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So let's discuss chapters 1 through 4. So before we dive into the problems that we'll be working on let's first just talk about normal balances. Right so normal balances are how in account increases. So we need to remember that assets drawings and expenses all increase with a debit and liabilities owners capital and revenue accounts all increase with a credit. And then to make it one of those accounts decrease we do the opposite of its normal balance. So we need to
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know these normal balances for when we come up with journal entries for when we prepare trial balances so that little piece is going to be so important throughout all of accounting. So we have our first question here. It says Emily Valley is a licensed dentist. During the first month of operation of her business the following events and transactions occurred. We will need to journalize each transaction then post all of those entries into T-accounts and then prepare
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a trial balance. So let's take a look at this first transaction. So our first transaction says that she invested $20,000 in her business. So we think about what accounts are being affected here. Well the company is getting money right she's investing cash into her business so we debit cash to make our cash increase. And then what's the other side of this transaction? Well if she's investing in the business her owners capital is increasing as well and capital increases with a
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credit so we will credit our owners capital. And for how much? That's where we get our 20,000. Now our second transaction hired a secretary receptionist at a salary of 700 dollars per week payable monthly. So here all we did was we hired someone so they haven't done any work for us yet we don't technically oh them any money yet and we aren't paying them any money here. So all you did was you called someone up and said hey congratulations you're hired. That's not a
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business transaction and so we would not need an entry for hiring an employee. When we eventually pay this employee at the end of the month that's when we will record it in our journal. Now here on April 2nd paid office rent for the month of $1,100. So you're paying this month's rent. Since it's just for this month we will debit rent expense and credit cash for $1,100. Now if we were paying office rent for 6 months or for a year then we would deal with prepaid rent. But since we
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are just paying the office rent for the month of April we just consider that an expense here.
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Now on April 3rd purchased dental supplies on account from Dazzle Company for $4,000. So we think about what accounts are being affected. Well we are buying dental supplies and we are making this purchase on account. So our supplies an asset account has to increase so we debit our supplies. And then how are we paying for these? On account so we credit our accounts payable. And for how much? $4,000 because we purchased supplies that were worth $4,000.
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Now on April 10th performed dental services and build insurance companies $5,100. So here when we think about which accounts are being affected whenever we perform services that's gonna be service revenue. Right whenever you see the phrase that you performed services we can be thinking service revenue. So we can be thinking that we'll have to credit our service revenue to make our revenue increase. And are we getting paid right now? No,
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right we're billing insurance companies. So whenever you bill someone or send an invoice that's going to affect your accounts receivable. Account receivable is an asset and it's increasing so we will debit our accounts receivable and we will credit service revenue. Because we need to show that these insurance companies us more money right they owe us an additional $5,100 now and why do they owe us that money because we performed services. So we credit service revenue.
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Now here on April 11th. Received $1,000 cash from Lea Smith for an implant. So Lea Smith is a customer right and she's paying us $1,000 right now on April 11th for work that we will do in the future. So whenever you receive money before you perform the work that's going to be considered an unearned revenue. Right so this is an example of an unearned revenue a few other examples gift cards right a company will receive money before actually performing
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the work. Or airline tickets right if you buy an airline ticket you typically buy that well before the flight itself. So those are unearned revenues. So in this entry we are receiving cash so our cash has to increase and unearned service revenue is credited. Now unearned service revenue is not a revenue account instead it's a liability. But liabilities still increase with a credit so we're okay there and then how much that's where our $1,000 comes into play.
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Now on April 20th he received $2,100 for services performed and you received it from Michael Santos. So another one of our customers paid us money for services. So what did we get? We got cash all right so our cash has to be debited here to make it increase. And why did we get cash? We got cash because we performed services right so our service revenue will be a credit. How much cash did we receive and how much in revenue did we earn? $2,100.
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So we will debit our cash twenty one hundred and credit service revenue 2,100. Now we have a couple more entries here so on April 30th you now finally paid that secretary receptionist that you hired back at the beginning of the month. So we are paying them for their one month of work which came out to $2,800. So how are we going to record this entry? Well whenever you pay an employee their salary we're dealing with a salaries expense. Right so a salaries expense or
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salaries and wages expense has to be debited. So we will debit that expense account. And then how are we paying them? Well we're gonna pay them with cash. Right so we will credit our cash in this entry as well. And then our number in this entry the amount that we need debit our expense and credit our cash for is $2,800. Now our final entry. You paid two thousand four hundred dollars to Dazzle for accounts payable due. So way back on April 3rd we purchased supplies on account from
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Dazzle and now we're gonna pay part of what we owe them back. So if you are paying back someone that you owe that's going to affect your accounts payable. And how's that going to be affected? Well we need our accounts payable to decrease because we need to show that we don't owe them as much money anymore. So to decrease your accounts payable you will debit that account. Because accounts payable is a liability and liabilities account liability accounts decrease with a debit.
