples that were sold
3:53:08
so what do you do well fifo assumes that the very first items in this example apples that were purchased were the first ones to be sold so if you know the cost of each purchase then you can assign the cost to the ones that were sold for example let's imagine we start off with four apples in our inventory that we paid ten dollars each to buy now if we sell two of them we know the cost of goods
3:53:45
sold is twenty because we know for sure we pay ten dollars each for the two apples that just went out
3:53:54
but now we buy two more and we pay twelve dollars each for the two new ones that we just bought
3:54:04
so now after that if we sell two of these do we know the cost of goods sold well it depends on which two did we sell if we sold the two red ones we know the cost of goods sold would be twenty dollars each because we know we paid ten dollars for each of them but if instead we sold one red and one green that means we sold one for ten dollars and the other one we paid twelve dollars for so in the second example if we sell one
3:54:41
of each the cost of goods sold would instead be twenty two dollars for that very same sale
3:54:50
fifo assumes the first ones in were the first ones out and the red ones came first so which two did we sell according to fifo according to fifo we sold the two red ones and in our first example the cost of goods sold for that first sale would have been twenty dollars
3:55:12
but now let's imagine we buy two more and we pay fifteen dollars for each of the two new apples that we just bought now in the next sale let's imagine we sell three of these apples so there are four in front of us and we sell three well which three did we sell the green came first and fifo says first in first out so we sold the two twelve dollar ones so so far that sale is up to twenty four dollars in cost of goods sold but we didn't
3:55:53
sell just those two we sold three so we need to sell one blue one and that means that adds an additional fifteen dollars what we paid for the blue one and that gets added to the cost of goods sold for the sale so for that sale of those three the cost of goods sold would be 39 dollars
3:56:20
now we'll try examples with larger numbers and if you need to pause the video to do some math calculation on a calculator or Excel just to verify what we're doing that's fine or you might want to watch the whole video and then the second time around that you watch it pause and verify the numbers that we're calculating are correct so let's imagine we're starting in inventory with 150 apples that we paid ten dollars each
3:56:58
now let's imagine we buy 200 more apples and we paid 13 for each of them
3:57:07
well that's fine we now have 150 at 10 and 200 at 13 and you could multiply and figure out what the cost of inventory asset is however let's imagine now that we sell 175 apples remember the first one's in or the first ones out so if red was first and we sold 150 apples that means all of excuse me red was first and we sold 175 apples that means that all 150 apples at ten dollars each are sold and we didn't have enough from the ten dollar apples we actually have to have 25 of the 13
3:58:01
apples to make the 175 for the sale so we're going to also take away 25 from the 13 apples so that after this sale we're left with only 175 apples that we paid 13 for each of them and multiplying 175 times 13 would be the inventory asset cost of apples after that sale
3:58:35
so we now have 175 apples at 13 each remaining in our inventory
3:58:43
but what was the cost of goods sold for that sale well we sold all 150 apples that were purchased at ten dollars each so that contributed fifteen hundred dollars to the cost of goods sold and then we needed to add another twenty five dollars to make the total 175 apples for the sale and we paid thirteen dollars for each of those so that contributed 325 dollars to the cost of goods sold so the cost of goods sold for that particular sale was 1825 dollars
3:59:26
QuickBooks Online is keeping track of these numbers behind the scenes there is no report that shows the breakdown of the purchase cost of each item on hand
3:59:39
the inventory valuation detail can help you figure this out but you have to look carefully at it it's not always clear so if we go now to QuickBooks online and we go reports inventory excuse me excuse me inventory valuation detail let's scroll down to bananas and let's use bananas for our real life example I'm going to stretch this a bit here you can see that right now on hand we have 280 bananas and we paid two hundred dollar excuse me we paid twenty dollars for each of these
4:00:21
280 bananas and that's why the cost specifically the asset cost of just bananas is 5600 right now
4:00:32
so the inventory report before we buy bananas at a different cost is showing right now we have 280 bananas at twenty dollars each now let's imagine on January 25th we purchase 300 bananas from Sam and we pay twenty two dollars each well if we do that what will be an inventory we'll still have 280 bananas at twenty dollars each and then we'll have another 300 bananas at 22 each so let's go ahead and record that in the top left click new expense
4:01:20
this is January 25th
4:01:25
of 2020 we bought from Sam's Farm oh don't forget that we're paying from cash don't forget we're paying from cash and by the way let's close this because this is not related to any prior transaction so we're paying from cash and bank to to Sam's Farm on January 25th product and service is bananas and the quantity is 300 and this is the first time we're going to change the rate the rate is twenty two dollars instead of twenty dollars now look what happens when we click save
4:02:07
