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Accounting For Slow Learners — Transcript

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0:00would you like to be an expert in Accounting in less than five hours
0:05well if that's the case then just watch this video a little bit every day and you will be an expert
0:12in accounting by the time you finish just sit back and relax and enjoy learning like you're watching
0:20your favorite education Channel and by the time you finish you will have everything you need
0:27my name is Mark smolen I'm the founder and CEO of worldwide QuickBooks I personally guarantee
0:36you the clearest possible explanation for every important accounting idea that a small business
0:43owner could need or an accounting student could want to learn I answer all questions immediately
0:50if you leave them in the comments section below and I promise to get back to you quickly and give
0:56you the best answer I can I love hearing from all of you and I know you'll enjoy this video [Music]
1:14let's start off by saying that everybody learns differently and everybody listens differently too
1:23that's why YouTube gives you the ability to change the volume right here in front of the
1:30video and you should also know you can click on the Cog wheel and adjust the playback speed to
1:37your listening pleasure this way you can make it faster if you think I'm speaking too slowly or you
1:44could slow it down if you think I'm speaking too quickly and most importantly you need to
1:50know how to navigate this video the description field has the table of contents and you can get
1:58to the table of contents by clicking the show more button that's right under the video at the end of
2:05the description field if you click show more the rest of the description field will open up and it
2:13will reveal the table of contents that'll give you the ability to click on the time index of
2:20the chapter you want and this way the video will jump right to the place that you want to watch
2:26so I thank you very much for watching and I hope you will click like And subscribe and without
2:34further delay I now present an introduction to accounting part one has only one chapter
2:43introduction to accounting chapter one what is accounting what is accounting if you can
2:55answer that question right at the beginning then everything we do here will make perfect sense
3:02accounting is the way that companies record summarize organize and present financial
3:11information let's look at that again it's the way companies record summarize organize and present
3:23financial information now to explain this clearly let's first focus on the recording part
3:30we record transactions right now into the computer the same way that we recorded them
3:37on paper spreadsheets in the days before the computer and then once all of the transactions
3:44are properly recorded we would simply Summarize each area of accounting and financial data
3:52obviously the summary numbers were very important we would then have to organize these totals onto
3:59meaningful documents that would reveal how well the company is operating this is an example of
4:07a profit and loss it shows how well the business is operating during a particular period of time
4:15of course we would have to organize all the financial information and this is an example
4:21of another financial statement called the balance sheet it shows what a company has
4:28compared to what a company owes this is a very abbreviated version of a balance sheet
4:35but it does give you an example of the financial position of a company at a specific Moment In Time
4:44so then the question is why do we do accounting that's where the presenting comes in
4:51we do accounting so that we can present our financial statements to people or organizations
4:58who need to know what's going on with this business and you may well ask who needs to
5:07see that information well obviously the owners and the managers of the company need to see how
5:14well the company is doing and need to see the financial position at different periods of time
5:20and of course everybody in this country needs to report their numbers at some point to the IRS so
5:31to summarize accounting is recording summarizing organizing and presenting financial information
5:42and exactly how do we get there well we get there by learning the ideas of debits and credits
5:51now come on it's easy and fun if you try this video a little bit every day just patiently watch
6:00a little bit each day and you will be amazed how easy and fun it is to learn accounting
6:08part two the story of debits and credits chapter 2 what are assets
6:19the only reason why people think that the accounting words sound complicated is because
6:25the words are used in everyday life but when we use these words we're not using them the same way
6:33that we use them in accounting we're using them as a metaphor for the way we would use it normally in
6:42accounting for example the word asset we all know the metaphor it means something good or helpful
6:50for example you might say she's an asset to the team however the real meaning of the word asset
7:00is anything a business owns that has value now most assets are tangible assets because you can
7:10physically touch them like a car or a Furniture item or a bank account but there are other types
7:18of assets that a company could own like copyrights and patents and things that you can't physically
7:26touch but things the company did pay for that they own that has value that will help the company earn
7:34money into the future so you see asset is an idea it's something you can own that has value whether
7:44you can touch the item or not chapter three what are liabilities we even have the same issue with
7:54the word liability the word liability is usually used as a metaphor it usually means something
8:02that's a hindrance or something that would work against you but the real meaning of the word
8:08liability is money or some kind of obligation the company must pay give or do in the future
8:18so if the company took a small business loan that would be an example of a liability that you would
8:25have to record in the company books and Records if the company had a mortgage for a house that the
8:31company owned or a building that the company owned that would also be a liability of the company
8:39what if the company took a car loan well we know the car would be the asset but the loan
8:45would be the liability and of course if the company had a company credit card or let's
8:52say the owner had a company credit card the company credit card would be on the books and
8:59records as a liability just like the bank account would be on the books and records as an asset
9:07but remember a liability can also be a future obligation to do something for example if a
9:15customer paid in advance before getting a product or a service between the moment we
9:22got the money and the moment we give the product or service our company books and
9:27records must reflect that we have this liability a future obligation to pay give or do something
9:39you probably already know that the three most important accounting words that we learn at
9:45the beginning are assets liabilities and owner's equity but I think owner's equity deserves its
9:56own special video because all the other ideas of accounting come from the idea of owner's equity
10:03so don't forget to tune in to the next video what is owner's equity a conceptual overview
10:12I thank you for listening to my definition of these words I know they're going to help you
10:19chapter 4 what is owner's equity the textbook definition of owner's equity is the amount of
10:30ownership rights or ownership claim that someone has in an asset or even an entire business
10:39in accounting we can measure this in dollar amounts the ideas are common sense and we
10:47deal with them all the time every day any object or business can be owned by one or more people
10:56and the idea is that there must be fairness or equality regarding the ownership
11:03the textbook definition of owner's equity is the amount of ownership rights or ownership
11:11claim that someone has in an asset or even an entire business in accounting we can measure this
11:20in dollar amounts the ideas are common sense and we deal with them all the time every day
11:29any object or business can be owned by one or more people
11:34and the idea is that there must be fairness or equality regarding the ownership
11:42the idea is to share the value in a fair and equal way when there's more than one person
11:49that owns something so the accounting equation was derived by measuring the value of something like
11:58a car or a house or a company all the assets of a company together have a value that you can measure
12:07and the accounting equation created the idea of owner's equity when we assert that the value of
12:15these assets must be equal to who has a claim to the assets so if there's only one owner the
12:24owner owns the entire ownership equity and owns the entire asset but if there are several owners
12:31we need a fair way to measure how much ownership claim or ownership rights is in the asset and how
12:40much each owner is entitled to have or use so let's start with a simple example let's imagine
12:48that Sharon and Sally buy a car together now if the car costs a thousand dollars and Sally only
12:57gives 600 towards the purchase price and Sharon pays the other 400 what would the ownership
13:05structure look like well very simply put Sally has 60 percent ownership claim or ownership rights
13:13in the car and Sharon has 40 percent ownership claim or ownership rights in that very same car
13:21so we could say that the car is equal to the value of who owns the car Sally owns 60 Sharon owns 40
13:32and we could say that Sally has 60 owner's equity in the car and Sharon only has 40 percent owner's
13:43equity in the car and you will notice that you know more about owner's equity than you
13:51realize for example question one can Sally tell Sharon that Sharon cannot use the car of course
14:00not you know from your life experience that if you bought 40 of something and someone else owns sixty
14:07percent you can still use it and the person who paid more can't tell you that you could never use
14:13it so that idea of owner's equity you already have but what about this question if they agree that
14:22they must paint the car only one color they're not going to paint 60 percent of the car one color and
14:29forty percent of the car or the other color they've already agreed they have to paint it
14:33only one color should it be the color that Sharon wants or should it be the color that Sally wants
14:41well common sense says from your own life experience if it's an either or question
14:47about an asset that you share the one that sacrificed more contributed more and paid more
14:53is the one that gets the either or question settled in their favor so when it comes to
15:00painting the car one color Sally would get the color that she wants we all feel that's fair
15:09now the car in that previous example was a metaphor for an entire company in other words
15:16all the assets together of one business can be owned jointly in the same way that Sally and
15:26Sharon share the car Sally could be a 60 owner of an entire business Sharon could be a 40 owner
15:35of that very same business but when it comes to an either or question Sally would get what
15:42she wants but Sally can't tell Sharon that she cannot participate so these ideas about owner's
15:49equity come from common sense and fairness and we experience them in our everyday life
15:57now this second example will make it clear how owner's equity relates to the fundamental
16:03accounting equation let's imagine you want to buy a house and the value of the house costs
16:11a hundred thousand dollars and of course we all know the house is an asset well in order to buy
16:19the house you would have to come up with a certain down payment from your own personal pocket and you
16:26would have to take a mortgage for the rest of the money to buy the house so you could say the value
16:33of the house which is the asset is equal to the liability that you owe for the house which is the
16:41mortgage and the down payment that you put in from your pocket which is the equity that you
16:47invested yourself so this is the same equation as it was with Sharon and Sally but in this case
16:55we have another type of claim against the value of the house the mortgage is a debt claim not
17:02an ownership claim like owner's equity the way we were talking about Sharon and Sally before
17:09but a debt claim is a certain type of claim against the rights and the usage and the
17:16ownership of the asset so we know very well that if you had a restrictive mortgage the
17:22bank has the right to tell you certain things but the bank does not have the right to have
17:28their administrators come to your house at two o'clock in the morning and have a party
17:32because that's not the type of ownership claim that they have and we've experienced both of
17:39these types of claims in our lives so we already have some sense on how they work
17:46now clearly in this example the house is a metaphor for an entire business and what we've
17:54just derived right here in this video is the fundamental accounting equation the assets of
18:02a house or an entire business must always be equal to the liabilities plus the owner's equity of that
18:12business and in this case the hundred thousand dollar house is equal to the eighty thousand
18:18dollar mortgage plus the twenty thousand dollar down payment that came from the owner's pocket
18:23so we're going to put it up here as the fundamental accounting equation and what you're
18:29going to see is that the accounting equation will always stay equal after each transaction
18:39for example let's imagine we pay five thousand dollars towards the mortgage for the purposes of
18:48decreasing the mortgage well if we pay five thousand towards the mortgage the mortgage
18:54will decrease by five thousand but that 5000 did not come out of thin air that 5000 came from the
19:02owner's pocket it means the owner took more of their personal money and put it into the house
19:09if you take your personal money and you put it into an asset by investing in that asset or that
19:15business you then have more owner's equity in that asset or that business so if we pay the
19:23mortgage five thousand the mortgage balance goes down but the owner's equity which is the amount we
19:30put in from our personal pocket will increase so the value of the house stays the same it's still
19:36equal to a hundred thousand but now the balance of the mortgage has decreased to 75 000 but on
19:45the other hand the total that we've invested in the house is now 25 000. the 20 000 was the down
19:53payment and the additional five thousand went to pay the mortgage so that we could keep the house
20:02now I've updated the balances and let's try a second example let's imagine that we invest
20:09ten thousand dollars to add a room to the house well if you pay ten thousand more for physically
20:18more house than the value of the house is going to increase by ten thousand but of course that money
20:27did not come from the bank that money is more money that we took from our personal pocket and
20:34put into the house therefore the amount of owner's equity that we put into the house increases
20:42the new value of the house is about a hundred and ten thousand dollars because we bought it for a
20:47hundred thousand and added a ten thousand dollar room but the amount prior to this that we had put
20:55into the house was twenty five thousand we now put another ten thousand dollars of our personal money
21:03into the house so the total that we've taken from our personal pocket and put into the house at this
21:10point is now thirty five thousand dollars and because we paid for the room the balance of the
21:17mortgage didn't change which means the accounting equation stays equal after each transaction
21:30now let's apply this idea to an entire company we're going to imagine that the house was a
21:37metaphor for all the assets together of a company and let's imagine we're going
21:44to measure these transactions and record them in the fundamental accounting equation
21:50let's imagine that this company is starting out with ten thousand dollars in cash
21:56starting out with twenty thousand dollars of equipment that they paid for and starting out with
22:02five thousand dollars worth of cars now let's also Imagine That in order to own some of these assets
22:10the company had to take a small bank loan and if the bank loan only covered some of the cost of the
22:18assets that means that the rest of the money for the assets must have come from the owner's pocket
22:26so we're starting our little exercise with the assets on the left being equal
22:32to the liabilities and owner's equity on the right and this company's accounting
22:39equation is equal at the beginning and it will stay equal after each transaction
22:49let's imagine the company buys another car for three thousand dollars cash well if we
22:56paid cash then the amount of cash the company has goes down but if we bought
23:03a car the amount of car or the money value of the cars the company has will increase
23:10so in this case the new balance of cash after this transaction is seven thousand but the new
23:18balance of the cars that we have is now 8 000 and of course all the other numbers in the equation
23:27did not change from this first transaction so those balances will stay the same and you
23:34will notice the equation stays equal after this transaction now here's an interesting one let's
23:43imagine the owner takes five thousand dollars of equipment that they were only using at home and
23:50brings that to the business to be used only for the business well in that case the business will
23:57have five thousand dollars more worth of equipment but on the other hand the business or the owner
24:05has five thousand dollars more of owner's equity in the business because the owner just took more
24:12asset value from their personal pocket and put it into the business the new value or the new
24:19balance of the equipment is now twenty five thousand and now the new Total that the owner
24:26invested is twenty five thousand and of course because none of the other numbers changed for
24:33this particular transaction the accounting equation stays equal after each transaction
24:43now let's do one more for good measure let's pay 2 000 to decrease the bank loan well of course if
24:52we pay to decrease the bank loan we're paying money so our cash will go down by two thousand
24:59but because the reason we're paying the money is to decrease a bank loan the bank loan will
25:05also go down by two thousand the new amount of cash we have is only five thousand but the new
25:13amount that we owe to the bank is down to thirteen thousand and again because
25:19none of the other numbers changed during this transaction the accounting equation stays equal
25:29after five the origin of debits and credits we learned in the previous video that the assets of a
25:38company must be equal to the liabilities plus the owner's equity of that company and we also learned
25:48that after each transaction the equation must stay equal but in the previous video we recorded
25:57the transactions directly under the item name as if we were adding them up and down in one column
26:05the correct way to record transactions when we study accounting at the beginning is put
26:12them in things that look like this these are the same numbers and the same asset balance is on the
26:20left these are the same liabilities and owner's equity balances on the right and it is still the
26:27case that the assets equal the liabilities except now the numbers are in their proper
26:35position inside something called a t account now a t account looks like the letter T hence the term
26:45and like everything else in the physical Universe a t account has a left side and a right side now
26:54here's where the word debit and credit come into play the word debit simply means left side the
27:04original meaning of the word debit comes from Latin and all it means is left or left side and
27:11of course the original meaning of the word credit comes from Latin and it means right side or right
27:19hand side or whatever you want to call it that's all it means all the other times you have used
27:27or heard those words spoken they were being used as a metaphor from the original meaning
27:34from basic accounting now here's what makes it challenging sometimes we put the positive numbers
27:42on the debit side but if it's a different type of account in a different accounting category
27:48then instead we're going to put the positive numbers on the right side the credit side
27:56and of course depending on the type of account we might need to put the negative numbers on the
28:02debit side which is the left side but again a different type of account in a different
28:08category would have the num negative numbers listed on the right side the credit side so
28:15we're going to record the same transactions as before and they're going to be recorded
28:22in the same items with the same positive and negative numbers that we put before the only
28:29difference is the numbers will be on the debit side and credit side instead of having a plus
28:35or minus in front of them the most helpful way to think of the relationship between our fundamental
28:44accounting equation and the idea of debits and credits is as follows assets were presented in
28:53this equation on the left side so you could think of them as normally being on the left side which
28:59means they would normally have a debit side balance and in the less frequent occasion where
29:05you have to put a minus to an asset you would put that on the credit side of that asset's t account
29:13and of course for liabilities and Equity the idea is the same but the exact opposite
29:19since they're listed on the right side of our accounting equation we could say that
29:24they normally have credit side balances and in the rare occasion where we have to put a minus
29:31to one of these we would put that on the debit side of that liability or that Equity account
29:39and this system will work perfectly so that after each transaction the accounting equation