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Now our accounts payable is decreasing but how did we get our accounts payable to decrease? By giving them cash. Right so our cash has to be credited in this entry as well. And for how much? That's the $2,400 that we paid to them right so our cash decreased by 2,400 and our accounts payable decreased by 2,400. So those are all of our journal entries for this problem. The next step is to post all of these
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entries into T-accounts. So we have our 9 t-accounts that we need for this problem.
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Right we had cash accounts receivable supplies, accounts payable, unearned service revenue, owners capital, service revenue, rent expense and salaries expense. And you'll notice a few things here you'll notice the order that I put them in. If we read across from top to bottom its assets, liabilities, capital, revenues and expenses. That's the same order as your expanded accounting equation right so the reason I put them in this order is because this is going to help
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us when we need to prepare a trial balance in the final step of this problem. Now before we start posting our entries into T-accounts the left side of a t account is for debits and the right side is for credits. So we're going to reference all of our entries over on the left side of the screen and post those into these t-accounts. So the first journal entry that we had was a debit to cash and a credit to owners capital of 20,000. So we'll put that
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20,000 over on the debit side of your cash t-account and the 20,000 on the credit side of your owners capital T-account. So now you've posted that entry into T-accounts. So now we can just keep moving down the list the next one a debit to rent expense of 1,100 and a credit to cash of 1,100. So we'll put those into the rent expense and cash t-account.
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Our third entry a debit to supplies of 4,000 and a credit to accounts payable of 4,000 will look like that. We'll put the 4,000 on the debit side of supplies and the 4,000 on the credit side of accounts payable. Our next entry a debit to accounts receivable of 5,100 and a credit to service revenue of 5,100. So we'll post those into our T-accounts. Again the left side of the t-account is for debits and the right side is for credits. Now we move
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on to our next entry we debited cash 1,000 and we credited unearned service revenue 1,000. So we'll post that entry into our T-accounts. So just a few more journal entries now to post we debited cash 2,100 and credited service revenue 2,100. So we post that into are T-accounts.
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Then we debited salaries expense 2,800 and credited cash 2,800. And then our final entry was a debit to accounts payable of 2,400 and a credit to cash of 2,400. So you've posted all of your entries into T-accounts. Alright so we have all of our entries in here and what we need to do now is figure out the balance for each individual account. So how do we do this? Well we can do it a few different ways right we can think back to our normal balances and we can say well cash is an
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asset and assets increase with debits and decrease with credits. So your twenty thousand, one thousand and twenty one hundred over on the debit side for cash those are all increases and your three credits are all decreases. So you could add up all of your debits and subtract your credits. Another way to do it is add up your debits and add up your credits subtract the two amounts and the balances on the side where there's more. Right so if we add
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up our three debits for cash and add up our three credits for cash subtract those two amounts we'll see that there's a debit balance in cash of sixteen thousand eight hundred. So we put that clearly over on the debit side of our t-account.
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Now the next couple accounts pretty easy to figure out their balances right. Accounts receivable only had one entry in the t-account so that's its balance supplies 4,000 is its balance. Right if there's not multiple entries into the t-account we can't do any math to figure out a new balance. Accounts payable well accounts payable had 4,000 on the credit side and 2,400 over on the debit side. Remember liabilities increase with credits so
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it's balance is 1,600 over on the credit side. Got that by taking 4,000 - 2,400. Now unearned service revenue only that one entry so 1,000 as a credit balance. Owners capital only one entry so it's balances 20,000. Now service revenue service revenue had 2 credits. Right revenues increase with credits so we add up those two credits and they add to 7,200. So the balance in service revenue is 7,200. And then our two expense accounts just had one single entry so
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rent expense has a debit balance of 1,100 and salaries expense has a debit balance of 2,800. So now that we have all of these balances now we can prepare a trial balance.
