Full Financial Accounting Course PDF

hello and welcome to our video series on financial accounting and welcome to module one in this module we will learn all about the financial statements but before we can prepare and understand the financial statements which we will do in this video series we need to understand s...

hello and welcome to our video series on financial accounting and welcome to module one in this module we will learn all about the financial statements but before we can prepare and understand the financial statements which we will do in this video series we need to understand some terminology some jargon when I was a beginning accounting student I thought accounting was all about numbers all about math it really isn't accounting is all about language they call accounting the language of business and if you want to have a prayer to survive your accounting class you're going to need to understand these six words that we're going to introduce in this video so let's do that this video I bet you it'll be over 10 minutes and all we're going to do is talk about these six words but you need to have them super internalized you need to be an expert on understanding what these words mean and how they make sense in the world of accounting so let's get to them here are the six words assets liabilities shareholders Equity I guess that's two words I've counted as one shareholders Equity revenues expenses and dividends and the three that are in color there are really going to be key to your life as an accountant well they'll all be key but those three particularly will be um so let's begin by talking about assets and when I begin a course I begin talking about assets and I ask my students hey make a list of all the assets you think a typical undergrad student at this University will have make a list of typical assets of an undergrad and so uh here's the things that they list out they'll list out things like uh cell phone they might say um you know textbook they're looking around the classroom they see textbooks that's a typical asset of an undergrad maybe a car you know that's the the the list generated by students but I also get some uh more interesting or creative answers some might say uh they have beauty or youth or even something like a high school diploma because of course you're an undergrad student at a university you probably have a high school diploma so these are all I think good examples of assets of an undergrad now the first three on my list are much simpler to discuss than the second three but we'll discuss both here the the thing that all of these things on the list have in common though and this is how I want you to think about assets they're anything of value the word I want you to think of is they are things of value so that word should just be really tied to assets uh the technical definition gets a little bit more complicated I don't ask my students to give a technical definition but your Prof might if they ask for a technical definition it's anything that a company owns or controls created from a past transaction that gives us a future economic benefit that's a pretty technical definition uh but anyway it's anything you own or you can typically think of it as owned in inro financial accounting but the least assets also can count under this category but most of the time it's just owned stuff you own that's good to own 99% of the time that's a sufficient understanding of what an asset is is now let's think about this list so cell phones textbooks cars those are all things of value and absolutely these types of assets find their way onto company financial statements when a company's listing its assets it would list any cell phones the company has any textbooks or any cars the company has those would all fit very easily under the definition of asset the last three however abs abolutely would not find their way onto a company's balance sheet even though I think they're assets I think they are things of value right uh your high school diploma is certainly something valuable to you it's useful for the rest of your life it makes you more employable than not having a high school diploma your youth your health these types of things absolutely are very valuable and should not be taken for granted um but why don't they find their way onto financial statements and there's a simple reason and the reason is it's hard to put a number on it it's hard to say how much they're worth right I have a CPA designation that allows me to teach at this University um well my CPA designation is definitely my most valuable sort of academic achievement but how many dollars is it worth is it worth $1,000 is it worth $10,000 $100,000 a million it's really hard for me to put my finger on how much that's worth now my car I can put a number on it and be pretty close my cell phone I have an iPhone 8 I can look up online what's an iPhone 8 sell for right that I can put a number on um my my beauty what's my beauty worth not much I would guess but who knows right what's the number you would put on somebody's Beauty very difficult to measure and so companies say look that stuff yes we agree there may be a value there we're not going to try to put a a number on it uh stuff like cell phones textbooks and carss absolutely yes we will so uh anything a company can own or control that has value that's good to owner control that can be reliably measured that's sort of another piece of what makes an asset an asset so what are typical assets we find on a company's uh financial statements on their balance sheet well we would find something like cash of course that's something you should want to own and own more of there's something called accounts [Music] reable and what accounts receivable are are when somebody owes you money so you're going to collect money in the future a future economic benefit I use that word well we're collecting money in the future that's a future economic benefit so that is absolutely something that would be categorized excuse me as an asset easy for me to say inventory if you walk into a Walmart or a retail store near you look around right all the stuff you see that they've bought from their suppliers that they're planning to sell to you the customer that is inventory and that is assets right that's stuff they own that's good for them to own uh we have the broad category which I'll call property plant and equipment and uh you know almost seems overly technical here property is land like literally land real estate property plant is buildings plant I I wish it's such an outdated term but you do see it used all the time it's buildings so you can own a building right that's something of value and Equipment all the stuff in there computer equipment or you might have machines these types of things a car would categorize as equipment it's a broad category of Assets Now the list here I could make a lot long longer we have things like Investments right like Facebook bought Instagram well they spent a billion dollars buying Instagram that is an investment Instagram is an asset that belongs to Facebook and our list could go on and on but these are typical assets you find on company financial statements moving over and and actually before I move over just to reiterate when you think asset I want you to think something of value something of value that a company can own or control okay something of value that a company owns or controls and the value can be reasonably reliably measured uh looking at liabilities if my keyword for asset was value my keyword for liability is even simpler it's O liabilities are anything that has to be repaid in the future so you know from a student perspective you might have student loans those are liabilities they're things you're going to have to pay back if you have a phone bill sitting on your table you haven't paid it yet great example of a liability I have a mortgage on my house there's a liability and companies can have very similar types of obligations right they have similar things they have to pay back and these are the liabilities of a company so anything a company owes um and I think to give a technical definition we would say any future economic obligation meaning anything they have to pay back in the future so uh examples on a balance sheet well uh we said for assets there's accounts receivable uh for liabilities there's something called accounts payable is a very common liability that you'll see on a balance sheet and it just means within uh typically within 30 days you've got to pay it back and so I always think of a phone bill when you think account payable just think of phone bills in bills like that and you're not far off um other types of liabilities well all sorts of we'll call them there's a broad category here called notes