29:47will stay equal but only if after each transaction the debits equal the credits
29:56that's the reason why you have to make sure that debits equal the credits because in
30:02the system that you're looking at in this diagram it will make it so that
30:07the fundamental accounting equation stays equal after each transaction
30:13now we'll do the same transactions as before except every transaction will change two accounts
30:21one will be debit the other will be credit and the result will be exactly as it was before
30:30now just like before we're starting with a total of 35 000 in debit and starting with a total of 35
30:38000 in credit because the assets on the left are thirty five thousand and the liabilities plus
30:44Equity are a total of thirty five thousand just like they were at the beginning of the previous
30:51videos transaction set now transaction a paid 3 000 cash for a new car now which two accounts do
31:03you think would change well if we paid cash cash will change and we probably have less
31:10cash if we paid so cash will be minus and since cash is an asset the diagram tells us that we
31:19have to put that 3000 as a minus to cash on the credit side the right side of the cash account
31:27but you can't make a credit without a debit now the transaction says the other account is the car
31:35and Carr is an asset and we have more car as a result so if car is an asset and we have more
31:44the diagram says we put the Plus on the debit side so for transaction a the answer is cash
31:52credit and card debit three thousand and the fundamental accounting equation stays equal
32:01now let's try transaction B the owner invested five thousand of equipment from his home to his
32:10business well we did this exact transaction in the previous video where equipment went up and the
32:17amount that this t account measures as the owner's investment in the company also went up because the
32:25owner invested more we know that equipment is an asset and if we have plus to an asset the diagram
32:33tells us that we put that on the debit side and if equipment is debit and the transaction
32:40says the owner's investment is the other account then the other account must be credit
32:46the owner's investment is credit because the owner has more equity in the company
32:51because she or he invested more value in the form of the asset equipment
32:59transaction C is one that we also did in the previous video paid two thousand dollars to
33:07decrease the bank loan well of course if we paid cash cash has less and of course if we
33:15paid down the bank loan the bank loan has less well cash is an asset and the diagram says if
33:23the asset has less we put that money amount on the credit side so therefore bank loan must be
33:30debit in this transaction and you can see that bank loan is a liability and we know if we pay
33:39to decrease the bank loan that the liability should be debit the way that we just put here
33:48transaction d sold four thousand of equipment for cash now of course this type of transaction
33:56is rare because we're not really in the business of selling equipment but if we sold equipment and
34:04we got cash it seems to me that equipment would go down because we sold some and cash would go up
34:12because we just got some cash they are both assets so if cash goes up cash should be debit and if
34:21equipment goes down equipment should be credit so just to see that again in slow motion the answer
34:27to D is equipment credit because we have less equipment and cash debit because we have more cash
34:38transaction e owner took home a car that costs one thousand well we had something like this in the
34:48previous video or at least I think we did first of all if we took home a car this t account is
34:56representing the businesses money amount of car not the owner the business is a separate entity
35:04and it is the businesses T accounts that we're looking at so the business has less car and car is
35:13an asset and it's decreasing and if the owner is taking asset value out of the company that means
35:20they invested less so car must be credit because the business has less car and car is an asset and
35:30car is minus so car will be credit and if car is credit the other account owner's investment must
35:38be debit because the owner has less investment in the company because they took out some asset
35:46transaction F borrowed seven thousand more from the bank seven thousand more
35:54cash that is so cash will go up because we have more cash but on the other hand
36:01we owe more to the bank and this t account represents what we owe so
36:09cash is an asset and because we have more cash and cash is plus cash is debit if cash is debit then
36:18the other account in the transaction the bank loan must be Credit Now does it make sense to
36:25credit bank loan well the bank loan is increasing and a liability that's increasing gets a credit
36:33so bank loan must be credit for transaction f for the seven thousand therefore cash must be debit
36:44and finally transaction G borrowed six thousand more from the bank to buy a new car
36:53well we know from a moment ago if the bank loan goes up that's a liability that's plus so bank
37:00loan will be credit and if we have more car and car is an asset car will be debit
37:07so six thousand credit the bank loan because we borrowed six thousand more from the bank and
37:13debit card six thousand because we just got six thousand dollars more of a car this is the idea of
37:22debits and credits it comes from the fundamental accounting equation and now that we're done we're
37:29supposed to do what's called foot every account that means take all the positive and negative
37:35numbers in each account and put them together and whatever remains shows up as the ending balance
37:43if the positive numbers for assets are more that means you had more debit than credit and you wind
37:50up with a debit balance so if you did the math yourself you will see cash has a debit balance of
37:57Sixteen thousand if you take the equipment account and put all the positive and numbers together
38:03put positive and negative numbers together you will see that they are left over with positive
38:09twenty one thousand and since equipment is an asset a positive balance goes on the debit side
38:17same thing with car if you put everything together you'll see that during this exercise Carr had 13
38:25000 more debits than it did credits so it finishes with a thirteen thousand dollar balance how much
38:33do we owe the bank at the end well we started with fit with fifteen thousand and twice borrowed more
38:39and that was listed on the credit side and during this exercise we only paid back two thousand so
38:45if we tried to find out how much is left on the bank loan we would see that we still owe
38:51twenty six thousand and because we still owe that money to the bank it's listed on the credit side
38:58now the owner's investment transactions are not really done exactly the way we showed it here
39:04we only showed it for the main idea but you can put together everything the owner put in
39:11and took out during the exercise to get the net result so the net result of what the owner put
39:19into the business was twenty four thousand and now that we're finished you could probably do
39:25a little bit more Elementary School math and you can see the ending total debits equal 50 000 and
39:33therefore the ending total credits must also be fifty thousand that means the total assets are 50
39:42000 and the total liabilities and Equity are also fifty thousand and we did everything right [Music]
40:02chapter six a simplified three-step plan for debits and credits presented by Serena May Jackson
40:13to be working with five simple accounts we're going to be working with cash car owner's
40:22investment bank loan and equipment if it's an asset then debit is plus and credit is minus
40:31if it's a liability decent Equity it's debit for minus and plus for credit
40:39every transaction changes two accounts One account has to be debit and the other account is credit
40:48total damaging credits must be equal after every single transaction
41:07three-step plan one which two accounts change two is a plus or minus
41:17three look at the chart decide which ones are debit and which ones are credit
41:25transaction a pay if you paid 3 000 for a new car the accounts that will change are cash and car
41:35cash will be minus because you're giving away cash and car will be plus because you're getting
41:41another car so the they're both assets so car would be debit and cash will be credit
41:57transaction B owner invested five thousand dollars of equipment from his home into his business
42:05so equipment will change and owner's investment owner so the owner invested more more into
42:15the job so there's it's plus and equipment is plus because the job's getting more
42:24equipment is an asset and it's and it's plus so it has to be debit and owner's investment is
42:34um inequity so it has to be credit
42:41transaction C paid two thousand dollars to decrease the bank loan
42:49so cash will change and bank loan will change they're both minus because cash you have less
42:56cash but you have but you decrease the bank loan too cash is an asset and if it's minus it has to
43:04be credit bank loan is a liability so it has to be minus and it's credit yes it's done it
43:18and action D sold four thousand dollars of equipment for cash cash will go up and Equipment
43:26will also change so cash you're getting more cash and your equipment is minus cash is an asset so it
43:35has to be debit if it's plus equipment is also an asset and if it's mindless it has to be a credit
43:46production e I want to take home a car that cost one thousand dollars it's owner's investment
43:53and car the company has less cars so it's minus and all their investment is also minus
44:03so car is an asset so it has and it's minus so it has to be it has to be on the credit side
44:14owner's investment is an equity so it has to be on the debit side if it's a minus
44:26transaction f borrowed seven thousand dollars more from the bank bank loan will go up and
44:34cash will go up because you have more of a bank loan because you're getting you have more so you
44:43have to eventually you have to pay back the money and cash goes up because you have more attached
44:52cash is an asset and it's plus so it has to be a debit bank loan is also
45:00a plus and it's a liability so it has to be credit
45:09action G borrowed six thousand dollars more from the bank to buy a new car car and bank
45:18loan will change because we have more of the bank loan because you you borrowed more so you
45:24had to pay back the bank even more and car it's also plus because you have another car
45:35um 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
45:47so if it's plus it has to be credit by the way folks Serena really does know her
45:54debits and credits and if you would like to see the footage of Serena learning her
45:59debits and credits you can vote Yes in the survey that's coming at the end of
46:04the video You could also leave a comment or send me a message on this very website
46:10and by the way please mention if you think this is a good intro to the videos hi I'm Uncle Mark
46:21okay and this and this is the debits and crowded show learn
46:26your debits and your credits learn your debits and your credits today
46:39chapter 7 empowering definitions knowing the crucial words that will help you really
46:48understand accounting first definition we will learn is income from service
46:55it's a t account that we use to record each event when we earned income from a service
47:03a service income is money you earn for doing what you normally do in business of course you don't
47:11only have to have a service business you could have a merchandise business and you would earn
47:18income in a merchandise business at the moment you deliver the merchandise to the customer you
47:24earn income in a service business at the moment you deliver the service there's one t account
47:31that you should record all the income which means all the money that comes in from that particular
47:38service and it's very easy to record it in the t account income will only be credit never debit
47:47that means if you are recording income and you record each event where you've done a service and
47:53earned income you should see transactions listed only on the right side the credit side because
48:01that's the way it goes and I'm going to show you the reason for that a little later in this video
48:09and now I will introduce you to a very important account when we study accounting this account is
48:17called accounts receivable accounts receivable is the total money that all customers owe you
48:26for selling them stuff or doing stuff for them like the income that we mentioned a moment ago
48:34if Alan owes you thirty dollars for delivering a service in the past and Betty owes you forty
48:42dollars and another customer candy owes you fifty dollars then in that case the balance of accounts
48:50receivable the t account at this moment should equal a hundred and twenty dollars that's the
48:57reason for it it equals the total balances of all customers at any given moment so accounts
49:05receivable is an asset because it represents money that you will receive in the future and
49:12as you know assets are Plus for debit and minus for credit that means if a transaction requires
49:21that you write down you will receive more in the future you'll put that on the debit side but if
49:27you will receive Less in the future as a result of a specific transaction then that transaction
49:34would be listed on the credit side so if we take a look at an example if Alan did a service or excuse
49:42me if we did a service and Alan promised to pay in the future well that means you will receive more
49:48in the future so the account receivable account will be debit because it's plus you will receive
49:55more in the future and of course the other account will be credit and in this case like usual it'll
50:02always be income credit now what about this we did a service for a different customer even
50:10though we did a service for a different customer it should still be debit for accounts receivable
50:18because that customer promised to pay in the future so the total money that we will receive
50:25from all customers in the future will be more as a result of transaction B so transaction B is debit
50:36however if we have a transaction that requires that we decrease accounts receivable because
50:44the transaction means that we will receive Less in the future as a result of that transaction
50:51then we would have to make a credit so if one of the previous customers who owed money pays some
50:59of the money that would be accounts receivable credit because we will receive Less in the future
51:08so even if a different customer paid any customer who pays we have to make a credit
51:14to accounts receivable and a debit to the other account involved in the transaction
51:20usually cash because we got more cash but this is how accounts receivable behaves and it will
51:27be matched to each individual customer's balance so that the total of each individual customer's
51:35balance will always equal the balance of this t account accounts receivable
51:42now most people already know the definition of this next word expenses
51:49you could think of them as the opposite of the first definition that we learned in this video
51:56expenses are like the opposite of income income is money that we earn for performing a service
52:03expenses are money or monies that we must pay to be able to earn the income if we don't need
52:12to pay the money in order to be able to earn income then it's not a valid business expense
52:19and of course we would not write down all the expenses in only one t account if we needed to
52:26pay for delivery in order to earn income from our customer we would record all of the deliveries and
52:34only the deliveries in a t account called delivery expense if we had to pay for repair in order to
52:42serve as a customer we would record all of the repairs or rather each time that we paid for
52:49a repair we would record that instead into this account repair expense and expenses are only debit
52:58never credit so if you are recording your expenses and you look at any of your expense T accounts
53:05in your general ledger or your chart of accounts you will see only transactions listed on the left
53:13side never on the right side because expenses are only debit never credit remember expenses
53:22are like the opposite of income and earlier we learned that income is only credit never debit
53:29so expenses are only debit never credit and I'm going to explain why at the end of this video
53:39and just like expenses are the opposite of income accounts payable is the mirror opposite
53:46of accounts receivable accounts payable is a t account it is a liability and it represents the
53:55total money that your business owes to people or companies who did a service for you for example
54:04if you owe Rex repair shop thirty dollars for a repair service or you owe FedEx forty dollars for
54:12a delivery service then that means the balance in the t account accounts payable should equal
54:19seventy dollars it represents the total money that you owe to all vendors at any given moment
54:27accounts payable is a liability that means that it's minus for debit and plus for credit
54:37so if we have a transaction that requires us to increase what we will pay in the future then we
54:46will make a credit to account payable even if that transaction is from a different vendor we
54:53will still make a credit to account payable and a debit to the other account usually an expense
55:00like a service that we received from a vendor of course if we record a transaction that reflects
55:09the fact that we owe less to our vendors in the future then for that transaction we would make a
55:16debit because we would pay less in the future as a result of that transaction of course the other
55:23account involved would be a credit usually cash if we're paying off some of our vendors so that's the
55:30way accounts payable would behave in the general ledger when you record your debits and credits
55:39and finally I will clarify the proper way that owner's equity transactions should be recorded
55:48they should not be recorded the way I demonstrated in previous videos
55:52of course we don't have only one t account to represent the entire category of owner's equity
56:00I only showed it that way before just for you to get the idea the real truth is that there are two
56:08separate owner's equity accounts one is called owner's capital and the other is called owner's
56:14withdrawals owner's capital is the t account where we record the owner's equity transaction when the
56:22owner invests any asset cash or equipment or anything when the owner invests any asset we
56:32record that only in the t account capital and we always make a credit because capital is always
56:41plus to owner's equity because all it represents is what the owner put into the business from
56:49his or her personal pocket so that's why capital is always a credit never a debit
56:57now the exact opposite of that account is the one right here on the left withdrawals
57:04this account will record anytime the owner takes out any asset from the business whether
57:12the owner withdraws cash equipment or anything the owner removes from the business to be used
57:19for non-business reasons would get recorded in this account on the left owners withdrawals
57:26and every time the owner withdraws any asset from the business the owner has less owner's equity
57:34so withdrawals is always minus to owner's equity and therefore you have to make a debit every
57:42time the owner withdraws money or asset from the business in fact you could even say that
57:50withdrawals is always debit never credit now in closing you should know that owner's capital
57:59and owner's withdrawals are not the only accounts under the category of owner's equity the other two
58:08accounts under the category of owner's equity are the two accounts that we learned about right here
58:16in this video both expenses and income are also technically under the category of owner's equity
58:26that's because expenses always make owner's equity go down because the person responsible for
58:34the expense is the owner and income always makes owner's equity go up because if a customer gives
58:42money to the business it's the owner's money that the customer is giving after the sale or after the
58:51service so these four accounts are technically under the category of owner's equity and they
58:59make debits and credits very easy I hope that you will use your accounting textbook to understand a
59:07little bit better why these accounts are under the category of owner's equity but if you have
59:14a transaction with any of them you should always know what to debit and what to credit
59:21if one of the two accounts in your transaction is either withdrawals or an expense you will
59:28have to debit the withdrawals or expense and credit the other account
59:33if your transaction requires that you use the owner's Capital account or the income account
59:41then you know for sure you're going to make a credit to either income or capital and the other
59:48account in the transaction should be debit so now your adventure of debits and credits
59:54should actually be easier by understanding the meaning of these four items under owner's equity
1:00:02chapter 8 it's time for more advanced debits and credits with our friend Serena May Jackson
1:00:13these are the accounts that we used in last video we are going to be adding video income accounts
1:00:22receivable delivery expense repair expense accounts payable honors capital and withdrawals
1:00:34if it says no Then you cannot record a transaction on that side
1:00:44transaction a we did a service for customer Allen for a hundred dollars he promised to
1:00:51pay in the future accounts receivable changes because we're because we can receive money
1:00:58and video income changes because we did a service if there's a no X on the debit side
1:01:05it has to be credit and if video income is credit accounts receivable is debit
1:01:15transaction B Rex repair shop did a repair service for us we promised to pay him 85.