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So a trial balance it's gonna start off with this. The company name then it's gonna say trial balance and then it's going to have the date that you prepared it. Right so this was all for just the month of April so April 30th 2020. Now you'll notice it says accounts debit and credit. What we do in a trial balance is we list out all of our accounts and then their balances in either the debit or the credit column. So
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that's why we first figured out all of these balances here in our t-accounts. Right so if you don't have these t-accounts written down I would recommend taking a picture of the screen right now and then that's gonna help you as you prepare all of your trial balance.
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All right so let's start creating our trial balance. Now now we need to list out these accounts in a specific order and that order is the order that I talked about a little bit earlier with the order that I listed out those T-accounts right it's gonna go assets, liabilities, owners capital, owners drawings, revenues and expenses. So that's the amount of your or that's the order of your accounting equation. So we're gonna start off with assets.
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Now assets need to be listed in a specific order themselves. And that order is called your order of liquidity. So your order of liquidity is how quickly can you turn it into cash or how quickly you're going to use up that asset. So your most liquid asset will be cash and we put the balance that we had for cash in the debit column because it was a debit balance. After cash we have accounts receivable. Again accounts receivables balance was in the
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debit column because it's an asset right. After accounts receivable we had supplies. So those were our three different assets. We had cash, accounts receivable and supplies. And their three balances go in the debit column. After assets we start listing out our liabilities. First one was accounts payable its balance of sixteen hundred you'll notice is now over on the credit side. Because a balance for a liability is a credit balance. After accounts
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payable is unearned service revenue. And that $1,000 balance is also on the credit side. So those were our two liabilities. After your liabilities comes owners capital. Owners capital had a credit balance of 20,000. Now after your owners capital would be your owners drawings. But in this example you didn't have any owner's drawings so we don't need to include owner's drawings on this trial balance. So after your capital here we're gonna list out our revenue account.
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So service revenue had a credit balance of 7,200.
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After your revenue accounts come your expense accounts. Right we had two different expense accounts we had salaries expense of 2,800 and we had rent expense of 1,100. And you'll notice I listed out the expenses in order from greatest to least. So you've listed out all of your accounts and their balances. That's step one of a trial balance. The next step is to add up all of your debits and add up all of
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your credits, because we want to be able to show that your total debits equal your total credits. Right because we had a few different rules early on here in accounting your debits have to equal your credits and your assets have to equal your liabilities plus owner's equity. Right we had those two different rules that we had to follow here. So if we add up all of our debits and all of our credits we will get twenty nine thousand eight hundred as your total debits and
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twenty nine thousand eight hundred as your total credits. So if you prepare a trial balance and your total debits equal your total credits you probably did everything right. You may have still messed up somewhere but there's no point in going back and just double-checking, right. However if your debits don't equal your credits something's wrong. I would first double-check your math to just make sure that you didn't just add things up incorrectly. But after,
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after that if that's all right you then have to work your way backwards and figure out where that mistake might have been. So maybe it's in your T-accounts or maybe it's all the way back at your journal entries. So we prepared trial balance like this to help us prepare financial statements. Right so you have those four financial statements. The first one that you prepare is your income statement and on the income statement are your revenues and expenses,
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to help you find your net income or net loss. So the income statements number one. After you prepare the income statement then you can prepare your owners equity statement. And we prepare that one second because we need the net income or the net loss from the income statement to help us prepare our owner's equity statement. So your owner's equity statement helps you figure out your ending owners capital. And then you use that ending owners capital amount on your balance sheet
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the third financial statement that you'll prepare. And that balance sheet proves that your total assets equals your total liabilities plus owner's equity. And then after you prepare a balance sheet then you prepare a statement of cash flows. So those are your four financial statements that you prepare. So question number two. We need to use a trial balance to help us calculate net income or
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net loss, our total assets, are total liabilities and our ending owners capital. All right so we have this trial balance for us. We have a bunch of different accounts here. The first step is to figure out our net income or net loss. Well we were just talking about that with the income statement right you find that by taking your total revenues and subtracting out your total expenses. So revenues minus expenses get you your net income or net loss. So we need to go through
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this trial balance to figure out our total revenues. Well on this trial balance we had a service revenue of 64,000 and a rent revenue of 6,500. So we had those two revenue accounts, 64,000 and service revenue 6,500 and rent revenue. So our total revenues will be sixty nine thousand five hundred. We'll keep that in mind for when we figure out our net income or loss. Now we can figure out our expenses. So we take a look over at our adjusted trial
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balance and we see we had depreciation expense of 8,000. We had salaries and wages expense of fifty-five thousand seven hundred. And we had utilities expense of fourteen thousand nine hundred. So we have those three expenses eight thousand fifty-five thousand seven hundred and fourteen thousand nine hundred. So your total expenses if you add up those three amounts are seventy eight thousand six hundred. Red flag should be going off right now.