payable and you know within that category is things like bank loans student loans mortgages the category is called note pay and note pay is just a piece of paper you know contract you've signed saying I promise to pay you back on this date with this much interest right that's a note payable and so that a bank loan fits that a mortgage fits that an informal they call it a promissary note fits that all sorts of things fit that category uh but those are typical liabilities and we can have all sorts of other ones we can have wages payable to our employees and bonuses payable things like this uh there there's no shortage of of items I could put on my list but we'll we'll cut it off there so when I talk to my students about these categories people generally have a pretty good idea about assets and about liabilities where things get a little bit shakier is when I ask about shareholders Equity not very many people have a good definition of shareholders equity and largely because it's defined by what it's not and I'm going to explain shareholders Equity actually by explaining my house I own a little house and uh it is a house that cost $300,000 so there's this asset right and it's this house and it's a $300,000 house now as I already suggested to you when I bought the house I did not have $300,000 so I took out a mortgage and if I look at that mortgage statement today it's around a $200,000 mortgage and a mortgage of course we've said is a liability so I have a liability of $200,000 I have a $300,000 house against which there is a $200,000 debt or $200,000 liability if and this is where Equity comes in if I were to sell my house today and I were to liquidated and I got 300 Grand cash I pay off all the debts against it so I pay off the mortgage how much money goes in my pocket well the answer is a 100 Grand right I have a $300,000 house I liquidated I get 300 Grand cash the mortgage company isn't going to allow me to keep the mortgage if they don't have the security of the house so they take their $200,000 back $300,000 proceeds on the sale 200 goes to the mortgage company 100 goes to me my my piece of the pie my piece of the house the shareholders piece of the company is called their Equity Equity is the concept of what's left over if I sold off all the assets I paid off all the debts what goes in the shareholders Pockets that is their Equity so uh for my home we would call it home equity for a company I've I've abbreviated here as SE and SE stands for shareholders equity and so my shareholders Equity is $100,000 this relationship creates something and you'll you'll learn about it in chapter one of any accounting book in the world this thing called the accounting equation assets equals liabilities plus shareholders Equity a equal L plus SE so 300,000 = 200 + 100,000 okay so when I think about Equity I actually think of this formula I just think a equals l+ SE or alternatively shareholders Equity is what's left over when I take my assets and I subtract my liabilities right that's what I think of when I think of equity so there's not a sort of fancy one worder I guess if I would trying to put it into words I would say what's the owner's piece of the pie right they pay off all their debts how much money is going into the owner's pocket that's what I think of when I think of equity what are the accounts well one is called common shares so if you buy into a company you buy shares you're buying Equity of the company right you're putting in thousands of dollars they're giving you shares you're buying a piece of the pie so it's called common shares there's also preferred shares if you're taking an intro class you might see this referred to as share Capital um that's that's a common thing you'll see and a big important account is called ret retained earnings and we'll get into this more as as our videos go on here's the gist of retained earnings though uh you invest or buy into a company or you run a company to make profits right you want to make money right you want to earn money uh if your company is profitable in making money you have two choices with what you can do with the money you can keep it in the company retain those profits in which case the amount goes into retainer and the shareholders piece of the pie gets bigger or you can take it out of the company and you can pay yourself a dividend in which case the retained earnings gets smaller the shareholders Equity gets smaller so it might seem a little complicated right now just know that there's retained earnings is an account that keeps track of how much profit is being kept in the company versus and again the alternative is pay it out as a dividend so uh that is uh what retained earnings is so we've got these three key accounts assets the stuff we own and control that's good to own or control uh the things of value liabilities that's what's owed shareholders Equity that's the shareholders or the owners piece of the pie what's left over if I take all my assets sell them off pay off all my debts what goes into my pocket that is my equity in the company very quickly revenues expenses and dividends I'll be much quicker here revenues the word I want you to think with revenues is earn whoops not ear earn revenues are what happens when the company does what it does to earn money Walmart sells me stuff they have sales revenue uh my University uh uh charges tuition they have tuition Revenue um you know I my my landlord or well I own my own house but if you were a landlord and you charge rent you would have rent Revenue right it's the the business doing what it does to earn money think of revenues as being earned how is the money coming in it's the revenue generating part of the business expenses think of costs so again thinking of a university uh I love my job at the University but I don't do it as a volunteer I don't do it for free they got to pay my salary they have a salary cost a salary expense they also have to pay to keep the lights on well that's a utilities expense they also have to pay to keep the carpets clean and the place maintained that's a maintenance expense there's all sorts of costs of running a university and those are the expenses those are the costs dividends as discussed earlier are at the end of the year if the company's revenues exceed the expenses in other words if we earned more than we spent we are profitable and if we're profitable we have a choice to make we can keep the money keep those profits in the company or the shareholders can say I'd like some of that money I'm going to take a dividend and they'll pull their money out of the company so Dividends are shareholders pulling profits from the company taking it from the company's retained earnings I used to think that was a problem I used to think like there's something wrong with that I no longer think that I think look if your company's profitable and you would like to use the money for something else you should be able to and that's called a dividend okay uh so these six terms should be ingrained in your brain right now and going forward through the course you need to understand these six terms asset things of value things the company can own or control that are good to own or control liabilities that is owed that is a company's obligation they've got to pay something back in the future shareholders Equity if I take all the assets I sell off the LI I sell them all off for cash and I pay off all my debts how much money goes into the shareholders pocket what's the shareholders piece of the pie that is their Equity revenues are the company doing what it does to earn money expenses are the costs of earning that money and dividends are when the shareholder wants to pull money from the company they want to withdraw money from the company they take a dividend all right with those six words in mind you are ready to take on the rest of chapter one module one good luck I'm thrilled that you're with me on this journey to better understand accounting all right bye for now everybody okay let's examine problem 11a to download the problem there's a free pdf available on accounting workbook.com you just click the link uh download the file and you can work along with me so this problem has us exploring the accounting equation and if you're not sure what I mean when I say the word accounting equation go back and watch the last video it's going to be really help ful in just defining these terms assets liability shareholders Equity we also uh explained a couple more revenues expenses and dividends and I think it's just so useful to go through that video before you do this one but anyway assuming you've gone through that let's go through this problem so uh this just sort of says okay fill in the missing information and keeping in mind this formula that we