1:01:24so it's accounts payable and repair expense repair expense has a no X on the credit side
1:01:33so it has to be debit and if repair expense is debit accounts payable has to be credit
1:01:46action C did a service for Betty and she paid us immediately with cash 95 so um
1:01:57service income changes and cash because cash changes because she immediately paid
1:02:06us so we're getting more cash and service income because we did a service for her
1:02:12if service income cannot be debit and it has an x on the debit it has to be
1:02:19credit and if service income is credit cash is debited boom
1:02:28action D paid FedEx immediately with seven day 75 cash for a delivery today
1:02:36so delivery expense and cash delivery expense has a low X on the credit side
1:02:45so it has to be debit and if delivery spends is debit cash has to be credit
1:02:55transaction eat owner withdrew 28 cash from the business
1:03:02so um cash will change and I think withdrawals correct because so cash
1:03:12well um well withdrawals has an x on the credit so it can't be credit
1:03:22so what draws is dead if withdrawals is that big then cash must be credit
1:03:39it's an F Alan paid us half of what he orders from transaction a so um so cash will go up because we
1:03:52got more cash and accounts receivable because we received half of what was in transaction a so um
1:04:05this so accounts receivable and cash neither of them have an X so we don't know immediately
1:04:16which one is which which one is debit and which one's credit so cash you're getting more cash so
1:04:26if you would get plus and it's an asset so Plus is this side and it has receivable
1:04:35it's it's you have only 50 left to go and you um you you got you got half of what was in
1:04:46transaction a so accounts receivable it is an old asset too and it's minus so it has to be credit
1:05:01we pay Rex repair shop only 65 of what we owe for transaction
1:05:11oh I meant to still uh B I meant to say well if if it was five dollars
1:05:22paid 65. we still have a little bit left over and payable and um cash will change
1:05:35neither of these have an x on either on any side so again we don't know immediately
1:05:47so cash we have less cash and it's an asset so it has and it's minus so it has
1:05:56to be on the credit side accounts payable is a liability and if it's minus it has to be a debit
1:06:12transaction H owner brought seven hundred dollars worth of equipment
1:06:17from his home into the business equipment will change and owner's Capital will change
1:06:23appointment will change because the company has more equipment and owner's Capital will
1:06:29change because the the company well the owner is giving more equipment
1:06:39so equipment is an asset and it's plus so it has to be debit owners
1:06:45capital is also plus but it's in equity so it has to be credit
1:06:55section j instead of paying cash we gave the bank 300 of equipment to decrease the bank loan
1:07:03so bank loan will change and Equipment will change okay so bank loan will change because
1:07:10you're decreasing the bank loan and Equipment will change because you have less equipment
1:07:17so bank loan is minus and it's a liability so it has to be debit equipment is also minus and it's
1:07:27an asset so it has to be credit it doesn't have to be one account debit and the other
1:07:33account is credit as long as total numbers and credits equal each other after each transaction
1:07:46okay in service for customer candy was all 200 she paid 50 cash and promised to
1:07:53pay 150 later so service income is 200 cash is 50 is 50 and accounts receivable is 150
1:08:05and what are the debits and credits so the um service income has a no on the it has no X on the
1:08:14debit so it has to be credit accounts receivable is is plus because it's an asset and plus is debit
1:08:26so so it's debit and cash is also plus and it's also an asset so it has to be debit also
1:08:38there's action l did red stripes did a repair service for us was a hundred thirty dollars we
1:08:47paid only thirty dollars now and promised to pay the rest later so it's accounts payable repair
1:08:54and expense and cash so cash changes because we paid 30 dollars so we're giving away money
1:09:06accounts payable because we can pay a hundred dollars later in repair expense because we have to
1:09:13pay so an amount of money by the way folks Serena really does know her debits and credits and if you
1:09:24would like to see the footage of Serena learning her debits and credits you can vote Yes in the
1:09:30survey that's coming at the end of the video You could also leave a comment or send me a message on
1:09:36this very website and by the way please mention if you think this is a good intro to the videos
1:09:45hi I'm Uncle Mark [Music] seven credits show learn your debits and your credits
1:09:55learn your debits and your credits learn your debits on your credits today
1:09:59because today
1:10:05chapter nine the full accounting cycle
1:10:12do you remember from the prior video how we found the results of each of these accounts
1:10:19we got the total debits and total credits and put them together and the result we put on only
1:10:26one side well what was that process and how is it done that process is called footing the accounts
1:10:35and footing the accounts means find the total debits find the total credits put them together
1:10:42and find the ending balance for example let's imagine we have a t account for cash or some
1:10:50asset and every time you had a plus to cash you put it on the debit side and every time you had
1:10:56a minus the cash you put it on the credit side then during the month you accumulated transactions
1:11:04well how could you know your result at the end what you would do is you would take the total of
1:11:11the credits and then you would take the total of the debits and then you would combine them
1:11:17for example this account has a total of 25 dollars in credits and it has a total
1:11:24of sixty dollars in debits so the debits in this case are more than the credits so the
1:11:32account will finish with a debit balance When you subtract the two that debit balance is the ending
1:11:40balance and that's the number that would begin the balance of the account starting in the next month
1:11:49you would use the same procedures to foot an account that has the opposite Behavior like a
1:11:56liability we all know that the bank loan is minus for debit and plus for credit so if you borrowed
1:12:03money you'd put it on the credit side if you paid off money you put it on the debit side and so on
1:12:09at the end of the month the t account bank loan would have a balance that you would
1:12:14have to find out you would do the exact same procedure you would find the total credits you
1:12:22would find the total debits and in this case the credits are slightly more than the debits
1:12:28so that when you combine the debits and credits the resulting number goes on the side of the
1:12:34higher one so in this case the bank loan is going to finish with a five dollar credit balance and
1:12:41that will be the number that the t account begins with at the beginning of the next month
1:12:47now in the days before the computer we did not use accounts that look like a t
1:12:53in real life Accounting in the old days this is the way the accounts looked
1:12:59the t account would not show you the balance after each transaction and it didn't really have a space
1:13:06to put in all the information across the row about each transaction so the accounts really looked
1:13:12like this and if you had a transaction that made the balance go up you would simply add it if you
1:13:19had a transaction that made the balance go down you would simply subtract this way you would know
1:13:25the balance after each transaction and you would also know the balance at any given moment in time
1:13:33for example you can see that September 17th we owed 75 dollars but if I asked you how
1:13:41much did we owe exactly on September 12 well September 12th is not listed in the date column
1:13:48so you would go back to the last transaction before September 12th find that balance and
1:13:55then you would know the balance on a particular day and time using the accounts like this helped
1:14:02bookkeepers record more detail and keep more accurate track of the balance and
1:14:08when the accountant would come in to find the results at the end of the month the accountant
1:14:13would simply know bank loan is a liability and this five dollars is a credit balance
1:14:21now footing the accounts was only the first step in the process of finding the results at the end
1:14:29of each month after you found the results you would put the ending balance of each account in a
1:14:37report called the trial balance the trial balance is a report that shows the results of all accounts
1:14:47and if the account had a debit balance it would be listed on the debit side of the trial balance
1:14:53and if an account had a credit balance it would be listed on the credit side of the trial balance
1:15:01and as you can see the trial balance would give you some information about how your business is
1:15:09operating but this data when it's in the trial balance is in its raw form you were not finished
1:15:16when you made a trial balance but one of the reasons you made the trial balance is to make sure
1:15:23that the debits equal the credits after the entire process of recording the transactions putting them
1:15:31in the T accounts finding the balances and putting the balances up in the trial balance
1:15:38we came up with this system of debits and credits thousands of years ago to make sure that we did
1:15:44not make any mistakes when recording transactions or doing the math to find the results remember
1:15:51accounting procedures were derived in the days before the computer and although you can see
1:15:59some things about the business operation simply by looking at the trial balance you would gain better
1:16:07insights into what is happening with the business if you took the numbers from the trial balance and
1:16:14reorganized them into documents called financial statements and I'm sure you've all heard the
1:16:21names of the typical common financial statements these are the documents that we look at in order
1:16:28to make a judgment about how well the business is doing and to make certain business decisions
1:16:34by taking the numbers from the trial balance and organizing them into these financial
1:16:41statements the numbers present a more clear picture of what's going on in the business
1:16:51now in the days before the computer the T accounts were not the original books of
1:16:58Entry instead you had something called the general journal and if you wanted to record
1:17:06transactions here you needed to know your debits and your credits that's because the
1:17:13transactions would first be recorded in the journal and when you record transactions in
1:17:19the journal you would write down which account will be debit and which account will be credit
1:17:24then later you would do what's called posting that means copying each transaction from the
1:17:33journal to its appropriate t account and putting in the appropriate debit and credit you would
1:17:41not post after each transaction the whole point of the journal would be to record everything on
1:17:47one paper to save time then at the end of the time period when you wanted to assess your results you
1:17:56would post all the debits and credits into the T accounts and if you did that correctly the results
1:18:03and the T accounts would be the same as if you put the numbers in there directly like we did earlier
1:18:12then of course you would foot the results of the T accounts and then again take the ending balance
1:18:19of each account and put it in the trial balance so now you know the accounting cycle perfectly
1:18:28we start with transactions that we would record in the general journal
1:18:34then we would post from the journal to the T accounts that we have been working with
1:18:39then we would foot the T accounts and put those results in a report called the trial balance and
1:18:47then of course we would take the numbers from the trial balance and put them on financial
1:18:52statements so people can look at those documents and understand what's going on with that business
1:19:02chapter 10. now let's see some example of journal entries and how it looks when we use the computer
1:19:11we remember the accounting cycle in the days before the computer involves several steps
1:19:18before we could find our accumulated totals in the trial balance now with the computer
1:19:25we can go directly from the journal and it will automatically post the transactions
1:19:31foot the accounts and copy the results to the trial balance in a Split Second
1:19:39so all those previous steps we learned about in the prior video happen immediately so all
1:19:46we have to do is record the transaction in the journal and the results change and the trial
1:19:52balance like that so if you are using QuickBooks Online this is the window that you would enter
1:20:00the transaction in and then the accounts would change immediately in your QuickBooks Online
1:20:08trial balance and I'm going to demonstrate this in QuickBooks Online if you're using QuickBooks
1:20:16desktop this would be the window that you would record the debits and credits of a journal entry
1:20:23and again in QuickBooks desktop the results in the trial balance would be updated immediately
1:20:33so first we will do these transactions with QuickBooks desktop and we will do the same
1:20:40transactions as before let's get prepared I have my Quickbooks desktop with a blank
1:20:47General Company open and for those of you who are new to QuickBooks you would open the trial
1:20:55balance by clicking reports accountant and taxes trial balance and for those of you who
1:21:03are new to my class we always change the date range to all transactions regardless of date
1:21:10and I'm going to change the shape so we can put it here and put next to this window the window that
1:21:16we actually record the journal entries in from the main menu click company make journal entry
1:21:26and then this little pop-up don't worry about assigning numbers just click the don't bother
1:21:32me box and click ok now you can't see much of this window unless you double click the words
1:21:39in the ribbon to collapse the ribbon now the top half looks a little bit more like the general
1:21:47journal that we learned about and let's read our transactions and remember as soon as we record the
1:21:55transaction in the journal it will automatically post the accumulated results to the trial balance
1:22:04now let's do the same transactions that we did earlier in the course except now we'll
1:22:11do them on QuickBooks let's imagine on January 1 of 2025 the owner invested fifty thousand dollars
1:22:21cash into the business if you learn your debits and credits properly you would know that that
1:22:29would be fifty thousand dollars cash debit and fifty thousand dollars owner's Capital Credit
1:22:36first we put in the correct date by clicking the date box and going
1:22:41forward or backward or even typing it in manually you should remove this check mark
1:22:47because this is not an adjusting entry we will talk about those a little bit later
1:22:54to record a journal entry in QuickBooks desktop click directly under the word account then click
1:23:02the pull down arrow and choose the account you want to debit I choose cash and Chase Bank and
1:23:10on the same row as that account I click under the word debit and type in the fifty thousand dollars
1:23:23if I keep clicking tab or pushing the Tab Key you will see that most software finishes the journal
1:23:32entry for you by trying to balance it out in other words QuickBooks knows that there has to be
1:23:39a fifty thousand dollar credit somewhere and that account is owner's Capital so this is the way that
1:23:48debit and credit would look like in the general journal cash and bank debit owner's Capital Credit
1:23:55now before we save it the trial balance is blank but when I click save and close you can
1:24:02see the numbers show up for the first time on the trial balance cash and Chase Bank 50
1:24:09000 and owner's Capital fifty thousand now let's imagine that on January 5th we pay
1:24:17twenty thousand more for more equipment if you studied your debits and credits
1:24:23properly that would be equipment debit and cash credit so company make general journal entry
1:24:35okay the date is January 5th of 2025. this is our second entry it's not an adjusting
1:24:44entry and the account that will be debit will be equipment and the amount will be twenty thousand
1:24:53keep pushing the Tab Key and the credit or in the row of credit the other account is Cash because
1:25:02we know that if we pay cash and get equipment it's equipment debit cash credit now here's
1:25:09the question what will the results be after I save this transaction well cash right now is 50 000. so
1:25:20if I make a credit of twenty thousand what do you think the result would be that's right the result
1:25:27would be thirty thousand what about this what do you think the equipment would be well equipment is
1:25:35starting at zero so if I save this equipment should show up for the first time as twenty
1:25:42thousand save and close and don't worry about this just click the don't bother me box click OK aha
1:25:51cash went down to 30 000 exactly as we expected and Equipment showed up in the trial balance for
1:25:59the first time as twenty thousand what about this one January 10 the owner took home equipment worth
1:26:09five thousand dollars and he's not using it for business anymore well if you studied your debits
1:26:17and credits you would know that that would be equipment credit and owners withdrawals a debit
1:26:25again we click company make general journal entry in this case the date is on the 10th and this is
1:26:34our third such journal entry I'm going to double click here so we can see it nicely
1:26:40and now I'm going to choose owners withdrawals debit and put in the row of debit 5000.
1:26:50and I'm going to tab over until it puts a credit of 5000 and I'm going to credit equipment now
1:26:56here's the question can you predict the results what will equipment become well equipment right
1:27:04now is twenty thousand so if we're decreasing it by 5000 it should become fifteen thousand if we
1:27:11did this right and what will withdrawals become well withdrawals will show up for the first
1:27:19time here as five thousand save and close aha equipment is down to fifteen thousand and owner's
1:27:29withdrawals is five thousand on the debit side it means we recorded the transaction correctly
1:27:37what about this one January 15th we borrowed thirty five thousand from the bank
1:27:45what will Cash become well right now cash is only thirty thousand so if we borrow more from the bank
1:27:55will have more cash so if we record this transaction properly
1:28:00cash and bank will become 65 000 and bank loan will show up for the first time in the
1:28:09trial balance so we change the date to the 15th and we make a debit to cash and bank for the 35
1:28:17000 because we learned that when cash increases it's a debit and the balancing credit is here
1:28:25bank loan and when I click save and close the numbers are exactly as we expected cash becomes 65
1:28:35000 and bank loan shows up for the first time as 35 000. now we'll do a transaction that would
1:28:44absolutely require a journal entry what if on January 20 the owner invested a vehicle worth 25
1:28:53000 into the business what would be debit and what would be credit well we know Capital would
1:29:00be credit because the owner invested an asset and capital right now has a credit balance of
1:29:07fifty thousand so if the owner invests another twenty five thousand an asset that's right
1:29:14Capital will become 75 000 and vehicle will show up for the first time in the trial balance
1:29:26so from the main menu company make journal entry this time the date is January 20. and the account
1:29:38that's debit is the new asset that we are getting vehicle and we said that the vehicles are 25
1:29:47000 or at least they're worth 25 000 at the moment the owner invests it into the company
1:29:55and because the asset came from the owner the owner now has more capital and we make a credit
1:30:03to Capital to increase the owner's Capital when we click save and close Capital became
1:30:09the number that we expected it to become and therefore we recorded the journal entry properly
1:30:18now here's one that you might not need to make a journal entry for but it is one we learned before
1:30:26three thousand to decrease the bank loan well if this account represents what the bank loan
1:30:33is now and what we owe if we decrease it what will it become if we record this properly it
1:30:42should become thirty two thousand and what will Cash become well if we pay to decrease
1:30:49the bank loan cash will decrease by three thousand and it will become sixty two thousand
1:30:57so we're up to January 25th and we know that it will be cash credit because we are giving cash
1:31:10so cash and Chase Bank credit by the three thousand
1:31:16and we know that we're decreasing the bank loan and the bank loan is a liability so
1:31:22it will be bank loan debit now when we click save and close the results are exactly as what
1:31:31we expected the bank loan became thirty two thousand and cash in Bank became 62
1:31:39000. let's finish with a transaction that you would definitely need to make a journal entry for
1:31:48let's imagine on January 27th we borrowed seventeen thousand more from the bank and
1:31:55bought equipment that would be the same thing as just taking the equipment and assuming alone
1:32:03in that case you have more equipment but you also have a higher balance or more of a bank
1:32:12loan so we know that would be equipment debit and bank loan credit so company make journal
1:32:23entry and this one is on January 30th and it will be equipment debit for the 17 000.