and close at the bottom of the inventory valuation detail it's not exactly clear you have to look closely we had on the 22nd we had 280 bananas that we paid twenty dollars each now we bought an additional 300 bananas that we paid 22 dollars each now the quantity on hand is now 580 bananas where 300 of them we paid 22 and 280 of them we paid 20. so it's not laid out as clearly as it is in my little PowerPoint
4:02:52
but basically we have 280 bananas that we pay 20 each and we have another 300 bananas that we pay 22 each now here's where it gets interesting on January 26th we sold for cash 400 bananas to candy now if we sold 400 bananas which ones did we sell remember red was first so that means we sold more than the 280 that means we sold all of the 280 at 20 each that went out as part of this sale
4:03:31
but you see we didn't sell 280 we sold 400. that means we need to take another 120 bananas from the bunch that we bought for 22 dollars each and if we bought 300 at 22 each and we needed to take another 120 bananas out of that bunch to complete the 400 quantity sale that means that
4:04:01
if we that means that what's left in inventory after this sale will be a hundred eighty bananas at 22 each that's what will be left in inventory after the sale because we had 300 of those 22 dollar bananas but we had to give up 120 of them as part of the sale with the other 280. so let's take a look and write what's left will be 180 at 22. let's take a look at what happens when we make that sale so that was click new and go to sale receipt
4:04:44
okay because the date was January 26th and the customer was candy and the item that we sold her was bananas and the quantity that we sold to her was 400. now again it's you know don't worry about the sales price we're focusing on the purchase cost but what we should have left in inventory is 180 bananas at 22 dollars each so let's go ahead and save this
4:05:20
now scroll down to the very bottom scroll down to the very bottom you can see that what's left in inventory is a hundred and eighty bananas that's the ending quantity on hand after the last transaction 180 bananas and they're 22 dollars each and if you multiply the 22 times the 180 that explains the asset value 3960 but before we look at anything else let's ask this question what was the cost of goods sold for that sale well all of the 280 bananas that were twenty dollars each
4:06:11
were given as part of that sale so five thousand six hundred dollars was that part of cost of goods sold and we needed to take 120 of the twenty two dollar bananas to make a total of 400 for the sale so 120 bananas that we pay 22 each adds another 2640 to the cost of goods sold so the cost of goods sold for that sales receipt was eight thousand two hundred and forty dollars you can pause the video to check the math but let's do this if I double click this sale receipt
4:06:53
and then I click on more and go to transaction Journal you can see that the sales price you see they break it up all crazy they break up the cost of goods sold into pieces so it's really hard to kind of determine what it is okay what you could do is Click reports trial balance when they they make it harder for you to understand cost of goods sold if I double click this and I scroll down you
4:07:27
see what it does when you have a sale that has more than one purchase cost for cost of goods sold QuickBooks breaks it up crazy it breaks it up you see 10 14 1 2 3 4 5 6. it scattered it to six different lines but I'm gonna show you something these six lines together where is it
4:07:55
can I do this these six lines together for these for this one sale receipt add up the money amount I guarantee that it equals eight thousand two hundred and forty dollars so it would be nice if it would just show you eight thousand two hundred and forty dollars but it doesn't it breaks it up crazy but that's the way QuickBooks shows it so fifo would be challenging enough to understand if it put everything in one line and none of the tech people actually gave a logical reason why
4:08:37
uh why it uh that it spreads it out like that so if you click reports
4:08:48
inventory valuation detail go to the bottom where we have bananas you can see what was given you can see on the 26th you can see that as part of this sale receipt 120 bananas were given at the rate of twenty two dollars and that's what we actually said we said part of this 400 banana sale 120 of those 400 bananas were 22 dollars each and that is showing on the bottom line 120 of the quantity that went out for this sale is for twenty two dollars each
4:09:29
and it's all we also know that the other 280 bananas that are part of the 400 quantity sale we're at ten dollar we're at twenty dollars each so but what they did was they scattered that across several lines so if you look at this these
4:09:53
these are adding up these will all add up to 120 guaranteed so these are the excuse me these will add up to the 280. so these one two three four five lines are the 280 bananas that we gave to the customer for twenty dollars each and in that same sale one zero one four we also gave them 120 bananas that we paid twenty two dollars each so fifo would be a lot easier to understand if they
4:10:31
didn't split it up like this and to be honest with you I really don't know and neither do the tech support people know why it splits it up like that in the report but you will only have a transaction listed on several lines one transaction for several lines you will only have that in a transaction where there's more than one purchase cost for the item that you're buying and selling
4:11:00
we thank you so much for watching this video to the very end we hope you'll come back and visit if you need any help with QuickBooks or accounting and please support the free help for Everyone by clicking like and please subscribe [Music]
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