introduced in the previous video assets equals liabilities plus shareholders Equity assets equals liabilities plus shareholders Equity that's called the accounting equation it's so fundamental to what we do so let's start with business one we don't know the assets we know the liabilities are 181 we know the equity is 212 so 181 plus 212 doing the math here that looks like $393,000 $3 93 and there we have it we've solved part one and again just sort of saying what they have $393,000 of good stuff that they own and control $181,000 of debts that have to be paid back if they liquidated all their assets got $393,000 cash paid their debts of11 $212,000 would flow through to the shareholders the shareholders piece of the pie is $212,000 for business number one let's do business number two uh the assets are $75,000 we don't know the liabilities but we know the equity is 36 so we know like 36 plus whatever is in this Blank Space equals 75 or stated differently 75 minus 36 equals whatever is in the blank space the blank space is $339,000 and you can double check right 39 + 36 equal 75 yes it works let's do business three $30,000 is the assets 21,000 is the liabilities uh our shareer Equity then the missing number has got to be $9,000 if I had $30,000 in assets let's assume we again sold them all off for cash we had $21,000 in debts or bills to be paid 30,000 in let's say we sold it for cash pay off all the debts 21 Grand how much money goes to my shareholders 9,000 okay the last one's a little bit funny and it says it's $10,000 you can see it's negative and it notes that business fors Equity is in an accumulated deficit position what does that mean it means they have negative shareholders Equity you see this happen once in a while right and it's the equivalent of somebody's morgage being higher than the value of their house they'll talk about this like the house is underwater they say in other words the debt is worth more than the asset is that the debt is sort of held against in the financial crisis this happened a lot happens with companies too where they have higher liabilities than they do assets and uh what does that mean it means they're going to need money from their shareholders or they're not going to be in business for long so uh business number four the liabilities have got to be $10,000 higher than the assets how do I know that because the equity is negative 10,000 so the if the assets are 25 the liabilities have got to be $35 $110,000 more 35,000 Plus -10 is 25,000 assets still do equal liabilities plus sholders Equity we call that accumulated deficit if we have negative uh uh retained earnings as this company certainly would okay there we have it problem 11a is in the books stay tuned for our next video bye for now let's take a look at problem one twoa from our accounting workbook this problem has us identifying accounts so in our very first video we explained what is an asset a liability uh shareholders Equity account Revenue expense dividend what are they what categories are they what does it mean to be an asset these types of things this video has us flexing those muscles so we're going to go down our list for each account we're going to say is it an asset is it a liability is it children's equity revenue expense or dividend and further if it's an asset or liability and many of these will be is it current or long-term now we haven't discussed this yet current versus long-term a current asset is one that is expected to be liquidated or we're expected to use it up within one year one year or less so uh an example of a current asset is inventory right Walmart expects to sell through any piece of inventory in less than a year so Walmart's inventories are current assets cash we're constantly moving it's very much considered a current asset now if I go back to the Walmart example I see that they have um in my Walmart they have like refrigerators where they sell stuff out of the refrigerator like that Refrigeration equipment uh that keeps stuff cold that is an asset of Walmart but it is longterm right those refrigerating units where you might buy milk from uh that is you know is going to last them years that's a long-term asset and so we can do the same for liabilities I have a phone bill that's a current liability I got to pay it in 30 days I have a mortgage that's a long-term liability it's going to take me 30 years right so one year is our distinguishing line between current and long-term okay I've rambled long enough let's get started we just worked it our way down the list identifying it and uh as asset liability shareholders equity revenue expense or dividend and is it current or longterm so uh number one long-term Investments this is something we can own or control that would be good to owner control this is an asset that it even says in the name long term well there's our dead giveaway it ain't current now we can have current Investments right I can buy and sell stocks and shares that I'm planning to hold for a week a month a couple months it can be current in this case though it's identified as longterm so it's going to be we're buying for the long run here accounts receivable absolutely an asset it's when somebody owes me money and you know it's part of normal business and so if somebody owes me money a customer I've done work for it I've given them a bill they haven't paid the bill yet that's a typical account receivable situation they're going to pay me in usually 30 days certainly 99% of customers are going to pay in less than a year this is a current asset see uh Consulting Revenue well it's got the word Revenue in it it is company doing what it does to earn money it's a revenue rent Revenue same thing it's a revenue not noted as current or longterm it's assumed it would have been earned in the last few months maybe the month or 12 months depending on the time period we're looking at computer that's an asset and yes computers go out of date quickly but still one would expect a computer to last more than a year so I would call that long term liability oh sorry I should say mortgage payable is a liability if it's got the word payable that's a dead giveway for a liability if it's got the word receivable you should be thinking asset mortgage payable is a liability and it is a long-term liability my mortgage is going to last 30 years salaries payable those are liabilities it's having to pay your employee salaries unpaid salaries they're not going to put up with you for not paying them for a year they won't be your employees they'll be suing you uh and so therefore this is a current liability not a longterm one cash is considered the most current of current assets supplies is indeed an expense retained earnings we said or supplies expense is an expense and we'll talk about that in a minute retained earnings we said said was one of our two shareholders Equity accounts it's the company choosing to keep profits within the company and uh uh there it's the account that tracks that temporary Investments asset the word temporary indicates to me that it is current or shortterm accounts payable liability think of your phone bill when you think of accounts payable and when I think of my phone bill I think 30 days so current income tax expense that's an expense uh car is an asset and it is a longterm asset right it'll last you more than a year salaries expense is an expense utilities expense is an expense land is an asset and it's a very long-term asset it'll be here long after we're dead well maybe after you're dead my head's going to be frozen in a vat somewhere so I'm going to live on for a long time we'll leave that for another discussion for another day inventory asset and it is current building asset longterm interest expense is indeed an expense bank loan payable liability it's not clear here whether it's current or long-term in most intro accounting classes assume a bank loan is longterm unless it tells you otherwise so let's assume longterm unless it says something else common shares that is shareholders Equity we don't need to know whether it's current or longterm supplies well if I think of office supplies like I got some Post-it notes right here if I think about Post-it notes these are assets they're things we can own or control that would be good to own or control and they are current um so we've answered the question but sometimes when I do this in a classroom students will call this out they'll say supplies expense are expense but supplies are an asset what's going on here like what isn't this like kind of the same thing like what's going on uh and so I just want to explain this if you don't feel like you need an explanation fine skip to the next video but just a brief explanation on like this is supplies but what is supplies expense then so if my