1:32:37and it will be bank loan credit can you predict what the results will be
1:32:44well let's see if equipment goes up if bank loan goes up by 17 000 bank loans should become forty
1:32:53nine thousand because bank loan is thirty two thousand right now and if equipment goes up by 17
1:33:01000 equipment should become thirty two thousand because these are the numbers for equipment and
1:33:08bank loan before I click save and when I click save and close you can see the numbers are exactly
1:33:16as what we predicted bank loan is forty nine thousand and equipment is thirty two thousand
1:33:25don't forget to watch the QuickBooks online version of this video chapter 11. now let's
1:33:34practice what we've learned about journal entries debits and credits this service business
1:33:43transaction practice set is literally just like an Accounting 101 textbook practice exercise
1:33:52you have to set up the T accounts on something you can write on in the old days we would use a paper
1:33:59or and a pen or pencil but of course you could use word or Excel or anything else what you will do is
1:34:08after you make the T accounts you'll record the transactions that I give you and you'll compare
1:34:14your results to mine if they're different you will use logic to find and fix mistakes and I'm going
1:34:22to give you some logical tips that will always help you find and fix mistakes after you're done
1:34:28recording transactions in accounting so what are The Specific Instructions of this project first
1:34:37create a t account for each of the accounts on the account list in the given chart of accounts
1:34:45two record all transactions from the transaction list to the T accounts that I have provided for
1:34:52you three find the balance of each account after you're done recording all the transactions and
1:35:00then make a list of all the account balances and that list is something called the trial balance
1:35:09then once you have your trial balance you can compare your results to mine and use logic to
1:35:17find and fix mistakes and don't worry about a thing because everything you physically need to
1:35:25do this project is inside the downloadable Excel file that I have put in the resource tab of this
1:35:34video just download it open it up and follow the steps you can easily access the files for all of
1:35:43these projects by clicking show more just like you did before to reveal the table of contents but if
1:35:51you look all the way down at the very bottom of the description field you will see that there are
1:35:58links to each of the project sheets for each of the projects and if you just click on any
1:36:04one of the links to download them all you have to do is Click where the link is for this particular
1:36:11exercise and you should be given an option to choose which folder to download the file to
1:36:21in this Excel spreadsheet that you will use for this project there is one particular sheet with
1:36:28a t account for every account in this list of accounts which is also called the chart of
1:36:35accounts and it is those T accounts that you will record the transactions into now also in the sheet
1:36:44is this list of transactions you should record every debit and every Credit in proper order
1:36:51using this list go slowly and record it exactly as you saw us record each of these transactions
1:37:01in the lectures where I gave you similar examples and record them in the T accounts that you either
1:37:09draw on a pencil and piece of paper or record them in the T accounts that are provided in the Excel
1:37:17sheet now in order to use this Excel sheet you don't need to know any excel at all just type in
1:37:26the numbers you want and Excel will automatically add them for you it's just a simple convenience
1:37:34but if you're having any trouble at all just use a pen and paper so if you download the file and
1:37:42you open it up you would click down here to get the different sheets and if you can't see all the
1:37:49sheets you would scroll right and scroll left the leftmost sheet are the general instructions the
1:37:56next sheet is the list of transactions that you will record the net sheet are the T accounts and
1:38:03if you don't know Excel watch carefully how they work if you're going to make a debit to an account
1:38:09you should click in the top left and put just the date and hit enter and Excel will record the date
1:38:19then click next to it just like we showed in the video and put the money amount type it in and to
1:38:26save it in the field push enter and notice Excel will add it for you if you want to make a credit
1:38:35put the date in the rightmost column hit enter then on the inside put the type the money amount
1:38:45hit enter and Excel will add it for you if you need to make a second transaction go to the
1:38:53next line and do the same thing as soon as you hit enter it will automatically add the column so that
1:39:02you don't have to do any math and the numbers will stay nice and neat and you will save huge amounts
1:39:08of time putting in your debits and credits when you finish putting in your debits and credits you
1:39:16will see that there is a sheet provided for you to make a list of every remaining debit balance
1:39:23and credit balance for each of the T accounts that you were using during the transaction set
1:39:30try to put the list of the final balances into that sheet and make it look like this
1:39:37Excel will add and do the math for you now the name of this report that you're constructing when
1:39:45you finish putting in all the ending balances which are the results of all transactions this
1:39:52report is called the trial balance and the trial balance was a very important report for both the
1:40:00bookkeepers and the accountants in the days before the computer you see the trial balance is a list
1:40:08of ending balances of the chart of accounts after a specific period of time usually some accounting
1:40:15period like after one month or after one fiscal quarter where you would stop and assess everything
1:40:22the account balances must be separated into debit and credit columns so that you can see if it's a
1:40:30debit balance at the end or a credit balance at the end while reading the accounts from the list
1:40:37so the reason to make this is to be sure that you have not made any mathematical mistake before
1:40:45putting these numbers on your formal financial statements if the debits equal the credits then
1:40:53there is no mathematical mistake so if there's still a mistake even though there's not a
1:41:00mathematical mistake you have to use logic and use the logical steps and The Logical thinking that
1:41:08you're about to learn here to fix the differences and to make your final numbers the same as mine
1:41:16first you have to ask yourself if you finished with any number that's different than what it
1:41:22shows in the answer ask yourself what specific account balances are different
1:41:30just by isolating those two you'll be able to also hone in on how much they are different by
1:41:37and by thinking of which specific accounts are different and how much they're different by you
1:41:44should then also consider which account is too high and which account is too low
1:41:51thinking about all these things will help you focus on what were the only transactions that
1:41:59were recorded in only those accounts the mistake must be from one of those transactions so if you
1:42:09know which specific transactions change these specific accounts or which specific transactions
1:42:17are the money amount of the amount that's too high or too low or which specific transactions are
1:42:24of the money amount that the wrong accounts are different by you can use logic to fix the mistake
1:42:32check any transactions you put into only those accounts or maybe should have put into those
1:42:39accounts when considering what mistakes you could have made for example if cash in the bank is too
1:42:47high and accounts receivable is too low what could be the only reasons that those would be
1:42:54the only two accounts that are different well if you give yourself a moment to think about it
1:43:00it could be that if you recorded receiving cash for a service of a sale rather than recording it
1:43:09an account receivable that's something that might make cash too high and accounts receivable too low
1:43:16so you might want to double check any transaction where you were doing a service for a customer
1:43:23or what if you recorded receiving a payment from a past service twice if you duplicated
1:43:30an entry and you duplicated both the debit and the credit they would still balance
1:43:36in the trial balance but the individual numbers of the accounts would be different
1:43:41find out which specific accounts are different and see if they have any duplicate entries in them
1:43:48also look at the money amounts to determine the mistakes it's very rare that you would have two
1:43:55mistakes in one account so if you know how much a difference is in one particular account you
1:44:02know that you can look back on the transaction list and find the transaction with that specific
1:44:07money amount and there's your mistake so have confidence that you will find whatever mistake
1:44:14you might have made don't peek at the answers until you absolutely must good luck doing the
1:44:22exercise and please stay in touch and give me feedback about how well you did and how
1:44:28you felt it might have helped you learn thank you again and I'll see you in the next video
1:44:36thank you so much for learning this with us there's more great stuff to come and remember
1:44:42you have the benefit of a live teacher if you ask me your questions in the comments section below
1:44:49and don't forget to click like And subscribe to help support the free channel that helps everyone
1:44:57part three end of cycle procedures chapter 12 end of period accounting adjustments
1:45:10adjustments are journal entries that we make periodically to correct our financial records
1:45:16for the passage of time it also helps us prepare for financial reporting by acknowledging the
1:45:24cutoff dates of certain amounts we also make adjustments to correct for mistakes and we
1:45:31usually make them monthly or immediately before reporting our financial statements to someone
1:45:37because we want to adjust our general ledger to make sure our financial statements are accurate
1:45:46the idea behind this is that assets and expenses are really the same thing
1:45:54think about the definition of expense
1:45:57it's when you pay for something after you use the value of whatever service that you're paying for
1:46:06things like salary expense repair expense utilities expense delivery expense usually
1:46:13you pay for them before you use them and of course we always think of them as expenses
1:46:21but assets are something you pay for before you use the value for example a car usually you buy
1:46:31the car before you can drive it and use the value of the car so we always think of car as an asset
1:46:40what about furniture usually you buy the furniture you don't sit on it for five years and then when
1:46:47it breaks you pay the person you took it from usually you pay for it first which means assets
1:46:54are paid for before you use up the value of whatever you need them for but what about
1:47:01things like rent insurance and supplies we usually think of these things as expenses and they are but
1:47:11these things we usually pay for them before we use them so even though we think of them as expenses
1:47:20technically at the moment we pay for them they are assets and they become expenses as we use them so
1:47:32therefore if at the moment you pay for something it still has value you can use into the future
1:47:39you just paid for an asset but if at the moment you pay for something you have already used the
1:47:47value or you could say you have already expended the value then at that moment you have an expense
1:47:55and if it was an asset don't worry wait a little while and you will finish using the value and the
1:48:02amount you use let's say the amount you expend will become the amount you record as the expense
1:48:10for example supplies you always pay for them before you finish using them then
1:48:17over time you use some supplies and the amount of supplies you have used the amount of supplies
1:48:24you have expended then gets recorded as supplies expense now this idea is also
1:48:32the same for paying office rent you usually pay office rent in advance of staying in the office
1:48:40so technically at the moment you pay the rent you have an asset you have something of value
1:48:48that you can use into the future you have the ability to stay in the office but over time as
1:48:55you stay in the office the amount of time that you've used or expended becomes your real rent
1:49:03expense and that's the amount you record on your income statement for that month as rent expense
1:49:11insurance is the same thing you always pay insurance in advance of the time in which
1:49:18they protect you then over time you're using the coverage and your coverage is elapsing
1:49:25after you've used a certain amount of time during the policy the amount of time of the policy that
1:49:33has elapsed is your insurance expense and the remaining amount still stays on your books as
1:49:41an asset so let's see how this would work let's imagine on January 1 Holden the owner of the
1:49:50company paid Staples seven hundred dollars for supplies well on January 1 we did not finish
1:50:00using the supplies so we cannot record this into supplies expense on January 1 we have a new asset
1:50:09and just like we did in previous videos we make a debit to the asset for the amount that we paid
1:50:17of course cash is credit if we paid cash but we're not really focusing on cash right now we're just
1:50:24focusing on the asset that we bought that we will use into the future now the most important
1:50:31date is January 31. let's imagine it's one month later and we physically count the supplies and we
1:50:41see we only have three hundred dollars worth of supplies left well the first question is how much
1:50:50of supplies did we use obviously we used 400 you could also say we expended four hundred dollars
1:51:02worth of supplies during January and that means supplies expense should be debited four hundred
1:51:10dollars for the amount that we actually used during January and that four hundred dollars
1:51:17will go on the income statement profit and loss as supplies expense for the month of January
1:51:25now of course if we made a debit to supplies for 400 we have to make a credit of 400. we credit the
1:51:34asset if the value is going down and of course it is correct to credit supplies for the 400 so
1:51:44that the ending balance of supplies at the end of the month truly reflects what we physically have
1:51:51we physically have three hundred dollars worth of supplies and as you can see that's the new
1:51:58ending balance the supplies expense account is an expense so that will get closed at the end of the
1:52:06month so that you can measure more uh starting from zero how much supplies you used in the next
1:52:13month so you will see in the following videos expenses become zero after each period so that
1:52:20you can start counting fresh what you used in the next month but this 300 remaining in
1:52:27supplies goes up top as the beginning balance on February 1 for the asset account supplies
1:52:36now that idea will help you understand a special type of asset called prepaid expenses
1:52:44these 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
1:52:59we pay that we will use in the future but we would normally consider it an expense
1:53:05for example let's imagine on January 1 Holden the owner paid Farmers Insurance
1:53:13one thousand two hundred dollars for the whole Year's office insurance now
1:53:20we know that the office insurance is only really a hundred dollars per month
1:53:26we're really only using the value of what we paid at the rate of a hundred dollars per month
1:53:34now you can put the whole 1200 into the insurance expense account if you only report once a year
1:53:43so if you don't need to show anyone your financial records until December 31 it really wouldn't
1:53:50matter if you put this into Insurance expense at the beginning however if you need to report
1:53:57monthly financial statements you must put the 1200 into an asset called prepaid insurance and
1:54:06then adjusted each month just the way you saw in the previous example with supplies
1:54:13prepaid insurance is another current asset type of account so what's the difference why can't I just
1:54:22put insurance and insurance expense when I pay or rent into rent expense when I pay well let's
1:54:29think about it if you recorded this the wrong way and it all goes into Insurance expense when you
1:54:38write the check that means January's income statement is going to list Insurance expense
1:54:45as one thousand two hundred dollars because that's what you paid in insurance for January
1:54:51in February you didn't pay anything for insurance so on February's income statement
1:54:58Insurance expense will be listed as zero March's income statement Insurance expense will be listed
1:55:05as zero and so on do you think you can fairly and reasonably compare your operations between January
1:55:14and February by comparing January's income statement to February's income statement of
1:55:22course not you cannot compare them in a fair way because you recorded all of the year's insurance
1:55:30as an expense for January and none for February so January and February's profit and loss statement
1:55:38cannot be compared in an accurate and Fair Way but if you do it the right way and adjust it the
1:55:47way I'm about to show you the then January's Insurance expense will be only what you used
1:55:55during January and February's Insurance expense will be only what you used during February and
1:56:04so on this way you can properly compare January's income statement to February's income statement
1:56:12and make a fair and clear judgment about the difference in how well you did each month
1:56:18because now it shows the real amount of insurance expense that your company is using each month
1:56:26so how do you actually do this so it comes out correct well when you pay the insurance put the
1:56:35money into the account called prepaid insurance which is another current asset like supplies
1:56:43then make a journal entry to adjust at the end of each month decrease the prepaid insurance for what
1:56:52you did use and put it into Insurance expense to reflect that it was used during that month
1:57:00so it's going to look very similar to what we did a moment ago with supplies
1:57:07let's imagine on January 1 Holden paid Farmers Insurance 1200 for the whole Year's office
1:57:15Insurance well we did not use the value or we did not finish using the value on January 1 so we do
1:57:24not have an expense on January 1. on January 1 we have an asset debit the asset and of course
1:57:32credit cash but we're not examining cash so just believe me cash will be credit now the interesting
1:57:39part happens at the end of the month what should the numbers be well you know that this 1200 is not
1:57:47accurate as of January 31. it was accurate back on January 1 before the insurance company protected
1:57:56and covered US during January but on January 31 they are finished protecting us they are finished
1:58:04covering us for January so we have actually used a hundred dollars worth of insurance during the
1:58:12month how do we record this in our records to reflect this well Insurance expenses debit for the
1:58:20amount that we actually used during January and of course we have to credit a hundred dollars the
1:58:26asset to bring the value down to what it really is as of January 31. there are only 11 months
1:58:35left on the policy so on January 31 the balance of this asset is eleven hundred dollars now of course
1:58:44the hundred dollars in Insurance expense will go on January's income statement to show that during
1:58:51January we used a hundred dollars of insurance and then of course that gets closed and becomes
1:58:59zero so we can start measuring March's Insurance expense fresh at the beginning of the next month
1:59:06and of course the eleven hundred dollars goes as the balance on the balance sheet
1:59:11as of January 31 to show what we had in prepaid insurance going forward at the end of January
1:59:23chapter 13 closing entries and partnership distribution we all know that every account
1:59:32in your chart of accounts has a debit side and a credit side and depending on the type of account
1:59:38sometimes the transactions are listed on the debit side for certain types of accounts and on the
1:59:43credit side for other types of accounts the most important owner's equity account is the owner's
1:59:50Capital this is an account in your chart of accounts that reflects or shows the total money or
1:59:58value that the owner took from his or her personal funds or personal assets and put into the business
2:00:06and of course every chart of account should have a separate account for each separate
2:00:13asset so you can account for how much value of that asset is in the business
2:00:19in this example let's imagine that the company has ten thousand dollars in cash and the company has
2:00:26twenty thousand dollars worth of equipment well if that's the case when the company starts that means
2:00:33that the owner of the company has invested thirty thousand dollars worth of assets into the business
2:00:40and the account that keeps track of how much the owner has invested in the business should say
2:00:45thirty thousand dollars now of course the owner should also have a separate account
2:00:52called withdrawals the reason for that account is to keep track of and take a total of all the
2:00:58money or all the assets that the owner took out of the business for personal non-business use
2:01:06for example if the owner takes two thousand dollars of company cash out of the business
2:01:11for non-business use that means that he or she would have to record that two thousand dollars
2:01:17in withdrawals and the new amount of cash that the company has would be eight thousand dollars
2:01:25the owner could also take home any other asset like equipment for example if the owner took home
2:01:32five thousand dollars worth of equipment you would still have to record a withdrawal of asset from
2:01:39that owner of five thousand dollars that means the new value of equipment would go down to 15
2:01:46000 and the new balance of the withdrawals account is seven thousand dollars
2:01:51so as you can see the owner invested thirty thousand from his or her personal funds into the
2:01:59business but withdrew seven thousand dollars of cash and other assets from the business
2:02:06and obviously you would have to net out these two accounts to know that the actual amount of
2:02:12owner's equity that the owner has in this company is twenty three thousand dollars
2:02:18so then you might ask how do you distribute the net income from the income and expenses accounts
2:02:25to the owner's equity accounts well we will use the same two owner's equity accounts we used a
2:02:32minute ago except now we're showing other accounts in the chart of accounts let's imagine at the end
2:02:38of the quarter or the end of the fiscal year the service income is twenty thousand and let's
2:02:44imagine in this example company there are only two expenses six thousand and four thousand here
2:02:51now this example is showing you how to distribute the income when the company
2:02:55is a sole proprietorship that means there's only one owner in order to find out what the
2:03:03net income is as well as distribute it or give to the owner or put into the owner's equity account
2:03:10the net income we use a special account in the chart of accounts called income summary
2:03:16this is a temporary account that begins with xero and also ends with zero when we're finished
2:03:23we make a series of debits and credits in order to move the income to the income summary account
2:03:31and make all our income accounts zero we also move all of our expenses to the income summary account
2:03:38and make the balance of all of our expenses zero and the days before the computer this would help
2:03:46make sure that the income and expenses do not accumulate into the next accounting period and
2:03:52they begin with zero at the beginning of this uh fiscal year or this accounting period with
2:03:58the computer it's not necessary to do it this way anymore but at least we know in the income summary
2:04:05account that we can calculate the net income as ten thousand dollars that's because we moved 20
2:04:12000 to the credit side and that was the income we moved ten thousand worth of expenses to the debit
2:04:17side and the net difference shows ten thousand more on the credit side than on the debit side
2:04:24so we know the ten thousand is the net income as I mentioned a moment ago income summary also becomes
2:04:32zero we take the ending balance of income summary and we bring it to the owner's Capital account
2:04:39this makes sure that the owner's Capital reflects not only what they invested from their own
2:04:45personal pocket but what they earned as their share of the net income and of course the last
2:04:52step in the closing process is to move the owner's withdrawals also to the owner's Capital account
2:04:59this way withdrawals also starts with zero for the next accounting period so you can clearly identify
2:05:07the withdrawals just for that time period and when you find the end result of the owner's Capital we
2:05:14can see in this situation the owner is left with twenty three thousand dollars of owner's equity
2:05:21all of which will be in the owner's capital account when you finish doing the closing entries