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Right our total revenues, sixty-nine thousand five hundred. Total expenses 78,600. Well since our total revenues are less then our total expenses we’re not going to have a net income. Right we're gonna have a net loss. so if we take our total revenues of 69,500 and we subtract out our total expenses of seventy eight thousand six hundred. We end up with a net loss of 9,100.
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So we've lost money in this in this month in this year.
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Now we need to figure out our total assets. So we take a look over at our adjusted trial balance and we know that assets are listed first. Right so we had cash is an asset, nine thousand eight hundred and forty. Accounts receivable that's an asset of 8,780. Equipment that's a long-term asset right that falls under property plant and equipment that's fifteen thousand nine hundred. We have one more we have accumulated depreciation on that equipment. But that's not just a normal
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asset that's a contra asset. So we're going to subtract out that 7,400 when we calculate our total assets. Here so we will add together our nine thousand eight hundred and forty from cash. Our 8,780 from accounts receivable. Are fifteen thousand nine hundred from the equipment. But then subtract out the 7,400 for your accumulated depreciation equipment, because that accumulated depreciation decreases the book value of that equipment. So if you do that math you'll end
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up with total assets of twenty-seven thousand one hundred and twenty. Right your cash plus accounts receivable plus equipment minus your accumulated depreciation on that equipment.
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Now we can move on to total liabilities. So once again we're taking a look over at our adjusted trial balance and we need to figure out what are our liability accounts. Well liabilities come after your assets. Right so we're looking at accounts payable that's a liability right because that's money that we are liable to pay for someone. You have one other liability unearned rent revenue. Again remember these unearned revenue accounts are
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liabilities they are not revenue accounts. So those are our only two liabilities. So your total liabilities will just be your accounts payable of four thousand two hundred and twenty plus your unearned rent revenue of 1,800. Which gives you a total liability amount of 6,020. So once we find our total liabilities we can then figure out our ending owners capital. So a few different ways that we can go about this here. Let's, let's make something that resembles a
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owner's equity statement right where we start off with our beginning owners capital. That's the 45,200 you on your adjusted trial balance. Then we subtract out this net loss of nine thousand one hundred that we've found earlier in this problem and we subtract out the sixteen thousand dollars in drawings that the adjusted trial balance shows us so. That's a total of 25,100 that we need to subtract out. Right we
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need to subtract out 16,000 in drawings and 9,100 in a net loss. So if we take our beginning owners capital of 45,200 and we subtract out 25,100 we end up with an ending owners capital of 20,100.
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So that's one way that you could have found this. The other way is using your accounting equation. Right your total assets were 27,120 and your total liabilities were 6,020. So if you take your assets minus your liabilities you would have ended up with 20 thousand one hundred. So those are the problems that we're gonna be completing here during this review. I also just want to touch on a few things from chapters 3 and 4. Right so chapter 3 discussed
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adjusting entries. Now these adjusting entries will always have either a debit to an expense or a credit to a revenue. Right so you need either a debit to an expense or a credit to a revenue. And the other account in that adjusting entry would be a balance sheet account. But make sure that that balance sheet account is not cash because adjusting entries will never include cash.
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So that was really the big takeaway from Chapter three right learning you're adjusting entries. Chapter four focused on closing entries. So we had those four closing entries right first you would close your revenues to income summary. Then your second one would be closing expenses to income summary. So you've closed revenues and expenses to income summary in your first two closing entries. And remember when we are closing these accounts we are zeroing out the
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balance right we want the ending balance to be zero. So step one we close our revenues to income summary step two close expenses to income summary. Step three is you close your income summary to owners capital. So you zero out your income summary account. And then step four you close owner's drawings to owners capital. So owners capital is involved in these closing entries but it is never closed itself. Owners capital is a permanent account. So it's affected
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by your closing entries but it is never closed. Your revenue accounts, your expense accounts, income summary and owner's drawings those are the four accounts that are closed they're called temporary accounts. So after you close those accounts their balances would be zero.
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