University let's say they bought $1,000 worth of these sticky notes right and they put them in a sticky note cabinet and so they have supplies right they have $1,000 worth of sticky notes that is an asset they own and control $1,000 worth of sticky notes months go by and of course us professors are like vultures circling around the supply cabinet waiting for new order to come in and grab supplies for ourselves uh we we look at the supply cabinet a a month later and in that Supply cabinet that used to have $1,000 of sticky notes the vultures have circled and now there are only $100 of sticky notes left over well we have a $100 worth of assets right if we're the the company here we have $100 worth of assets we have $100 worth of sticky notes that is my supplies asset that is this one uh what about supplies expense well supplies expense is the amount of supplies I've used up in a given period of time and so from the the perspective of the company they've used $900 they had $11,000 now they only have a 100 their supplies expense for that period is 900 it's the amount of supplies they've used up over a given period of time so it sounds similar supplies the asset and supplies the expense but it is different supplies the asset how much physical stuff do I have supplies the expense how many dollars worth of supplies have been used up okay I hope that was fairly clear this is again is chapter one module one we really explore this concept in chapters two and three of the course but it's good to have sort of that the we've primed the pump now right when we get to it in module two or module three you're going to be ready for it okay stay tuned for our next video bye for now welcome to problem 13A in this problem finally we're here we will explore the financial statements in this video or this series of videos it'll be multiple Parts you're going to learn how to prepare an income statement a statement of changes in equity and a balance sheet we're not going to touch the statement of cash flows here but we'll talk about it a little bit um before we can jump into the problem we should understand understand what all three statements are and what they do so our first video is just going to explain the three statements what we're looking for what we're trying to do and then we'll actually jump into the problem in the next bunch of videos so uh here are the statements that we're kind of worried about here income statement statement of changes in equity balance sheet and cash flow statement and let's start with the income statement the income statement summarizes list is list is lists out the company's revenues and expenses so it's all about revenues and expenses and what this statement does is it captures this relationship revenues minus expenses equals net income or profit so what does the income statement tell us it tells us if the company was profitable or not and if they were profitable how profitable were they how much money did they make that's the question that's being answered here was the company profitable if so how much money did they make if not how much money did they lose right so when I'm sort of examining a company I want to see how they're doing this is typically a first place I look I say hey do they make any money this year how much money did they make right they make more this year than last year look at the income statement so tells you how profitable the company is this is also called the statement of operations and you'll hear it frequently called a p&l profit and loss like profit and loss statement uh and all it is is a list of all the revenues the stuff the company earned versus all the costs the expenses and we say did the earnings exceed the costs if so we were profitable okay moving over to the statement of changes in equity this one I find to be a little less useful but we do need to learn how to prepare it so across the top of the statement of changes in equity we list all of our shareholders Equity accounts and in an intro class and in my intro class I only introduced two accounts your Prof might introduce different accounts or more they might label them differently the two I think that really matter are common shares CS for common shares and re retained earnings common shares and retained earnings are our two accounts that really matter here and here's how it works we say what did we begin with as a balance how many dollars worth of common shares how many dollars worth of retained earnings did I have at the beginning of the period how did those amounts change and triangle just means change and what did I end with so it says how did my what happened to My Equity accounts this year that's what this statement is sort of summarizing for the user it's saying what happened to those shareholders Equity accounts so what did they begin with how did they change what did they end with that's what happens on the statement of changes in equity the third statement we're going to learn how to prepare is the balance sheet and this is another super important statement and it is one of the first places I look I do look at the income statement first balance sheet is second for me uh the balance sheet lists all of the company's assets it says how many assets does the company have what kind of assets does the company have right what are the good stuff that the company owns and controls that's what we can look up on the balance sheet it also lists out the company's debts the liabilities and finally lists out the equity accounts and what we find on the balance sheet is assets equals liabilities plus Equity that's what makes a balance sheet balance because the two sides are equal the asset side the liabilities and Equity side at the end of the day that's what makes a balance sheet balance and so it's sort of good to say okay what stuff does the company have what kind of debts does the company have that's what we learn by looking at the balance sheet the cash flow statement is one that we don't prepare at least in my cour as I've designed it uh we don't learn that until like module 11 so for weeks and weeks and weeks um the reason is it's more complicated but some courses do put it in module one they do sort of a basic version of it and then they come back at it again I don't even touch it in module one I will explain what it is it's very similar statement of changes in equity except it's just for cash so you say what amount of cash did I begin with how did it change and what did I and with for cash and there's lots of interesting subtotals and lots of interesting information on there why do I have a statement devoted to cash right all my other statements there's multiple accounts listed cash flow statement is all about cash the reason is two reasons one if a company runs out of cash they're dead so as a shareholder you're very interested in how they're managing their money their physical cash like or cash in the bank account because if they run out of that cash they're dead two uh it's hard to manipulate cash so you can manipulate various revenue and expense accounts cash is thought of as very difficult to manipulate that number right it's not uh an Airy up in the air number so for example the value of my car you know if I said it was $15,000 and somebody else said it's 14 and somebody else might say it's 16 because it's this used car it's actually hard to argue and there are numbers like that in a counting where it's like is the car worth 15 is it worth 16 is it worth 13 you know is this building worth you know a million bucks or is it worth 1.1 million or is it worth 900 you know it's debatable and reasonable people can disagree typically with cash reasonable people can't disagree and so the numbers around cash are thought of as very trustworthy so when a company discloses its cash flow you can really trust those numbers so a lot of times analysts and investors really like to see those cash flows flow numbers they think they're more honest than say income statement numbers but we're leaving those for later in module one I don't touch touch this at all when we get back to the problem we're going to prepare an income statement a statement of changes in equity and a balance sheet so we'll do that we'll begin to do that in the next video stay tuned we're continuing to work through problem 138 we didn't make much progress in the last video I kind of just laid out like okay we're going to in this problem be doing an income statement the summary of revenues and expenses the statement of changes in equity uh tells us how common shares and retained earnings and any other Equity accounts change during the year and the balance sheet uh the list of assets liabilities and shareholders Equity accounts so in this video Let's just kind of work through the accounts of Sherry shuttles