2:05:30if you need to know how to make debits and credits you can watch the supplementary videos about
2:05:36journal entries included in this course but the end result is that we now know the ending period
2:05:44capital for this fiscal year which is also the amount of capital that will begin as the
2:05:51beginning balance in the next fiscal year now let's see what it's like to distribute the net
2:05:59income in a partnership here we have a situation where the company has two owners Holden and Gary
2:06:08and as you would imagine each individual partner has to have their own Capital account
2:06:14which keeps track of the amount that they physically invested into the business
2:06:19and each partner should have their own withdrawals account that keeps track of how much money or
2:06:25asset that particular partner took out of the business so these numbers for Holden are left
2:06:32over from the previous example Holden invested a total 30 of 30 000 of cash or other assets from
2:06:40his personal funds and he withdrew seven thousand from the business for non-business reasons
2:06:46whereas Holden's partner Gary only invested 20 000 from his personal funds and he withdrew a
2:06:53total of three thousand from the business so far this fiscal year now let's imagine in this example
2:07:00Holden and Gary share the profits sixty percent Holden and forty percent Gary so just like in our
2:07:09previous example income summary is the account where all the income and expenses get close to
2:07:15so we can determine the net income and distribute the net income to the partners but in this example
2:07:23we see that the the net income is the same as the net income in the previous example except sixty
2:07:30percent of it belongs to Holden and the other 40 percent of it belongs to Gary that means
2:07:36that Holden will have an increase of six thousand in his capital and Gary will have an increase of
2:07:43four thousand in his Capital when we finally make income summary zero to distribute the net income
2:07:51now of course both owners have to net out their own withdrawals into their own Capital account
2:07:59so the seven thousand of Holden's withdrawals gets close to Holden's capital and the three
2:08:04thousand of Gary's withdrawals gets close to Gary's capital and Holden's
2:08:10capital or total owner's equity at the end of this fiscal year is 29
2:08:15000 up here and Gary's owner's equity at the end of this fiscal period is twenty one thousand
2:08:25foreign something about our new friend income summary we all know income summary is where
2:08:34we move all of the accumulated income for the fiscal year and all of the accumulated expenses
2:08:40of the fiscal year this way the income and expense accounts don't accumulate into the next period and
2:08:48we can isolate exactly how much income and expense came in and out during a particular
2:08:54time period and the income summary will give us our net income but you should know that income
2:09:00summary is a temporary account the account that we actually use as a permanent account to show the
2:09:08difference between income and expense and a prior accounting period is called retained earnings
2:09:15so retained earnings will still show the difference between income and expense in but only
2:09:22in a prior period and that's how QuickBooks works so for example if you look at reports dated in the
2:09:31current period you will see the income and expense and you will not see them in retained earnings
2:09:37however if you look at a report dated after the fiscal year end you will not
2:09:43see any income or expense accounts listed instead you will see the net amount as net
2:09:50income or at least the accumulated net income in the retained earnings account
2:09:56for example if Holden's fiscal year ends on June 30. any report dated before June 30 will show
2:10:05this the income in the income accounts the expense and the expense accounts and nothing in retained
2:10:12earnings however any report dated after June 30 will show that you have zero income and expenses
2:10:23and the net amount of net income has been moved to retained earnings now let's check how well we
2:10:32understand all of the end of month procedures by doing this Hands-On end of month project
2:10:43the end of month procedures that we just learned were adjusting entries after all the transactions
2:10:51have been recorded during the accounting cycle and then after the adjusting entries we learn how
2:10:58to make closing entries and after the closing entries were mostly done we then were able as
2:11:06part of the closing entries to distribute the partnership income now you only saw a brief
2:11:12overview of these three steps in the end of the month procedures but let's see if you can figure
2:11:20out what to do and finish with the correct numbers and the project you're about to try you see The
2:11:27Specific Instructions start with asking you to download the Excel file that's in the resource
2:11:34tab of this video and everything you need is in the downloadable you can easily access the files
2:11:42for all of these projects by clicking show more just like you did before to reveal the table of
2:11:49contents but if you look all the way down at the very bottom of the description field you will see
2:11:57that there are links to each of the project sheets for each of the projects and if you just click on
2:12:04any one of the links to download them all you have to do is Click where the link is for this
2:12:10particular exercise and you should be given an option to choose which folder to download the
2:12:18file too so what are The Specific Instructions of this project well first use the end of the month
2:12:26information that's given in the Excel file to make the adjustment in the T accounts that are given
2:12:33then record the closing entries in the accounts make a post-closing trial balance when you're
2:12:41done and then compare your results to mine see if you finish with the same numbers by
2:12:48doing all the correct steps that we learned about in the end of the month procedures
2:12:54now what do I mean by using this file well if you download the Excel file says end of the month
2:13:00project you see that first you use the end of the month information and make the adjustments in the
2:13:08t account now you can see there are different tabs across the bottom if I click here I get
2:13:14a clear description of what the end of the month procedures are I should probably get rid of this
2:13:20so if it fits in a little better here so this is the information you need for the adjustments and
2:13:28this is the information you need for the closing entries and you can even pause the video here
2:13:34because there's not that much to remember and then just go ahead and enter them now you will enter
2:13:40them here oh excuse me this is the trial balance actually before you do the exercise this is where
2:13:51what all the beginning balance numbers are in the general ledger that you're given so then you will
2:13:57read this information and record the appropriate debits and credits in this tab called the general
2:14:04ledger now it's zoomed out a bit but if you zoom in you can see that it's set up like the previous
2:14:12one where all you have to do is enter a number and it will do the math for you so you don't have to
2:14:20stress or do any work so again you can zoom in and out here from the bottom if you click the bottom
2:14:28right you can zoom in and zoom out and I left the view zoomed out so you can better see the you know
2:14:36most of your accounts but if you scroll down a bit by using the scroll bar here you can see
2:14:43I've provided every account in the trial balance that I just showed you every account including the
2:14:50income summary account that we learned about in a prior video so you physically have everything
2:14:56you need to record all the debits and credits and all of the beginning balances are already
2:15:02input from the trial balance that you're given to set up with and when you finished compare
2:15:10your trial balance to mine and I gave you a special sheet for you to put in the results
2:15:16in your trial balance to tell me what you think the ending numbers are good luck and stay in touch
2:15:38[Music]
2:15:39part four have some appreciation for depreciation chapter 15 what is depreciation now you may
2:15:53well ask what is depreciation well the word depreciation is a noun and it means the amount
2:16:03of decrease in value of an asset that happens over time the verb to depreciate is what we are
2:16:13doing when we record the decrease in value of an asset over time you see there's two kinds of
2:16:21depreciation there's the type of depreciation that happens when an asset is no longer needed
2:16:29or desired and that's not the type of depreciation that we account for when we keep books and records
2:16:36of a company we are instead talking about the type of decrease in value that happens to the
2:16:43asset as you use it or use up the resource that the asset represents you see when an asset is no
2:16:52longer needed or desired that condition is called obsolescence or the asset has become Obsolete and
2:17:01that means that an asset is less desired and therefore less valuable for example you can
2:17:09buy a beautiful house worth a lot of money and rest assure that if a week after you purchase
2:17:16the house they open up a nuclear power plant just two blocks down the road you can be sure that the
2:17:24asset value will decrease but that's not the type of decrease we're talking about you can't control
2:17:32a nuclear power plant being built next to the house that you lived in for 20 years you can't
2:17:38predict it regardless of how you actually use the house or the asset and that's the reason why we
2:17:46do not use this thing called market value you see the market value of an asset is what people would
2:17:54be willing to pay for it at any given moment and we know that it's volatile so we do not use the
2:18:01market value of the asset when we record things in our accounting records you see the market value
2:18:08changes but not related to the business operations and if there's no relationship between using the
2:18:16asset and using up the value then we really can't record the depreciation in our records because
2:18:23then when we look at the resulting financial statements it won't really be a reflection
2:18:28of how much of the asset we used it'll only be a reflection of how much people are willing to pay
2:18:34and that won't really help a person when judging how well a company is doing and utilizing their
2:18:41assets to run the company and that's why that type of depreciation is not what we're talking about
2:18:50when we record depreciating assets we instead use something called historical cost
2:18:59only record what you actually paid for the asset or to extend the life of the asset that's what it
2:19:07means to record assets under historical cost that does reflect a change in value as you
2:19:16use the asset and it's the only legitimate way to compare financial statements between
2:19:22two different time periods so let's explore using the idea of historical cost together
2:19:31you see when an asset value is being used up you can picture the asset diminishing as you
2:19:38use it and the amount of the asset you use over time becomes the expense just like we learned in
2:19:47the prior video for example supplies are an asset at the moment you buy them because at the moment
2:19:53you buy them you have something of value you can use into the future then as you use the supplies
2:20:01the amount of supplies that gets used up becomes the amount of supplies expense that you record
2:20:09same thing with Prepaid rent like we learned in the prior video when you first pay rent you
2:20:15have something of value that you can use into the future you have the right to use the space
2:20:21that you rented But as time goes by the amount of time that you rent it for is being used up
2:20:29and the amount that's used up becomes the rent expense that you report on your profit and loss
2:20:37now of the three examples here the clearest one is when supplies becomes supplies expense
2:20:46you see at the moment you purchase the office supplies like pens and paper clips and so on
2:20:52you have them you own them they are assets at the moment you buy them because you can use
2:20:59them into the future then as you use the supplies the money you paid for the specific supplies that
2:21:08you use is the amount that becomes supplies expense on the next monthly profit and loss
2:21:16you see the remaining supplies still have value as of the balance sheet date so whatever the money
2:21:24value is of what you paid for for the supplies that you still have should be the balance of
2:21:31the asset account supplies at the end of the month and the amount that you report as supplies expense
2:21:38is the amount you actually used during the time period of the profit and loss or income statement
2:21:45and it's the actual amount expended or used and that makes for accurate financial statements that
2:21:54give a true picture of what's happening in the business and how well it runs now this is the same
2:22:02idea for fixed assets a fixed asset is an asset that you expect to have for more than one year
2:22:12it could be things like a company car or a company truck or it can be the office furniture that
2:22:19you buy and expect to use in the office for many years it can even be a restaurant that owns a big
2:22:27freezer that they're going to use over many years to operate the restaurant the idea is all the same
2:22:35it's the idea of an asset being used up over time and becoming an expense and the example asset or
2:22:45should I say the example fixed asset that we're going to use in this case is a car you see we know
2:22:53that a car only has a certain number of drivable miles that you can actually drive or use during
2:23:03the life of the car and we all know that the more miles you drive in the car the more you use
2:23:10up or depreciate the value and the expense that represents a fixed asset decreasing over time is
2:23:20depreciation expense so it's still the same idea of an asset losing value over time as you use it
2:23:31and the important part that we learned in Prior video chapters is that we record these in the T
2:23:38accounts in the chart of accounts we know that the asset supplies represents the physical supplies
2:23:46that we still have on hand and we know that as we use the supplies over time only the specific
2:23:54supplies that we use become the supplies expense and the money amount of what we used gets recorded
2:24:02as a debit to the supplies expense and a credit to the asset supplies you see we have less of the
2:24:10asset supplies and that's why we make a credit to decrease the value and therefore the value is
2:24:17lower on the next balance sheet and only reflects what we paid for the remaining supplies we then
2:24:24of course debit the supplies expense account only for the amount that was actually used or used up
2:24:32during the time period that the income statement or profit and loss is reporting on and that's the
2:24:40amount that will show on the income statement or profit and loss and since the idea is the same we
2:24:49can make t accounts that represent the car and depreciation expense except in this case what's
2:24:57being used over time is the drivable miles of the car at the moment that you buy the car you see a
2:25:06car only comes with a certain number of drivable miles that you can physically drive as you use the
2:25:14car in the future to run the business and as you drive the miles over time whatever miles you drive
2:25:23or let's say the cost associated with whatever miles you drive will decrease the value of the
2:25:31car in your books and records and those miles or the cost associated with those miles will become
2:25:39the depreciation expense that you report on your profit and loss during the time period that you
2:25:46actually drove those miles using the car and of course as you drive the car over time there are
2:25:55fewer miles available in the future to drive the car and that's why you would credit the
2:26:02asset to lower the value exactly the way that we learned in the prior example and the prior video
2:26:09that makes a lower balance on the balance sheet to represent what the car is worth when someone
2:26:17looks at the value of the car on the balance sheet and of course the actual miles expended
2:26:25or used up or let's say the cost associated with the miles that were expended or used
2:26:33up go as a debit to the depreciation expense account to show the amount that you will put
2:26:40on the profit and loss as the amount of expense associated with lowering the value of the car
2:26:49but then the question is how do you record it in your books and records at the end of each period
2:26:57Well the idea is exactly the same as what it was when we used supplies in our previous example
2:27:07we would make a normal monthly adjustment to adjust for the decrease in value of the asset
2:27:14and to acknowledge the amount that was expended during this period we would have to make a credit
2:27:20to the asset account to lower the value and we would make a debit to the depreciation expense to
2:27:28show how much was used or the cost associated with whatever was used up during that accounting period
2:27:37chapter 16 how much to depreciate if you want to know how much depreciation to record you first
2:27:46ask yourself how much of the car did you use and when we asked that question we're talking about
2:27:54the money value of the amount of car you used regarding the miles that you're able to drive
2:28:02so how do you calculate and
2:28:07credit adjustment for depreciation well the first important new phrase that we will learn regarding
2:28:17finding out how much to debit and credit for the depreciation adjustment is the phrase useful life
2:28:27you see useful life means how many years will the asset give service and produce value that we can
2:28:36use in our business and in the case of the car it means how many miles will the car be drivable
2:28:44and produce valuable services that the business can use now how do you calculate and find useful
2:28:52life well first you have to figure out how much of the car did you use now what does that mean
2:29:02well you have to use a logical comparison to determine during any period of Time how much
2:29:10of the car you actually used and logically the way we do this is We compare how many miles you
2:29:20actually drove this particular accounting period whether it's a month a fiscal quarter or a year
2:29:28and we compare that many miles that we actually used to how many miles you could have driven if
2:29:37you completely used up all of the useful miles in the car by logically comparing this you can
2:29:45figure out how much of the car you used and then mathematically what's the money amount of the
2:29:52car that you used during the period that's your depreciation adjustment so useful life you should
2:30:00know is always an estimate based on past data and past statistics if you buy a car it's not going
2:30:08to be exactly the numbers in miles they predict but based on past services and past information
2:30:15about that car you should be able to estimate the useful life in Miles pretty accurately for example
2:30:26for example let's imagine on January 1 of 2025 we purchased a car for ten thousand dollars and let's
2:30:37imagine that the estimated useful life on this car is ten thousand drivable miles in its lifetime
2:30:48well how would we record the purchase we already learned how to do that in Prior videos with simple
2:30:55debits and credits if we paid cash then we would credit cash ten thousand because the
2:31:02asset cash decreases and we would debit the car ten thousand for the amount that we paid
2:31:09for the car and that would reflect the value of the car in our books now continuing in the
2:31:16same example let's discuss the difference between how much we could drive and how much we did Drive
2:31:24how do we find that out well we know we paid ten thousand dollars for the car
2:31:31and we know that there's ten thousand drivable miles that we can drive during the life of this
2:31:39car before we have to scrap it therefore we could consider the money value of every mile driven to
2:31:49be one dollar per mile that means that the value of the car from the point of view of someone who's
2:31:57using the car not planning on selling it the value of the car decreases one dollar every time a mile
2:32:05is driven that's in theory that's the idea of depreciation based on usage so in theory each
2:32:16mile you drive you would use or expend one dollar of the value from the original purchase that means
2:32:24that we have to then use that one dollar per mile to figure out the monthly adjustment amount
2:32:33and if we know that we lose one dollar in value every time a mile is driven then what we need to
2:32:41do is look on the odometer and see how many miles have been driven since the last accounting period
2:32:48so let's imagine on January 31 the odometer on the car shows 500 Miles have been driven during the
2:32:58first month of using the car and if it's one dollar per mile that we figured out a moment
2:33:05ago that means in theory you expended or used up five hundred dollars worth of car or let's
2:33:15say accumulated five hundred dollars worth of depreciation on the car for driving at 500 miles
2:33:23so then what would we do we would have to debit depreciation expense car for
2:33:29the monthly adjustment amount and that's the expense that would show up on the profit and
2:33:34loss to show how much of the car's value was used during that period and of course the balancing
2:33:42credit would go towards the asset so that the net amount would show up on the balance sheet
2:33:49as the actual value of the car reflected in drivable miles in other words there would be
2:33:579500 remaining drivable miles in money value as of the date of the balance sheet and of course five
2:34:06hundred dollars of depreciation expense is the money value of the actual driven miles and that
2:34:13would show on that particular periods in this case January's profit and loss as depreciation expense
2:34:22now let's do a different example so the numbers are not as round for example let's imagine instead
2:34:28on January 1 we purchased a car for fifteen thousand and in this case the estimated useful
2:34:37life is 30 000 drivable miles in its lifetime so therefore the first thing we need to do is
2:34:46calculate the cost per mile in theory regarding the purchase cost and how many miles we can use
2:34:55so if we paid fifteen thousand dollars to be able to drive 30 000 miles that means in theory each
2:35:05time we drive a mile we are using up 50 cents out of the fifteen thousand that we paid for the car
2:35:13because the reason that we paid fifteen thousand is to be able to drive thirty thousand miles to
2:35:21use the car for our business but what would be the monthly adjustment amount in this case
2:35:29we know the car in this example would start off with a thirty thousand dollar debit balance but
2:35:37in order to know the monthly adjustment amount we would have to again look on the odometer and see
2:35:45how many miles were driven during the specific month that we are preparing our financial
2:35:51statements for and we see in this example that we drove the car 1450 miles during January
2:36:00and if it costs us 50 cents in value every time we drive the car it means we have expended or used up
2:36:09725 dollars of what we paid for the car during January so that's the amount of depreciation
2:36:18expense that we would record and again we always debit depreciation expense for the value that was
2:36:26expended or used up and we always in theory credit the asset so that when we get the net
2:36:33value of the asset we can see that the remaining drivable miles in money value as of the balance
2:36:41sheet date shows up as the balance of the car and of course only the money value of the miles
2:36:50that were driven or expended and used during the period will show up as depreciation expense for
2:36:58that particular month's profit and loss chapter 17 depreciation methods you see we actually learned
2:37:08one way already our first example with the car is the example of the unit of production method
2:37:17you see this method is depreciation based on usage you would first divide the total Purchase cost of
2:37:24the asset by how many units in the useful life this will give you the depreciation amount per
2:37:33unit like we did with the car when we divided the total Purchase cost of the car by the estimated
2:37:41number of miles that the car could be driven in its useful life that gave us the cost per mile but
2:37:48if it's another asset it's cost per unit you then multiply the unit amount by how many units were
2:37:57used or in the case of the car driven during this specific accounting period and that would give you
2:38:04the money amount of the adjustment to debit the depreciation expense and lower the value of the
2:38:11asset that's the one that we already did and you can go back and look at that and apply that to any
2:38:19kind of asset whether it's a car or a piece of manufacturing equipment or anything you needed
2:38:26the second common method of calculating the amount of depreciation expense is called the
2:38:33straight line method and it's called the straight line method because every year has the same amount
2:38:39of depreciation for the asset this method is based on the time that you spent using the asset
2:38:48you divide the purchase cost of what you paid by the total number of years in its useful life
2:38:56that's the amount of depreciation each year if you make an annual depreciation
2:39:02adjustment and if you report monthly then you divide the annual amount you found by 12.