and we'll try to prepare an income statement based on on what we see here so uh the question says Sherry shuttles is a bus company offering rides to outdoor adventurers in the Summer She caters to mountain bikers and in the winter to skiers Sherry's company has the following account balances all on December 31st 2024 and for the year then ended unless otherwise noted and there's a big long list of accounts below it notes the company did not issue or repurchase any common shares during the year and then it asks us first to prepare an in income statement so in this video I'll try to get to the end of that income statement and then we'll we'll pause there and and do a new video for the statement changes in equity and the balance sheet so before we can prepare an income statement we just need to identify our accounts now if you look back to the previous video Problem one 12a we just went through identifying accounts and we're going to do the same thing here so each account I want to say is it an asset liability shareholders equity revenue expense or dividend if it's an asset or liability is it current or long-term so here we go wages payable that is a liability and it is current right it's less than a year so current liability Dividends are dividends they're just their own thing cash is an asset and it is a current asset common shares is a shareholders Equity account accounts payable is a liability and again this is think of your phone bill it's less than a year that you're going to have to pay that thing buildings are an asset and they are a long-term asset the word net there is very relevant for now just know that uh this is our building this is the value of our building is $100,000 we'll get into how we calculate that net and what that net means in future videos shuttle Revenue it's Revenue fuel expense that is an expense depreciation expense is an expense it's got the word expense in it Insurance expense that's expense telephone expense that's an expense expense equipment again it's got that word net we'll explain that later but just think okay the value of our equipment is $30,000 that is a long-term asset uh bank loan uh in the absence of other information we're going to assume bank loans are long-term in nature and it's definitely a liability something to be paid back retained earnings shareholders Equity accounts receivable that's an asset and it's current this is uh our customer hasn't paid the bill right we did some work for the customer they haven't paid us yet we would expect to collect in less than a year office supplies another current asset wages expense are an expense utilities expense also an expense so we've identified our accounts and what we've said is when we prepare an income statement we're going to want to see the revenues and expenses so I'm going to highlight these now H just to note that this is what I need for my income statement so I need the revenues and any expenses I'm just highlighting all of them there's a couple more down here and so as I think about preparing my financial statements think about preparing my income statement I don't need any of the other accounts those non-h highlighted accounts are not relevant here they're not going to be used here they can be ignored for the time being so when you prepare financial statements and we'll do it a lot in this course you need to properly format your statements and that includes properly titling your financial statement they uh I'm not very picky on formatting in most of my course on the financial statements I'm super picky you need the title just to be just so you need the layout of the statement to be just so you need to put dollar signs in the right place I am super duper picky on all the little details surrounding financial statements and many professors are so maybe your Prof will be too so uh when you go to prepare your title know that all titles in accounting have three lines the first line is the name of our company the second line is the name of the statement we're preparing and the third line is the date and the date has little bit of special details that I want to get into so again name of the company name of the statement date let's get to it Sherry shuttles is the name of our company the name of the financial statement is an income statement now this again can also be called a uh statement of operations I've heard it called a profit and loss statement as well and then the date and we don't date this just by putting the date December 31st on it we have to put a time period on it and the reason is because if I compare Amazon's La statement income statement for last month to Google's income statement for last last year you know how much a company earns in a month is going to be very different from how much a company earns in a year so you just need to know the time period that applies otherwise you don't know what you're looking at so this is and here's how we'll phrase it for the year ended and then we give the date and how do I know it's for the year ended well the question said give me an income statement for the year ended the question is going to have to say what time period you're dealing with somewhere and in this case it's a year so it's going to be a year a month or maybe a quarter and a quarter is three months those are the typical dates you would see so for the year ended and then the date December 31st 2024 but you have to put that time period otherwise you don't know what you're looking at so anyway there we have a beautiful beautiful title uh now we just want to summarize our revenues and expenses we start with our something weird going on there with my pen we start with our revenues and we had I think it was like called shuttle Revenue yeah there it is uh shuttle Revenue 6,300 just right here so uh shuttle revenue of 69,3 shuttle re actually should be a lowercase R here Revenue uh 69,3 write the 69 three over on this side of the page so there we have our shuttle Revenue I'm having weird pen issues I'm really making an effort to write more neatly and I feel like it's being let down by the technology and the talent I don't have a lot of writing talent but I'm doing my best here folks I'm absolutely this is as neat as I can write I know it's pretty pathetic but I'm trying uh okay let's list our expenses and we're going to list our expenses in the order we see them uh you know you might list them in order from biggest to smallest or some in alphabetical order I'm just going to list them in your order I see them I'm not picky here about order fuel expense is the first one I see 11,000 oh my gosh I am I just said I was trying to write meat and I'm making a mess out of this fuel expense I forget the amount 11,000 we've got depreciation expense of 2,000 now one thing I'm not picky about is I allow my students write X instead of expense your Prof might or might not allow that insurance expense 4,000 telephone expense 400 wages expense 30,000 utilities expense 1,200 okay so there we have our long list of expenses now you'll notice something with revenues I wrote the number kind of on the right and with the expenses I've written them kind of on the left if you're kind of lining them up they're they're not aligned properly the reason is when I have a long list of numbers I'm going to list on the left I'm going to Total those numbers onto the right now with revenues it just so happened I had one Revenue stream so that was my total revenue so I wrote it on the right hand side now you'll see here when I total my expenses I add up that list and let's add this up so 11,000 plus 2,000 + 4,000 + 400 plus 30,000 + 1200 I add that up 48,600 and I write the number on the right hand side what we also said was the purpose of this revenues minus expenses we want to know if the earnings exceeded the costs did they well yeah 69,000 in money earned 48,000 in cost we're definitely above here and I think the number is 20 ,700 the difference I've just gone taken the difference between the two so 693 minus 48,600 I'm just double-checking my work yeah it's 20,700 this is the profit of the company was the company profitable yes how much money did they make $20,000 this is the net income of the company if I take all of the revenues I deduct out all of the cost all the expenses I get the profit and this is a very key number in fact so key it gets double underlined at the bottom it's the bottom line of this statement we're done the income statement just a couple of formatting flourishes and it'll be all over so this company made $20,700 we put dollar signs at the top of each column so there's a column there dollar sign goes at the top of that column there's a column here the dollar sign goes there we also put a dollar sign beside anything double underlined that's really the rule of thumb your Prof might have slightly different conventions but that's not a bad R of dollar sign at the top of every column and dollar sign beside the any number that's double underlined and you won't be going far wrong we don't want to see a dollar sign beside every number that is for sure okay so we've got ourselves a very nice looking income statement uh what can we learn from this we learned the company was profitable we learned it made $20,700 is this good or bad we don't know why don't we know well if last year they made $100,000 in profit we'd say oh $20,000 that's a disaster if last year they made $2,000 in profit we'd say oh $20,000 hey pretty good uh so it really just depends on the company and we'd need more years of data to to have a better understanding of whether this was good or bad okay we've finished the income statement in the next video we'll prepare the statement of changes in equity stay tuned okay we've just completed the income statement for Sherry shuttles in this video we're going to go through the statement of changes in equity so uh the statement of changes in equity just says how did our shareholders Equity change during the AA how did the accounts classified as cherl Equity accounts change during the year and to do it we are going to need a three line title so let's just start with our title very similar to that of the income statement so the income statement Sherry shuttle income statement for the year ended December 31st 2024 the statement of changes in equity we're going to say Sherry shuttles statement of changes in equity for the year ended December 31st 2024 so exactly the same name of the company sheres shuttles name of the financial statement statement of changes in equity this could also be called the statement of changes in shareholders equity and a very similar related statement that you might see in your intro accounting textbook is statement of retained earnings but we'll go with statement of changes inity here for the year ended December 31st 2024 okay uh we are ready to go we list our Equity accounts across the top and I know I just remember it but in our intro class we only do two Equity accounts common shares and retained earnings again you might have preferred shares and there's all sorts of other Equity accounts you can get into in a more intermediate level accounting class but for us common shares and retained earnings will be the two key columns as well as a totals column uh now the top line is going to be how much how many dollars worth of these common shares and how many dollars did we have in retained earnings at the beginning of the year and we actually give a date here so what is the date of the beginning of this year well the year end date is December 31st 2024 the beginning of the year must have been January 1st 2024 so there's not actually a a heading here other than the date January 1st 2024 and so what we want to say is how many dollars worth of shares did I have on January 1st 2024 let's scroll up to the question I'm going to undo the highlighting from before we're actually done with those now uh and let's highlight any Equity accounts so we got common shares we got retained earnings it's got to be ear here there it is there and we also have dividends that's going to be relevant here so under um common shares pardon me on January 1st you'll note the date here these are the only two that got dated January 1st and the reason is we need that January 1st amount to do our statement of changes and equity and under January 1st common chairs 60,000 retained earnings 10,000 so 60,000 for common shares 10,000 for retained earnings 70,000 for total okay now we're going to add to this uh any shares that were issued we'll deduct from it any shares that were repurchased looking up here it says the company did not issue or repurchase any common shares this year so common shares isn't changing again if we issued new shares we would add those if we bought back our shares as you hear big companies are doing share BuyBacks you would deduct from your common shares um but just because our common shares didn't change and ours didn't uh retained earnings will always change it goes up by the amount of the profit so again we had beginning retained earnings we made profit so that means there's more money to keep potentially within our company and we deduct any dividends that's us saying hey we didn't want to retain those earnings in the company we wanted to take them in the form of dividends so uh that's the shareholders making that decision so we're always going to add net income and our our net income here just comes from the income statement so we have to do our income statement first our net income was $20,700 we're going to deduct dividends and the amount of our dividends was 3,000 just looking at that highlighted row up there our total net income 20,700 our total div dividends 3,000 so we need Grand totals here and this is what we had at the end of the year this is December 31st 2024 our common shares didn't change they started at 60 there was no shares issued or repurchase they end at 60 our retained earnings was 10,000 plus 20 so 30,700 we took away $3,000 in dividends leave us 27,700 and our total here 87,7 you can get that total by adding down so 70 + 20 minus 3 or adding across 60 + 27 is 87 double underlines under all three lines these are final ending St amounts dollar sign at the top of each column and we have one two three column colums and dollar sign beside the bottom line of our financial statement right there and there we have it we have prepared a good statement of changes in equity in our next video we'll tackle the balance sheet bye for now okay everybody we've been working through problem 13A we've prepared our income statement our summary of revenues and expenses and we learned our company made a profit of $20,700 we work through our statement of changes in equity summarized how our common shares and retained earnings change for the year and now it's time to move on to the balance sheet so uh to start with let's just write in our title um now if you're preparing this and you've got a nice clean piece of paper I advise students the first few times they do a balance sheet to actually turn that piece of paper sideways so I guess if you're on a like printer you would say oh I'm printing in portrait mode when you're printing the normal vertical way when you turn it sideways you're in landscape mode you kind of want to do this one in landscape mode it's a pretty wide statement we'll be preparing and um it'll just help to have a little bit more real estate your first time and if you're not going to do that just be aware that we're doing a wide statement here okay so uh name of our company is a three line title as always the name of our company is sher's shuttles the name of our financial statement is the balance sheet this is also frequently called the statement of financial position but we call it a balance sheet and the balance sheet does not say for the year end for the month end for the quarter end the balance sheet just gets dated so we're just going to put the date December 31st 2024 on the top you might say well why we said for the year ended on the income statement we said for the year ended on the statement of changes in equity why don't we say that on the balance sheet why do we just give it a date December 31st the reason is if we think about what's on the balance sheet it doesn't make sense to say for a year so for example we want to know on December 31st how many dollars worth of cash the company has like how many dollars of cash in the bank does the company have well I don't need to know how much they had on you know if I'm looking at December 31st I don't need to know what their cash balance was on February 1st and February 2nd and February 3rd and March and April and May I want to know how much cash they had in the bank on December 31st 2024 no other date right for the year I'd have to get 365 numbers for cash right one for every day and in fact it would change throughout the day uh we just want to know at midnight or 11:59 p.m. on December 31st how much money did you have how many dollars worth of equipment did you have how many how big were your debts on that date in that moment so that's what we're looking at here on the balance sheet so we're going to list all of our assets and I I do this all in capital letters assets on the left on the right we're going to list all of our liabilities and somewhere down here we're going to list our Equity accounts now you don't have to write that se here because you know I can erase this really easily in my software it might be harder for you to erase so just know that okay I've got Equity coming somewhere down there and at the end of the day if I total my left