2:39:12and the third method of calculating depreciation is called accelerated depreciation it's when you
2:39:22record more depreciation expense in the early years of the asset and less in the later years
2:39:29in Accounting 101 we learned some number trick patterns that we use to calculate
2:39:36more depreciation in the early years of the asset's useful life and less
2:39:41depreciation expense in the later years of the assets youthful life
2:39:46and for taxes it helps us deduct more depreciation expense in the early years if we choose to
2:39:53and then this will help the business save on taxes and until until it can grow and get strong
2:40:02now let's do an example of straight line depreciation let's imagine on January 1
2:40:09we purchased a fifty thousand dollar truck with the estimated useful life of 10 years
2:40:16of course the truck will have a fifty thousand dollar debit balance in the asset account after
2:40:24you purchased it but what's the annual adjustment amount that you have to record
2:40:31well if you paid fifty thousand dollars for a truck that you're able to use for ten years then
2:40:38in theory you're using up five thousand dollars of the fifty thousand that you paid every year
2:40:46that you continue to drive the truck so then how do you record the annual adjustment well of course
2:40:55it would be debit depreciation expense five thousand and credit the truck five thousand
2:41:01just like we learned in the prior example however that's not the proper way to record
2:41:09and display the depreciation adjustment or the depreciation against the truck
2:41:17you see of course we have to debit the depreciation expense account five thousand
2:41:23because this shows the value that was used during the period and that expense will go with the rest
2:41:31of the expenses on the profit and loss but the balancing credit does not go directly to the asset
2:41:38account instead the balancing five thousand dollar credit goes to another account that's connected
2:41:47to the truck account and instead of putting the credit directly to the truck we put a credit to
2:41:54this account here and it's called accumulated depreciation an accumulated depreciation is
2:42:02a t account in the chart of accounts that only exists to be able to hold the amount of
2:42:09depreciation that has accumulated on any asset so you can compare it to the actual asset cost
2:42:20now this is your first introduction to the idea of something called a contra account you see a
2:42:29contra account is an account that exists only to decrease another existing account
2:42:37so these two accounts go together they must be shown together on the financial statements or
2:42:46they mean nothing you can think of them like conjoined accounts where you can't have one
2:42:53without the other and you must present both of them together so someone looking at the financial
2:43:00statements can see how much you paid compared to the theoretical value of the amount that was used
2:43:09so if you look at the fixed assets section of a balance sheet you will see three numbers for
2:43:17every asset that you have to depreciate because looking at only one number is not really enough
2:43:24information for people looking at your financial position to really understand the value of the
2:43:32truck as it relates to how the company uses the truck for business but if you display all three
2:43:40numbers together that will give the reader of the financial statements a whole picture of
2:43:47the value of the truck as an asset in the company and you may well ask what happens the second year
2:43:55that you depreciate well we know that each Year's depreciation amount is five thousand so no matter
2:44:03what at the end of each year even the second year we have to make a debit to depreciation
2:44:10expense to show the value of the truck that was used up during only the second year but after you
2:44:17make the debit to depreciation expense again the balance and credit goes to the conjoined account
2:44:24accumulated depreciation on the truck and that's why they call it accumulated depreciation because
2:44:33now a second Year's depreciation has accumulated and that means the total decrease in value since
2:44:40we purchased the truck was 10 000 against the fifty thousand that we purchased and at the end
2:44:47of the second year the amount of accumulated depreciation in the account would show up in
2:44:53the fifth fixed asset section as ten thousand and therefore if the depreciation was five thousand
2:45:00more that means the second year the book value would be five thousand less so this shows the
2:45:08reader we purchased the truck at 50 000 but ten thousand out of the fifty thousand has been used
2:45:15as we use the truck in business and therefore the real value of the truck is forty thousand dollars
2:45:24so simply put more accumulated depreciation means a lower Book value for the truck shown on the
2:45:33next periods balance sheet and this was a pretty simple example because each Year's depreciation
2:45:40was the same amount but what about accelerated depreciation how would you handle it in that
2:45:48case well accelerated depreciation means that you record more depreciation in early years and
2:45:56less depreciation in later years you notice the overall amount of depreciation is the same but
2:46:03you get to deduct more expense in earlier years when your business might need the deduction more
2:46:10so there are two common methods of accelerated depreciation one is called some of the year's
2:46:17digits and the other one is called double declining balance and they're both under
2:46:22generally accepted accounting principles when you report your financial statements
2:46:27they're both very simply number patterns that give us a depreciation table that tells us how
2:46:34much depreciation to deduct each year where the numbers at the beginning of the table for the
2:46:40earlier years are higher and the numbers at the end of the table for the later years or lower
2:46:47and this makes the more depreciation expense in the earlier years and less in the later
2:46:53years there's no point in getting into them now they're simply Elementary School number tricks
2:46:58that you can find from your textbook chapter 18. depreciation for taxes the IRS explains everything
2:47:11the Internal Revenue Service makes available publication number 946 which explains everything
2:47:19about how to depreciate property and in this publication they give charts and tables that
2:47:27break down different type of fixed assets into categories and these categories are called class
2:47:35life and if you can look up the type of asset you have and find what class life the asset belongs to
2:47:45then you can use these columns and rows to make a separate depreciation schedule for each asset
2:47:53you see the way it works is that some property falls under three-year property in that category
2:48:01things like some cars but then there's other property that's considered five-year property
2:48:09like farm equipment and so on so you would First Look up in the tables which category or how many
2:48:18years it would take to depreciate that specific asset then once you do that you would then make
2:48:26a separate depreciation schedule based on the category of that asset for example if the company
2:48:35car was three-year property then you would use the three-year column numbers to make the full
2:48:42schedule and the only reason for the full schedule is to be able to see how much depreciation you
2:48:51will deduct for that specific asset for each of the years of the assets life so the numbers for
2:49:00each individual tax Schedule for each asset come from the tables in the publication from the IRS
2:49:08this is an example of three-year property and this is what this schedule would look like if
2:49:14it were five-year property like some farm equipment then again the schedule for that
2:49:20piece of equipment would come from the column of five-year property and that's what that would look
2:49:27like if it cost ten thousand to purchase and here are two separate depreciation schedules
2:49:34for two separate example fixed assets and the way to find Total depreciation expense for the
2:49:43year would be to use the amount of depreciation for the specific year for each asset for example
2:49:51let's imagine that this is the second year of using the equipment so we would look on
2:49:58the second row and deduct the amount that the schedule indicates as the depreciation expense
2:50:06for the second year for this specific fixed asset but let us also Imagine in this same
2:50:15year that it's actually the third year using the company car so we would look in the row of the
2:50:23third year of depreciation to determine how much depreciation expense we should have for the car
2:50:30and if these were the only two fixed Assets in this example company that means you would
2:50:36add them together and total depreciation expense in this example would be 7242.
2:50:46many companies only have one fixed asset account for all their assets and for all their
2:50:54depreciation and if that were the case then the 7242 would go as a debit to one specific account
2:51:03depreciation expense and the balancing credit would go to one specific account accumulated
2:51:11depreciation on all fixed assets you could have a separate set of uh T accounts for each
2:51:20individual fixed asset but many companies lump them together and use the separate depreciation
2:51:26schedules to keep track of them separately from year t part five all about merchandise inventory
2:51:38Chapter 20 The Perpetual inventory system we have already learned how to record an income from a
2:51:48service it's just one t account that represents the total money that came in from what we earned
2:51:56in previous cases it was just one number the service fee and it represented the price of
2:52:05the service so you previously made a credit to this income account for exactly what the customer
2:52:12gave you however when we have merchandise that we're selling we still have an income account
2:52:20that represents the total money that came in from the customer for merchandise sales
2:52:28but in a case of a merchandise company we're not dealing with one number in the income section
2:52:33we're really dealing with three numbers the sales price of the merchandise which will get
2:52:40recorded as a credit to this income account the same way the income from a service got
2:52:48recorded to the service income account but with merchandise we also have to consider how much
2:52:55did the merchandise cost you when you bought it because the difference between the price that
2:53:02you record as income and the cost that you pay for the merchandise will be your profit
2:53:10now the most important words in this video are the words cost and the words price and you
2:53:18have to make sure you know the difference between the word cost and the word price
2:53:25cost means the amount that we paid to purchase the merchandise from the vendor
2:53:32but for that very same merchandise the word price means the amount we received from the
2:53:40customer when selling the merchandise and of course the difference is your profit
2:53:48price Minus cost equals profit and we all know that but only if the goods are sold so we
2:53:59therefore have to clarify our definition we should really say the price of the goods that were sold
2:54:07minus the purchase cost of the goods that were sold is what really equals our profit the price
2:54:17of the goods that are sold is the value that the customer gives us the cost of the goods that are
2:54:24sold is the value of what we gave to the customer it's what we paid for the goods that went out
2:54:34the word Perpetual means continuously changing that means if we're using the Perpetual inventory
2:54:41method to record the sale the account inventory asset changes after each transaction that means
2:54:50it changes after we buy the merchandise and it also changes after we sell the merchandise
2:55:00now of course in the top right here we have our sales income account this is very similar to
2:55:08the service income account that we were using in previous videos you record a credit for what the
2:55:15customer gives you because that's the income that you earned so previously we made a credit for the
2:55:22price of the service when the customer paid us or when we earned the service income so now when we
2:55:29deliver the goods we make a credit to sales income for the price of the goods that are sold because
2:55:37that's the income that we earned and that's a t account just like service income however the
2:55:44interesting stuff happens down here in the cost of goods sold account this is not technically an
2:55:52expense even though it behaves like an expense and even though it has the same effect on income it
2:56:00would go in the income section as a contra income account not an expense account because it's part
2:56:07of the income cycle you have to buy then sell then you can subtract your expenses to find your net
2:56:15income so that explains a little bit about this new account in the bottom right cost of goods sold
2:56:23and now let's see how to use these accounts when we purchase and sell merchandise
2:56:30first let's give cash a beginning balance that's not a transaction we're just pretending that we're
2:56:39starting off with ten thousand dollars cash now here's our first transaction paid 300 to purchase
2:56:47merchandise well we know if we pay cash is minus cash is credit and just like purchasing any other
2:56:55asset exactly what we paid for the asset becomes a debit to that asset for that date so this purchase
2:57:05transaction is no different than the ones we've learned before when we purchased other assets but
2:57:12the interesting part comes here when we sell with Perpetual we record it twice once for the cost and
2:57:23once for the price now that's a lovely little rhyme so let's say it again when we sell with
2:57:30Perpetual we record it twice once for the cost and once for the price let's take a look at an example
2:57:40let's imagine on January 8 we sold the specific merchandise that we purchased on January 1 but we
2:57:51sold them for one thousand two hundred dollars so you can see this is the merchandise that
2:57:58we purchased back on January 1. this is the merchandise sitting here waiting to be sold
2:58:04now if we sold it for twelve hundred dollars it means that the customer gave us twelve hundred
2:58:10dollars and it also means we've earned twelve hundred dollars worth of income for selling
2:58:18the merchandise so what would be the debits and the credits well if we've earned twelve hundred
2:58:25dollars worth of income for sales and we know that income is credit on January 8th we would
2:58:33have to credit the sales income account for the one thousand two hundred dollars that we earned
2:58:40on the other hand the customer gave us one thousand two hundred dollars so we have no
2:58:46choice but to debit cash on January 8th for the one thousand two hundred dollars
2:58:53so this first step in credit looks just like it looked when we sold the service credit the
2:58:59income and debit the cash however there is now an extra step for this same January 8th sale
2:59:09for this January 8th sale we also have to credit inventory because this three
2:59:16hundred dollars of inventory is no longer here it went out so we have to remove it
2:59:23from inventory by making a credit of 300. so then what would we debit 300 and obviously the
2:59:32answer is cost of goods sold credit inventory for the merchandise that went out and debit
2:59:40cost of goods sold for the purchase cost of the specific merchandise that we gave to the customer
2:59:50can you guess the profit from this particular sale of course the profit is nine hundred dollars
2:59:57anybody could figure that out because it was only one sale watch another one let's imagine
3:00:06on January 20 we purchased 500 more of inventory again that's the easy one we have 500 more of this
3:00:17asset and on the other hand we have 500 less of cash so we know purchasing under the Perpetual
3:00:26system is very easy debit the inventory that you got and credit the cash now again the interesting
3:00:35part is when you actually sell let's imagine on January 31 we sold the specific merchandise
3:00:44that we previously purchased on January 20. and we sold it for three thousand three hundred dollars
3:00:51well here's the merchandise that we purchased back on January 20 so we know that has to come
3:00:58out of inventory but what should we do first well we've actually earned three thousand three hundred
3:01:06dollars by receiving that from the customer for giving them the merchandise so always income is
3:01:14credit for what we earned and if the customer gave us 3 300 in cash we have to debit cash
3:01:23so the debit and the credit for the price of the January 31 sale is credit sales income and debit
3:01:31cash but we're not finished this specific five hundred dollars of inventory went out on January
3:01:39Thirty One so we credit inventory 500 then what do we debit 500 well 500 was the purchase cost of
3:01:50the goods that we gave the customer on January Thirty One the specific Goods so here we have
3:01:57the debit and the credit for the cost so we have four accounts changing when we make a sale credit
3:02:04sales income and debit cash for the price and the income we earned credit inventory for the cost of
3:02:11the goods that are sold and debit cost of goods sold now obviously at the end of the month or the
3:02:19end of the period we would get the total of the sales income and the total of the cost of goods
3:02:25sold and we would eventually put them together to find the profit from our merchandise operation
3:02:33in this case the profit is three thousand seven hundred but when you're an accountant you're
3:02:40not finished when you calculate the profit the profit is the result of the income section of
3:02:46our operation we then have to subtract out all the other expenses that we learned about in previous
3:02:53videos to get the final number the net income in fact sales income and cost of goods sold are
3:03:03together in the income section of the income statement and the expenses are at the bottom
3:03:10they're both in the income section because both buying and selling are part of the revenue cycle
3:03:18and if you have a merchandise business the gross profit is the result of the income section
3:03:27you then simply record all your other expenses and subtract them the way you did when you had
3:03:33a service business to find your final net income chapter 21 the Perpetual inventory system project
3:03:47let's check your knowledge and skill regarding merchandise transactions and will also check
3:03:54your knowledge and skill regarding the income statement of a merchandise business
3:04:00so The Specific Instructions in this project are to download the Excel files in the resource
3:04:07tab of this video everything you need is in the downloadable Excel you can easily
3:04:14access the files for all of these projects by clicking show more just like you did before
3:04:21to reveal the table of contents but if you look all the way down at the very bottom of
3:04:28the description field you will see that there are links to each of the project sheets for
3:04:35each of the projects and if you just click on any one of the links to download them
3:04:41all you have to do is Click where the link is for this particular exercise and you should be
3:04:47given an option to choose which folder to download the file to you see The Specific Instructions are
3:04:56record all transactions into the general ledger provided find the results of each account and
3:05:04make a trial balance with the ending numbers of the general ledger and then from those numbers
3:05:10make an income statement of a merchandise company from the resulting numbers in the trial balance
3:05:19when you click to open the file you this is what the file will look like it'll say the name of it
3:05:25up here and you'll have the general instructions in the first tab the second tab gives you the
3:05:32starting trial balance the third tab gives you the list of transactions that you need
3:05:37to read and remind you that the purchase what the purchase cost and the sales price of each item is
3:05:45now here's the blank general ledger for you to physically put the debits and credits you can zoom
3:05:52in or zoom out if you want to see more of them at once and if you click and put in a number like a
3:05:58debit or a credit you will see it automatically adds it for you so that will save you time rather
3:06:06than using a pencil and piece of paper when you finish make your own numbers in the final trial
3:06:13balance and then from those numbers here we have a blank sheet for you to make your profit and loss
3:06:19don't pick peek at the general ledger results or the final trial balance or profit and loss unless
3:06:27you've really exhausted every ounce of energy that you have trying to get the final numbers correct
3:06:35I wish you good luck and I'm here if you have any questions chapter 22 the periodic inventory system
3:06:47the periodic inventory method is appropriate if you cannot keep records of specific quantities
3:06:54on hand after each transaction if that's the case then you must use the periodic inventory method
3:07:03of recording your transactions the you see with this method you can only Calculate cost of goods
3:07:10sold when you are ready to report your profit and loss and the rest of your financial statements
3:07:17you don't calculate it in the accounts like we learned with the Perpetual method you instead
3:07:25calculate the cost of goods sold right on the income statement now what am I talking about
3:07:32well the profit and loss of a merchandise company has sections and subsections the numbers are in a
3:07:41relationship to each other and cost of goods sold still means the same thing but you can only find
3:07:49it at the end of the month or the end of the accounting cycle when you're ready to report
3:07:54your numbers so what did we already learn about the profit and loss of a merchandise company well
3:08:02we know that we first calculate how much money came in from the customers for the merchandise
3:08:10we gave them and common sense says we then subtract what we paid for the merchandise
3:08:18that we gave the customer and the amount that we paid for the merchandise we gave the customer is
3:08:26the cost of the goods that were sold and if we subtract them out then we get our real profit
3:08:34from buying and selling the merchandise now most of you remember this from your elementary school
3:08:41days but when you find your gross profit from the merchandise you're not really finished you still
3:08:48have to subtract out operating expenses and any other service you needed to pay for in order to
3:08:55be able to buy and sell to get your real final result which is the net income and hopefully
3:09:03you've seen this before in your accounting class or in your travels and hopefully this structure
3:09:09makes sense to you and should be very simple however you should know that when you use the
3:09:17periodic method of inventory cost of goods sold is comprised of four separate elements you see you
3:09:27can't have a t account for the cost of goods sold if you have too many products to keep track of
3:09:33so you do a series of logical steps to find and calculate the cost of goods sold first you start
3:09:40with beginning inventory which is a t account in the general ledger that doesn't change as you
3:09:47purchase merchandise if you are using the periodic method instead when you purchase merchandise all
3:09:56of your purchases gets recorded in a t account called purchases and then of course logic suggests
3:10:05if you add what you had in the beginning inventory plus your purchases you would then get a number
3:10:11that represents the goods that were available for sale and the last logical step to back into
3:10:20finding what the cost of goods sold is is to subtract out your ending inventory and then
3:10:27once you get that result then you have the cost of goods sold to put into your income statement
3:10:34subtract from your sales income to find your gross profit and these are the four elements of the
3:10:41logical steps that you would do at the end of the month and show on the income statement in order to
3:10:48show that you have an accurate cost of goods sold and therefore an accurate gross profit and so on
3:10:55but why is it that the cost of goods sold steps seem a little challenging it's only because you're
3:11:03using the words in accounting instead of using Common Sense words think about what cost of goods
3:11:10sold is it's what we paid for what went out it's what we paid for what we gave the customer so all
3:11:20we have to do is use different words and it will be clear and Common Sense exactly what cost of
3:11:26goods sold is instead of using the words beginning inventory let's just say we had some because
3:11:35whatever your beginning balance of inventory is recognize uh you know represents what you had at
3:11:42the beginning you had some but that during the month when you record your purchases you bought
3:11:48more so instead of calling it purchases call it how much more you bought and logic dictates if
3:11:56you add what you had at the beginning plus what you bought then you get a number that represents
3:12:05what you could have sold so Goods available for sale is the total that you had the ability to sell
3:12:14we then subtract what we did not sell and logic dictates if you subtract from what you could
3:12:24have sold the amount you did not sell then the number that remains is what you did sell
3:12:33so logically speaking Goods available for sale which is what you could have sold minus ending
3:12:40inventory which is what you did not sell equals what you did sell and what you paid for what
3:12:48you sold is the cost of goods sold so here's a practical example from an Amazon online store
3:12:56keeping in mind that any company with too many different types of products and large volumes
3:13:03can cannot keep track of the cost of goods sold for each sale and just like a supermarket they
3:13:10must count the inventory after each period that they want to report their numbers and use the
3:13:16periodic system so here's the Practical example you cannot know your profit unless you know how
3:13:25many items were sold during the month and how much money of item costs were sold during the month in
3:13:33other words how much you paid specifically for the products that you gave the customers most
3:13:42Amazon sellers do not keep count of the quantity of items after each sale or after each purchase
3:13:50so how do you know how many items and how much money of inventory was sold during the month
3:13:58the solution is to use old school elementary steps to basically back into the amount of
3:14:07cost of goods sold during the month so what does that mean well let's think of it from
3:14:15an elementary school's point of view let's imagine at the beginning of the month you had
3:14:21some inventory for example you had 10 items then let's imagine during the month you bought more and
3:14:32you kept track of how many you bought during the month and that was 20 items now you don't
3:14:39know exactly how many you sold because you did not keep quantities of that which were sold but
3:14:46what you can do is physically count the ones that remain and are with you at the end of the month
3:14:54and if you count the amount at the end of the month in this example and you have five
3:14:59items left over how would you find out how many actually were sold and went out well
3:15:08in order to know that you would have to be able to add the first two numbers together in other words
3:15:18you would have to find out how many you were able to sell and then of course you would subtract out
3:15:26the amount that you did not sell which is the amount left over so if we were able to sell 30
3:15:34and we did not sell five then how many did we actually sell and of course the answer is 25.