side it's going to match my right side right the the assets equals liabilities plus shareholders Equity so let's get down to business we're going to list our assets so we'll start there I'm going to erase all my highlighting and I'm going to highlight just the assets got cash we got buildings we got equipment come on pen we've got accounts receivable we got office supplies I think that's it so we want to list them and we want to list them in order and the order is called order of liquidity and it just means the most current to the most longterm so looking at our most current assets like cash is considered to be the most current it's it's very very liquid um buildings and Equipment would be more long-term in nature now if I had to list like what comes first buildings or equipment what is more liquid or or shorter term of those two they're both longterm but what's the more short term I would say equipment lasts us like 5 to 10 years buildings last US 20 to 40 years building should be more longterm so buildings is going to come last equipment will come before that cash will come first now looking at our other current assets accounts receivable or office supplies accounts receivable we assume will be collected in 30 days so they're considered quite liquid more liquid than office supplies office supplies are not likely to be gone through that quickly and certainly they don't convert to cash very readily so they're not considered very liquid so my list is going to go for current assets cash first then accounts receivable then office suppli so again order of liquidity what's the most cash-like coming First Cash AR then office let's do it so under ass ass we have current assets as a subcategory here and we have cash accounts receivable which I always say is AR and office supplies under long-term assets and I'll leave a bit of room for total um actually I don't know you just write that now total current assets uh and then we'll have long-term assets this category can also be called property plantant equipment PPN uh and there might be other categories for like Investments and things like this uh but we've just got the two we've got equipment which we said comes before building so equipment net and then building net and uh let's just list those amounts and and total everything up so cash comes first 5,000 then AR 1,000 then supplies 500 5,000 1,00 500 5,000 under cash 1,000 by AR 500 by office supplies total 5 plus 1 is 6,000 plus 500 is 6500 remember if I have a list of sums I list them on the left I total them towards the right for long-term assets equipment is 30 Building 100 30 plus 100 well that's 130 and that is my total long-term assets again this also gets called property plantin equipment it also gets called Capital assets but the fair enough just to call them long term for now 130 + 6 is 500 and that is our total assets again I've added my current assets to my long-term assets 6,500 in current 130 in longterm to get a total of 136 500 we've done the left side of our balance sheet it's time to move over to our right side so we've done all of our assets we highlighted them and dealt with them let's deal with our liabilities now I got wages payable I got accounts payable I got a bank loan I think that is it with an L beside it so let's go from there uh so current liabilities I have two wages payable and accounts payable from my experience accounts payable generally gets listed first this is a big uh liability number it's going to turn over in 30 days wages payable may actually be less or around the same amount of time but just by experience I've seen accounts payable kind of come up first wages payable often gets grouped with other they call them acrude liabilities but uh uh let's deal with accounts payable first so we have current liabilities and under that we have accounts payable and wages payable and I've forgotten the amounts so let's go all the way back up 2200 and okay so that's $3,800 in total current [Music] liabilities now in terms of long-term liabilities I'm really making an effort to write more neatly I know it's probably hard to tell but I am trying uh we just have the one we have the bank loan $45,000 should tell you a story about my hand writing one of these days liabilities when I was in elementary school they let me use a typewriter and that was oh that was a bad scene I'm an older guy and so it wasn't like a laptop it was the clunkiest thing you ever saw in your life I forgot the amount bank loan $455,000 I got made fun of a fair bit for having a typewriter in elementary school um okay adding it up our total liabilities uh 48,800 uh okay so that's it for liabilities we don't double underline that because we're not done we also have to do shareholders equity and shareholders equity in again our intro class is composed of really two accounts common shares and oops common shares and retained [Music] earnings our common shares and retained earnings do not come from up here in the question you might be thinking hey I know those they're right here and here but remember we're doing a balance sheet for December 31st and these are January 1st amounts where do I get my December 31st Equity amounts the statement of changes in equity so I go down to my statement of changes in equity I note I have common shares of 60 and retain earnings of 277 those are the numbers I'm going to use common shares 60 retained earnings 277 the total here is 87,7 that's my total shareholders Equity now I need a grand total and that total is total liabilities and shareholders Equity 48 8 was my liabilities 8877 is my shareholders Equity let's see six oh not 60 uh 48,800 plus 87,7 yes indeed it does equal 500 uh at this point I know my balance sheet balances a very very good sign so we need to put dollar signs at the top of each column and in this case I have one top of that column a top there top here and top here I don't need to put any in the equity section it's the not not the top of any column your Prof May disagree with me there so make sure you go with what they think of in terms of formatting I also need dollar signs beside anything double underline so dollar sign there beside 1365 in both places so you can see here our balance sheet balances right assets equals liability plus shareholders Equity this is a properly working balance sheet it's got a good title it's properly laid out and we've done a good job on our balance sheet okay in our next video we'll uh do some basic ratios and we will wrap this up and I'm going to tell you all a very sad story about how I failed my first accounting exam so uh stay tuned for that one bye for now okay we've just been working through our Sherry shuttles problems problem 13A from our accounting workbook and now we are at the time where we are going to compute some ratios so we've prepared an income statement already statement of changes and equity and now balance sheet and the question we've solved part A the income statement B statement changes in equity and C the balance sheet another question saying hey compute these three ratios the current ratio the debt ratio and the equity ratio what are ratios well they're just quick little calculations you can do when you're looking at a company at a glance and you can get some useful information from them so the first one the current ratio let me just write it out down here current ratio tells us well the the formula is current assets over current liabilities what does that tell us it tells us can the company pay its bills does it have enough current assets short-term assets to pay off to cover its short-term debts literally it's on top here it's covering it does it have enough money to pay its short-term bills so let's calculate it for our company and I'll kind of comment on the current assets right here 6500 the current liabilities right there 3800 so we'll calculate a number this is not a percentage it's just a number 65 oops let just do it this way 6500 divided by 1.71 again we're not going to write a dollar sign or a percentage here that's just the number so the rule of thumb here is anything above 1.5 is considered to be safe anything one under 1.5 is considered to be riskier and if you think about it like if you're below one it means you don't have enough money to pay your bills some bigger companies these rules go out the window but I think if you were looking at just your your family business or a typical smaller business I think a good rule of thumb is you want to be above 1.5 here if you want to be considered safe otherwise you're a liquidity risk you're at risk of running out of money you're at risk of not being able to pay the bills so that's our current ratio bigger is safer and in an intro accounting class safer is better again I've seen real companies where uh the shareholders