3:15:45logically if we had some for example in this example we had 15 at the beginning of the month
3:15:54then during the month we bought 45 more well we don't know how many were sold but we know we can
3:16:03physically count the ones that are left over at the end of the month and in this example there
3:16:10were 25 left over so remember in order to find out how many you did sell the first step is finding
3:16:18out how many you were able to sell and in this example you were able to sell 60 and had 25 left
3:16:28over so in this example how many did you sell well you sold 35 because 60 that you were able to sell
3:16:40minus 25 that you did not sell because 25 was left over logically equals the 35 that you did sell
3:16:52and now we will do the same thing we just did but we will do it with money amounts
3:16:58instead of counted quantities for example let's imagine at the beginning of the month
3:17:06we knew we had 250 dollars worth of merchandise inventory that means we
3:17:14paid 250 dollars for the items that were sitting here at the beginning of the month
3:17:21then during the month we kept track of how much we paid to buy more inventory
3:17:28and therefore we know the money amount that we were able to sell we could also check the amount
3:17:37left over in ending inventory and figure out what we paid for that so we know the money amount of
3:17:44what remains and logically we could figure out the money amount of the goods that were sold
3:17:53and we know in this example it was 300 because eight hundred dollars worth of inventory that
3:18:01we were able to sell minus five hundred dollars worth of inventory that we did not sell equals
3:18:10three hundred dollars worth of inventory that we did sell and since we paid the cost for that 300
3:18:19that we did sell the three hundred dollars in this example is the cost of goods sold and now we will
3:18:29do the same thing we've been doing but using the proper accounting words for example instead of
3:18:38saying we had some we're going to say beginning inventory was 250 dollars worth of merchandise
3:18:46and instead of saying we bought more we'll call the amount that we bought more the very important
3:18:53word purchases so these are the words that we would use when doing accounting and calculating
3:19:01our cost of goods sold now the word able is in the phrase able to sell so instead of saying the
3:19:10amount we were able to sell the official word for this number is Goods available for sale
3:19:20and of course instead of saying the amount left over we call the amount left over ending inventory
3:19:31so what's the proper word for the result well the result is what you paid for the goods that
3:19:39you sold and went out so if in this example three hundred dollars worth of merchandise went out then
3:19:48that's what we call the cost of goods sold because three hundred dollars is what we paid for what
3:19:58went out because in this example eight hundred dollars worth of merchandise is what we were able
3:20:06to sell that was the goods available for sale 500 is what we did not sell that was the ending
3:20:14inventory so logically we sold three hundred dollars worth of merchandise and 300 is the
3:20:22cost of goods sold now let's do another example with the proper words beginning inventory was 400.
3:20:31then during the month we purchased 350 dollars more worth of inventory
3:20:38and when we physically count the inventory at the end we know we have a hundred and fifty
3:20:44dollars worth of inventory still sitting here so of course the next step is to find out how much
3:20:52money worth of inventory we were able to sell and that's the goods available for sale so beginning
3:21:00inventory plus purchases equals Goods available for sale and goods available for sale minus ending
3:21:07inventory equals the cost of goods sold and in this example it is six hundred dollars because
3:21:14seven hundred and fifty dollars were the goods available for sale a hundred and fifty dollars
3:21:21was the ending inventory therefore the cost of goods sold in this example was six hundred dollars
3:21:32now we need to know the cost of goods sold so that we can subtract it from the money that
3:21:39came in in sales income to calculate the gross profit because Common Sense dictates the money
3:21:47that came in from sales minus the cost of goods sold which is what we paid equals the profit on
3:21:56the sales of the merchandise so how was this done in the old days in the chart of accounts well
3:22:03the sales were recorded this way we had a separate account in the chart of accounts just to record
3:22:11all the money that came in from sales and only the money amounts that the customers paid us got
3:22:19recorded in the sales income account because that was recorded at the same time in the cash and bank
3:22:27account that we used in our general ledger to keep track of how much money we had in the bank
3:22:34so we knew if it came in and it was a plus to the bank account that it was also sales
3:22:39income and each individual sale was recorded on the credit side of the sales account to
3:22:46keep track of the income and the debit side of the cash and bank account to keep track
3:22:52of how much money was in the bank or came into the bank account then of course at the
3:22:58end of the month we would total the money that came in from the sale and that amount would be
3:23:06the sales income that we would subtract out the cost of goods sold to fine the profit
3:23:13so then you may ask how were purchases recorded well we had a separate account to record the money
3:23:23amount each time we purchased inventory and of course that was matched to the deduction of the
3:23:31bank account every time we paid for the purchase and in the purchases account we only put the
3:23:38purchase cost we only put what we paid for the merchandise that we purchased and every time we
3:23:46did that we put a of the money amount on the debit side of purchases to keep track of everything we
3:23:54paid and the credit side of the cash and bank to keep track of each reduction to the bank account
3:24:01and after each purchase was recorded in the purchases account during the month at the end
3:24:08of the month we would get the total purchases and the total purchases would help us find the cost of
3:24:17goods sold to be able to subtract from the sales income to be able to determine our profit but we
3:24:25know that what we paid for the purchases is not exactly equal to what we pay to what the cost of
3:24:34goods sold is so how did we actually find the cost of goods sold well we had our purchases account
3:24:43and we had another account to keep track of the inventory which is an asset and that account
3:24:50kept track of what's physically here at the end of one month and the beginning of another
3:24:58and then of course we had a separate t account just to show us the amount of cost of goods sold
3:25:06and what would we do well we would start with the beginning inventory that means that if we looked
3:25:14at the inventory asset account in our chart of accounts at any given moment it would only show
3:25:22the amount of inventory we had at the beginning of the month now let's just remind ourselves
3:25:30what the calculation was beginning inventory plus purchases equals Goods available for sale
3:25:40Goods available for sale minus ending inventory equals cost of goods sold so the first thing we
3:25:49would do is remove the beginning balance from inventory asset and move it to cost of goods
3:25:57sold we would do that by making a credit to the inventory asset to wipe it out because that's no
3:26:05longer the inventory amount that was the amount at the beginning so since the number at the end
3:26:12of the month is not the same we make a credit to wipe it out and the balancing debit goes into the
3:26:19account cost of goods sold now the inventory asset is zero after step one now what would be
3:26:29step two move the purchases to cost of goods sold purchases normally had a debit balance so we made
3:26:38a credit to wipe it out and make purchases zero so that we could account for only the purchases
3:26:46in each individual month and purchases will become zero as a fresh balance to record the purchases in
3:26:54the next month and the balancing debit of course goes to cost of goods sold now cost of goods sold
3:27:04now has this final third step the ending inventory will go as a decrease to cost of goods sold and we
3:27:15know the amount that we physically count at the end which is the amount left over gets subtracted
3:27:22in our little calculation so that's why it goes on the credit side of cost of goods sold because
3:27:31it gets subtracted and of course the balancing debit goes into the asset account inventory so
3:27:40that now is the ending inventory of this month and now going into the next month the inventory
3:27:48account reflects what's the beginning inventory in the new month and now our cost of goods sold
3:27:55account in the chart of accounts has every part of the calculation on the left left it has the
3:28:03beginning inventory and the purchases so the total on the left is the goods available for sale and
3:28:12we know that on the right side it has what's left over that we subtract out as the ending inventory
3:28:21so when we take the total debit side of cost of goods sold minus the total credit side of cost
3:28:27of goods sold we get the actual balance of cost of goods sold and in this example that's eight
3:28:36thousand dollars and that's how we found out the cost of goods sold by managing the chart
3:28:42of accounts in the days before the computer and that cost of goods sold is what we would subtract
3:28:50from the sales income to get the gross profit from buying and selling merchandise after that we would
3:28:58subtract our general administrative expenses to get the net taxability
3:29:05chapter 23 the periodic inventory system project the profit and loss of a merchandise company has
3:29:16sections and subsections the numbers on the profit and loss are all in a relationship to each other
3:29:26and it's remembering and understanding this relationship that will help you learn and remember
3:29:32the merchandise accounting that you studied in this course you see The Specific Instructions
3:29:40to this puzzle are as follows download the two Excel files in the resource tab of this video
3:29:49then use the Excel file to fill in the missing numbers by using your knowledge of the different
3:29:57parts of an income statement of a merchandise business and everything you need is in the
3:30:04downloadable you can easily access the files for all of these projects by clicking show more just
3:30:12like you did before to reveal the table of contents but if you look all the way down at
3:30:19the very bottom of the description field you will see that there are links to each of the project
3:30:26sheets for each of the projects and if you just click on any one of the links to download them
3:30:33all you have to do is Click where the link is for this particular exercise and you
3:30:38should be given an option to choose which folder to download the file to
3:30:46we know that sales income is the money the customers give you for the merchandise
3:30:54that you give them and we subtract from that the cost of goods sold and we know that the
3:31:02cost of goods sold is what we paid for the merchandise that we just gave the customer
3:31:09so logically if you subtract the money the customer gave us in sales minus what we paid
3:31:16for the cost of goods sold for the merchandise that we gave the customer that difference we all
3:31:24know is your gross profit and we all know what profit from a sale means but of course we're not
3:31:33finished with the income statement once you get the gross profit because that only accounts for
3:31:38buying and selling the merchandise we know very well that if you buy and sell merchandise there
3:31:45are additional expenses that you have to subtract from the profit of the sale of the merchandise to
3:31:53finally arrive at the true amount of money that you actually made called the net income
3:32:02and most of you remember this from your elementary school days when you did practical simple projects
3:32:09however what you learned in Accounting 101 is that cost of goods sold actually is comprised of four
3:32:18elements to get the cost of goods sold you need to have your beginning inventory counted last month
3:32:25you have to add the amount that you that you paid for all the merchandise that you purchased during
3:32:32the month or the period and that would give you a number called Goods available for sale
3:32:39and what you were able to sell minus what you did not sell because it remains an ending inventory
3:32:47then you will know your cost of goods sold then you will know the amount that you paid
3:32:54specifically for only the items that went out to the customer so since these are the elements
3:33:03and this is the math relationship you should be able to do this exercise so let's take a look at
3:33:11what the sheet looks like you'll notice there are one two three four five six seven little puzzles
3:33:20across seven little sheets in this Excel exercise and all you have to do is find the missing numbers
3:33:28by using the math relationship you learned about a moment ago okay now most of them should seem
3:33:36easy but if purchases is the number that's missing how do you figure that out how do you
3:33:45figure out what purchases is when you're usually given beginning inventory and purchases and you
3:33:52have to find the goods available for sale but in this case you're given the goods available for
3:33:58sale and beginning inventory and you have to find the purchases so how do you do that well
3:34:07we know that beginning inventory plus purchases is equal to Goods available for sale and if you
3:34:17think about that for just a couple of minutes you'll remember from elementary school that it
3:34:23follows therefore that Goods available for sale minus beginning inventory equals the purchases
3:34:33just think about the math relationship and some of the puzzles you did in elementary school and
3:34:40you will understand why this is true so if we know beginning inventory and goods available
3:34:47we can find purchases purchases is equal to the goods available minus the beginning inventory
3:34:58now again you don't have to use Excel and you don't have to use math formulas if you don't
3:35:04know Excel just use a calculator and type in the number in the empty space so we used this
3:35:12logic going backwards in order to find out the missing number now to find the remaining three
3:35:20missing numbers that's easy we just go back to the math relationship that we learned about a moment
3:35:27ago and we can finish putting in the rest of the numbers for example what's the cost of goods sold
3:35:34well we know that it says here Goods available for sale minus ending inventory equals cost
3:35:42of goods sold no problem Goods equal to Goods available for sale minus the ending inventory
3:35:55equals cost of goods sold just like it says in the layout of the diagram of the income
3:36:04statement of the merchandise business now how to find gross profit well it says it right here
3:36:09income Minus cost of goods sold is equal to gross profit so that's what we put we put equal sales
3:36:18minus the cost of goods sold which is in B8 and now that's your gross profit and then of course
3:36:26we look One Last Time gross profit minus total expenses equals the net income so gross profit
3:36:37this one minus total expenses which is in B10 equals the net income so that's how you do it
3:36:49you don't need to use Excel just click in the field and type in the number and hit enter
3:36:55and just by doing these little puzzles you will be an expert by the time you finish
3:37:01try the rest of the sheets yourself I know you'll be an expert if you give yourself time to finish
3:37:09each sheet stay in touch good luck and if you have any questions please reach out to me immediately
3:37:18chapter 24 the weighted average inventory system changing purchase costs can be a challenge when
3:37:29you're trying to track your cost of goods sold to subtract it from your sales income
3:37:34to determine your profit Purchase cost of items sold as you know get recorded in the
3:37:42cost of goods sold account QuickBooks needs to know the purchase cost of the items that were
3:37:49sold in order to be able to calculate the amount of cost of goods sold for that particular sale
3:37:59if all purchase costs always stay the same then QuickBooks will always know how much to put into
3:38:06the cost of goods sold account when you sell your merchandise unfortunately if purchase costs change
3:38:14on new items purchased then you have different purchase costs for the same item in inventory
3:38:23and that's the problem the problem is if you have different costs for the same item the question is
3:38:31how does QuickBooks know which costs to use when you sell an item and need to find the
3:38:40cost of goods sold for the items that were in that sale for example let's imagine on April
3:38:491 you have three apples in your inventory that you previously purchased for ten dollars each
3:38:57now let's imagine on April 2nd you purchased two more apples each for twelve dollars
3:39:04now here's where the interesting part comes in on April 3rd you sold three of them
3:39:13which three did you sell they all look alike when they're sitting in the bunch
3:39:20and then if you don't know which particular three apples you sold then what costs get assigned to
3:39:27those apples for you to determine the cost of goods sold to subtract from your sales for that
3:39:34particular sale that's the issue well QuickBooks desktop uses a special accounting method called
3:39:43the weighted average method it's the average of all of the different costs that you paid for
3:39:52the item with consideration to the quantity of the item after each step so let's first discuss
3:40:01what a normal average is let's imagine you have one apple for ten dollars one apple for twelve
3:40:08dollars and one apple for fourteen dollars if these were the three apples sitting in your
3:40:14inventory then you know you paid a total of thirty six dollars for each of those three apples and you
3:40:21know that the normal average cost for those three separate costs would be twelve dollars
3:40:28and then you could use twelve dollars as the cost of goods sold for the apples that went out
3:40:35however you would not normally use the normal average because that only considers the different
3:40:44costs without considering the quantity purchased at each cost the weighted average method considers
3:40:52quantity in the average so let's imagine we have one apple for fourteen dollars
3:41:00one apple for twelve dollars and we have three other apples that we previously paid ten dollars
3:41:08each now we have way more of the ten dollar apples so you can't just add 10 plus 12 plus 14 and
3:41:18divide by 3 because you're not considering that most of the apples were purchased for ten dollars
3:41:25so you have to factor this into your average and we still have three different prices but we have
3:41:33more of the apples that were purchased for ten dollars so you can't just add them up and divide
3:41:39by three and use the number 12 as your cost of goods sold because the real average would have to
3:41:46be closer to 10 because you have way more at the ten dollar cost so here are the steps to finding
3:41:55the weighted average so that you can assign a cost of goods sold to the items when you sell
3:42:03step one find the total quantity well that's pretty easy especially if you're using a computer
3:42:11step two add all the costs of all the items together to get the total cost and of course
3:42:20step three divide by a used division divide cost by quantity and then you will have come up with
3:42:29a weighted average for each individual apple that you could then use as the cost of goods
3:42:38sold the very next time you sell so if this were the situation and we sold three apples
3:42:45the cost of goods sold for that sale would be three times the eleven dollars and twenty cents
3:42:52notice it's a little bit closer to ten dollars than the original Twelve dollar regular average
3:42:59that we had because if we have more at the lower cost that tends to pull down the weighted average
3:43:07now let's try a second example just to make sure you got it before we go over to QuickBooks
3:43:15let's imagine an inventory right now we have five apples at 13 each eight apples at eighteen dollars
3:43:23each and three apples at sixteen dollars each now we know that the weighted average
3:43:30should be a little closer to 18 than anything else because you have eight apples at the 18
3:43:38Purchase cost each so the total quantity is easy to calculate and the computer will give you that
3:43:46but this is displayed a little differently so how would you get the total cost five apples
3:43:54well what you would have to do is find the cost of each separate purchase and add it together
3:44:02so for the five apples that you purchased at thirteen dollars you would multiply and find
3:44:07those five apples cost you sixty five dollars to buy for the eight apples that you purchased at
3:44:15eighteen dollars each those eight apples cost you a hundred and forty four dollars and for
3:44:22the three apples that you purchased at sixteen dollars each they cost you forty eight dollars
3:44:28so these apples together in total cost you two hundred and fifty Seven dollars and there's only
3:44:3616 of them so then when you divide you come up with a result that's sixteen dollars and
3:44:43six cents and that is the weighted cost of each unit the weighted average of each cost
3:44:50and it would be that number sixteen dollars and six cents that you would multiply by
3:44:56the quantity whenever you sold to find the cost of goods sold for that particular sale
3:45:06now let's see this in action in our QuickBooks file right now in our inventory if you've been
3:45:13following along properly you should have 273 apples physically available for sale and your
3:45:22report should show that you paid ten dollars to purchase each of those 273 apples worth 2730
3:45:33altogether so what if we purchased a hundred more apples but we purchased them at twelve dollars
3:45:43each what would happen well what would be the new cost per Apple that QuickBooks would give us
3:45:51right now we have 273 apples at ten dollars each making 27.30 for the money amount of our Apple
3:46:00inventory if we bought another hundred apples at twelve dollars each that means we'd be paying 1
3:46:09200 more for those hundred additional apples and we know the total quantity after that purchase
3:46:18would be 373 and we know the total Purchase cost of all apples after that purchase would be 3930
3:46:29therefore the weighted average per Apple would be 10.54 so if we recorded this purchase QuickBooks
3:46:40would then show us the new unit cost per Apple in the report that we just show showed a moment ago
3:46:47but it would not say ten dollars it would say 10.54 cents and that means that any subsequent
3:46:55sale would have 10.54 cents assigned to the cost of the apples to calculate the cost of goods sold
3:47:04for that particular sale so let's record that purchase let's imagine on May 2nd 2019 we paid
3:47:14Sam's Farm twelve hundred dollars for ten Apples uh basically 100 apples twelve dollars each well
3:47:22it's very simple banking write a check and we said that was May 2nd of we're doing 2019.
3:47:33might as well do it right we bought it from Sam's Farm and no we're not using a past
3:47:40purchase order and yes we're still writing a check don't worry about those two pop-ups
3:47:46but do not fill in the money amount go to the items choose apples and the quantity is a hundred
3:47:58however we are changing the purchase cost from 10 to 12. now it's going to ask you should we update
3:48:07with the new cost no because this might just be a fluke who knows or you might want to say yes if
3:48:14you really feel that it's a permanent change but the point is we're buying a hundred apples for 12
3:48:19each and we're paying Sam's Farm one thousand two hundred dollars now after we click save and close
3:48:27we're going to open the inventory valuation detail haha the new cost for apple as of May 2nd is now
3:48:3910.54 that means when we sell apples right now the amount of apples or the quantity of apples
3:48:49that we sell will be multiplied by 10.54 in order to calculate the cost of goods sold so let's sell
3:48:59with the new cost on May the 4th we sold 10 apples to candy and received cash let's talk about this
3:49:09the sales income will still be 500 because the sales price each apple is 50 and we're selling
3:49:1610 of them so 500 is coming in how much will be the cost of goods sold how much did how much does
3:49:25QuickBooks say that we paid for the apples that for the 10 apples that we just gave candy well
3:49:33QuickBooks is going to tell us that we pay 10.54 for each of the 10 apples that we just gave candy
3:49:43and therefore if we're selling 10 of them that means 105.40 is the amount of cost of goods sold
3:49:52for that sale let's see if that's what QuickBooks does we click sale receipt and change the date to
3:50:02May the 4th be with you now we're selling to candy and we're selling her apples now the
3:50:11sales price certainly didn't change so if we're selling 10 apples we know that's 500 in income
3:50:19but after I click save and close I can open the trial balance and I can see if
3:50:26I go to sales and double click the sales number yes 500 in income for sales however
3:50:34if I go to the cost of goods sold account and double click and go down to the most recent sale
3:50:41receipt here on May the 4th you can see that the amount of cost of goods sold for that sale that we
3:50:50just recorded is exactly the number we expected a hundred and five dollars and 36 Cents [Music]
3:51:00thank you foreign
3:51:13the first in first out inventory system also known as fifo in order to know the gross profit and net
3:51:24income of our merchandise business you must have an accurate calculation of the cost of goods sold
3:51:32you must properly track your purchase cost of all items that were sold as well as items
3:51:40still on hand there are three acceptable accounting methods to track your perch uh
3:51:47products changing Purchase cost the accounting method that QuickBooks Online uses to track
3:51:55changing Purchase cost is called First in first out also known by the acronym fifo
3:52:04first in first out assumes the items of the same type are sometimes purchased at different costs
3:52:13when selling the items the accountant or the bookkeeper does not know which specific items
3:52:20were physically given to the customer in that sale as you know all apples look alike even
3:52:28though we paid a different Purchase cost for the different apples that are sitting in our inventory
3:52:35some of the apples you gave to the customer were purchased at one cost and the rest of
3:52:41the apples that you gave the customer were purchased at a different cost and you don't
3:52:47know which ones were purchased at which costs all you did was grab the apples and give a bunch to
3:52:53the customer for the sale therefore you cannot know for sure the purchase cost of the goods
3:53:01that were sold because you don't know which cost you purchase the apples that were sold
3:53:08so what do you do well fifo assumes that the very first items in this example apples that were
3:53:17purchased were the first ones to be sold so if you know the cost of each purchase then you can assign
3:53:26the cost to the ones that were sold for example let's imagine we start off with four apples in our
3:53:35inventory that we paid ten dollars each to buy now if we sell two of them we know the cost of goods
3:53:45sold is twenty because we know for sure we pay ten dollars each for the two apples that just went out
3:53:54but now we buy two more and we pay twelve dollars each for the two new ones that we just bought
3:54:04so now after that if we sell two of these do we know the cost of goods sold
3:54:12well it depends on which two did we sell if we sold the two red ones we know the cost of
3:54:21goods sold would be twenty dollars each because we know we paid ten dollars for each of them
3:54:28but if instead we sold one red and one green that means we sold one for ten dollars and
3:54:36the other one we paid twelve dollars for so in the second example if we sell one
3:54:41of each the cost of goods sold would instead be twenty two dollars for that very same sale
3:54:50fifo assumes the first ones in were the first ones out and the red ones came first so which
3:54:58two did we sell according to fifo according to fifo we sold the two red ones and in our first
3:55:05example the cost of goods sold for that first sale would have been twenty dollars
3:55:12but now let's imagine we buy two more and we pay fifteen dollars for each of the two new
3:55:21apples that we just bought now in the next sale let's imagine we sell three of these
3:55:30apples so there are four in front of us and we sell three well which three did we sell
3:55:37the green came first and fifo says first in first out so we sold the two twelve dollar
3:55:46ones so so far that sale is up to twenty four dollars in cost of goods sold but we didn't
3:55:53sell just those two we sold three so we need to sell one blue one and that means that adds
3:56:01an additional fifteen dollars what we paid for the blue one and that gets added to the cost of
3:56:08goods sold for the sale so for that sale of those three the cost of goods sold would be 39 dollars
3:56:20now we'll try examples with larger numbers and if you need to pause the video to do some math
3:56:29calculation on a calculator or Excel just to verify what we're doing that's fine or
3:56:38you might want to watch the whole video and then the second time around that you
3:56:42watch it pause and verify the numbers that we're calculating are correct
3:56:49so let's imagine we're starting in inventory with 150 apples that we paid ten dollars each
3:56:58now let's imagine we buy 200 more apples and we paid 13 for each of them
3:57:07well that's fine we now have 150 at 10 and 200 at 13 and you could multiply and figure out what the
3:57:16cost of inventory asset is however let's imagine now that we sell 175 apples remember the first
3:57:29one's in or the first ones out so if red was first and we sold 150 apples that means all of excuse me
3:57:40red was first and we sold 175 apples that means that all 150 apples at ten dollars each are sold
3:57:52and we didn't have enough from the ten dollar apples we actually have to have 25 of the 13
3:58:01apples to make the 175 for the sale so we're going to also take away 25 from the 13 apples
3:58:12so that after this sale we're left with only 175 apples that we paid 13 for each of
3:58:22them and multiplying 175 times 13 would be the inventory asset cost of apples after that sale
3:58:35so we now have 175 apples at 13 each remaining in our inventory
3:58:43but what was the cost of goods sold for that sale well we sold all 150 apples that were
3:58:52purchased at ten dollars each so that contributed fifteen hundred dollars to the cost of goods sold
3:58:59and then we needed to add another twenty five dollars to make the total 175 apples
3:59:05for the sale and we paid thirteen dollars for each of those so that contributed 325 dollars
3:59:13to the cost of goods sold so the cost of goods sold for that particular sale was 1825 dollars
3:59:26QuickBooks Online is keeping track of these numbers behind the scenes
3:59:32there is no report that shows the breakdown of the purchase cost of each item on hand
3:59:39the inventory valuation detail can help you figure this out but you have to look carefully at it it's
3:59:47not always clear so if we go now to QuickBooks online and we go reports inventory excuse me
3:59:57excuse me inventory valuation detail let's scroll down to bananas and let's use bananas for our real
4:00:05life example I'm going to stretch this a bit here you can see that right now on hand we have 280
4:00:13bananas and we paid two hundred dollar excuse me we paid twenty dollars for each of these
4:00:21280 bananas and that's why the cost specifically the asset cost of just bananas is 5600 right now
4:00:32so the inventory report before we buy bananas at a different cost is showing right now we have 280
4:00:43bananas at twenty dollars each now let's imagine on January 25th we purchase 300 bananas from Sam
4:00:54and we pay twenty two dollars each well if we do that what will be an inventory we'll still
4:01:02have 280 bananas at twenty dollars each and then we'll have another 300 bananas
4:01:09at 22 each so let's go ahead and record that in the top left click new expense
4:01:20this is January 25th
4:01:25of 2020 we bought from Sam's Farm oh don't forget that we're paying from cash don't forget we're
4:01:34paying from cash and by the way let's close this because this is not related to any prior
4:01:40transaction so we're paying from cash and bank to to Sam's Farm on January 25th product and service
4:01:50is bananas and the quantity is 300 and this is the first time we're going to change the rate
4:02:00the rate is twenty two dollars instead of twenty dollars now look what happens when we click save
4:02:07and close at the bottom of the inventory valuation detail it's not exactly clear
4:02:14you have to look closely we had on the 22nd we had 280 bananas that we paid twenty dollars each
4:02:25now we bought an additional 300 bananas that we paid 22 dollars each
4:02:33now the quantity on hand is now 580 bananas where 300 of them we paid 22
4:02:43and 280 of them we paid 20. so it's not laid out as clearly as it is in my little PowerPoint
4:02:52but basically we have 280 bananas that we pay 20 each and we have another 300 bananas that we pay
4:02:5922 each now here's where it gets interesting on January 26th we sold for cash 400 bananas to candy
4:03:11now if we sold 400 bananas which ones did we sell remember red was first so that means we sold more
4:03:22than the 280 that means we sold all of the 280 at 20 each that went out as part of this sale
4:03:31but you see we didn't sell 280 we sold 400. that means we need to take another 120 bananas from the
4:03:42bunch that we bought for 22 dollars each and if we bought 300 at 22 each and we needed to
4:03:51take another 120 bananas out of that bunch to complete the 400 quantity sale that means that
4:04:01if we that means that what's left in inventory after this sale will be a hundred eighty bananas
4:04:10at 22 each that's what will be left in inventory after the sale because we had 300 of those 22
4:04:20dollar bananas but we had to give up 120 of them as part of the sale with the other 280.
4:04:29so let's take a look and write what's left will be 180 at 22. let's take a
4:04:35look at what happens when we make that sale so that was click new and go to sale receipt
4:04:44okay because the date was January 26th and the customer was candy
4:04:52and the item that we sold her was bananas and the quantity that we sold to her was 400. now again
4:05:01it's you know don't worry about the sales price we're focusing on the purchase cost but what we
4:05:07should have left in inventory is 180 bananas at 22 dollars each so let's go ahead and save this
4:05:20now scroll down to the very bottom scroll down to the very bottom you can see that what's
4:05:29left in inventory is a hundred and eighty bananas that's the ending quantity on hand after the last
4:05:38transaction 180 bananas and they're 22 dollars each and if you multiply the 22 times the 180
4:05:48that explains the asset value 3960 but before we look at anything else let's ask this question what
4:06:01was the cost of goods sold for that sale well all of the 280 bananas that were twenty dollars each
4:06:11were given as part of that sale so five thousand six hundred dollars was that part of cost of goods
4:06:18sold and we needed to take 120 of the twenty two dollar bananas to make a total of 400 for the sale
4:06:28so 120 bananas that we pay 22 each adds another 2640 to the cost of goods sold
4:06:37so the cost of goods sold for that sales receipt was eight thousand two hundred and forty dollars
4:06:46you can pause the video to check the math but let's do this if I double click this sale receipt
4:06:53and then I click on more and go to transaction Journal you can see that the sales price you see
4:07:05they break it up all crazy they break up the cost of goods sold into pieces so it's really hard to
4:07:11kind of determine what it is okay what you could do is Click reports trial balance when they they
4:07:20make it harder for you to understand cost of goods sold if I double click this and I scroll down you
4:07:27see what it does when you have a sale that has more than one purchase cost for cost of goods
4:07:34sold QuickBooks breaks it up crazy it breaks it up you see 10 14 1 2 3 4 5 6. it scattered it
4:07:45to six different lines but I'm gonna show you something these six lines together where is it
4:07:55can I do this these six lines together for these for this one sale receipt add up the money amount
4:08:04I guarantee that it equals eight thousand two hundred and forty dollars so it would be nice if
4:08:14it would just show you eight thousand two hundred and forty dollars but it doesn't it breaks it up
4:08:21crazy but that's the way QuickBooks shows it so fifo would be challenging enough to understand
4:08:27if it put everything in one line and none of the tech people actually gave a logical reason why
4:08:37uh why it uh that it spreads it out like that so if you click reports
4:08:48inventory valuation detail go to the bottom where we have bananas you can see what was
4:08:55given you can see on the 26th you can see that as part of this sale receipt 120 bananas were
4:09:07given at the rate of twenty two dollars and that's what we actually said we said part of
4:09:13this 400 banana sale 120 of those 400 bananas were 22 dollars each and that is showing on the
4:09:22bottom line 120 of the quantity that went out for this sale is for twenty two dollars each
4:09:29and it's all we also know that the other 280 bananas that are part of the 400 quantity sale
4:09:38we're at ten dollar we're at twenty dollars each so but what they did was
4:09:43they scattered that across several lines so if you look at this these
4:09:53these are adding up these will all add up to 120 guaranteed so these are the excuse me these will
4:10:03add up to the 280. so these one two three four five lines are the 280 bananas that we gave to
4:10:13the customer for twenty dollars each and in that same sale one zero one four we also gave them 120
4:10:23bananas that we paid twenty two dollars each so fifo would be a lot easier to understand if they
4:10:31didn't split it up like this and to be honest with you I really don't know and neither do the tech
4:10:37support people know why it splits it up like that in the report but you will only have a transaction
4:10:45listed on several lines one transaction for several lines you will only have that in a
4:10:52transaction where there's more than one purchase cost for the item that you're buying and selling
4:11:00we thank you so much for watching this video to the very end
4:11:06we hope you'll come back and visit if you need any help with QuickBooks or accounting
4:11:11and please support the free help for Everyone by clicking like and please subscribe [Music]

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