don't want the current ratio to be as high they're saying yeah we have too much cash you should either invest long-term or pay dividends but you shouldn't keep so much cash and obviously having more cash will make your current ratio higher so I've seen shareholders argue for a lower current ratio in our class we'll always Advocate that bigger is safer and therefore better um okay let's look at the debt ratio uh the debt ratio is computed as total liabilities divided by total assets so for our company the total liabilities not the current liabilities now the total liabilities is 48,800 the total assets 1365 so crunching the number here 48800 / 136 6500 we get 03575 now we do want to State this one as a percentage 35.75 per. what does this say it says if the company you know sold off the company today you paid off all the debts you took the rest of the money for yourself 35% of those assets have to go to pay the debts 36% almost uh meaning and that gets us to the equity ratio there are weird things happening and popping up on my computer right now um the formula here is total shareholders Equity divided by total assets now I don't actually need to calculate this I can say okay if the debt ratio is 35% I don't even need a formula I can just say Okay this has got to be the rest to get to 100% this has to be 64.2% right and that 35 + 64 it adds up to 100 um let's do the formula anyway our total shareholders Equity here was not 136 what was it it was 87 there 87,7 we're going to divide by 136 500 and let's compute it 877 divide by 1365 and we get 64249 so [Music] 6425 and that converts of course to 64.2% so what does this say well again if I took the company sold all the assets paid all the debts 64% of the money afterwards would land in my shareholders pocket 36% would go to the debt holders 35.75 per would go to the debt holders 64% would go to the shareholders so for the debt ratio bigger is thought of as riskier and in our class riskier is worse so you want to be lower in terms of a debt ratio you want to be higher in terms of an equity ratio all else kept equal again this isn't the case for all companies some companies it's very sensible to borrow and even borrow more and uh use what's called Leverage but in our class just think of uh debt ratio as bigger means riskier and risk is negative in in our view again and different uh companies and different Finance people may disagree with that statement but in a basic accounting class I think that's fair to say okay so that's it we've solved the problem now you can skip ahead if you don't want to sort of personal story but I uh I took this class as a student and and I I Gotta Give a bit of backstory here in fact I'm GNA drink a drink of water before I is very personal story so I I um from when I was a little boy I always wanted to be an accountant and I I look back and I have these like yearbooks not even yearbooks my mom would like take a picture from the year and then paste it to a page and on that page there would be a survey like Tony what's your favorite food and what's your who are your best friends and one of the things you know you ask a little kid is like what do you want to be when you grow up and I said accountant from a very young age from when I was like four years old accountant accountant accountant and you know I didn't know what accountant was how could you know but I I knew I liked numbers and I liked money and in reality somebody that really likes numbers and math and money should get into Finance but I I just had it in my mind accountant accountant accountant so I went through high school never took an accounting class but I'd tell all my friends and you know in the yearbook what do you want to be account accounted accounted account got through first year of University no accounting classes in first year so and I done well in school mostly B's and A's and uh I get into second year of University and I'm here I'm finally in my accounting class and I tried so hard in this class I worked so hard I studied so hard and most of my other classes I didn't even care I was lazy and I still did okay this class I was working my butt off and like because you know this is my life I'm going to be an accountant I've said this for the last 20 years I'm going to be an accountant and here I am in accounting class so I get to the first midterm exam and on that midterm exam was a financial statement question just like this one give me an income statement statement of changes in equity and a baling I ask my students to do this on my exams all the time income statement statement of changes in equity and balance she so anyway I'm working away I do the income statement I go okay great do the statement of change in equity seems like things are going well do the balance sheet get to the bottom of the balance sheet and what happens well my balance sheet did not balance and I did I made a mistake and this is the reason I'm telling you the story is because I don't want you to make the same mistake I made I said oh jeez I know these two numbers have to match assets T to equals liabilities plus shareholders Equity if there's one thing I know that must be true and for my question it's false clearly I did something wrong and I erased the whole thing and I start it over and I work through and I get to the bottom of my balance sheet and guess what the exact same number and by the way you know this question takes it took us you know 45 minutes in these videos but probably takes 20 minutes in real life to do like even if you're going quickly and so you know I've I've just wasted 20 minutes I got to the bottom and I see the clock's ticking I have a wrong answer I'm starting to sweat I start working on some other problem I start to cry in the middle of the test I just I broke down and uh you know so I I didn't finish the test I never finished the problem I erased it again I start again I run out of time it's kind of half there and half gone and I'm I'm just weeping in my seat like oh my God you know I've never failed the test before I I know I'm failing as I'm doing it and um I I just hand it in I say Prof like look I don't know what happened this was a disaster what can we do here and she just to her credit said listen you just have to do better on future tests like uh you know you this this exam happened and it counts and you'll have to do better going forward and so my advice to students a couple of things one if if you miss something and it causes your balance sheet to go out of balance just move on don't get hung up on that like this type of question is worth like double digit marks let's say 12 marks for me well you Pro you might get an 11 or a 10 out of 12 if you have most of the stuff right right you can still get an A+ level grade on the problem and still have it not bounc so don't lose your mind don't erase everything for sure the other bit of feedback here is I got like 28% on that test okay and this was like such an important subject to me and to get 28% really hurt but I passed the course I I didn't get a great grade I think I got a C+ overall but I had to work my butt off to pull it up to a C+ and I went on to be a CPA I went on to be a professional accountant and now I'm an accounting professor having got below 30% on the first accounting exam of my life so I have students all the time in my class that fail fail a test and it's not the end of the world and in fact it's not even the end of the world if you fail a course but really it's not the end of the world if you fail a test you can put it together you can put yourself together and you can improve and I'm I'm living proof of that because I bombed my first accounting exam ever so uh hopefully that's positive feedback hopefully that's helpful to you and uh good luck in your studies now I appreciate you watching these videos and I hope that helpful and I I made this little thing uh this is a new thing to me self-promotion but you know here I am if you're watching this on YouTube and you made it all the way to the end and you made it through my ridiculous story I hope you'll take the time to like and or subscribe uh and share with your friends let them know that this these videos are useful to you again uh it really helps uh to have the algorithm kind of know that my videos are good and know that they're worthwhile so I hope these videos were worthwhile to you and if so please don't be shy about liking and subscribing to them all right have a great day everybody and stay tuned for our next video bye for now welcome to module two of our course on financial accounting this module is the most important module of an accounting course if you want to survive your introduction to financial accounting course you need to understand journal entries the reason is you know in a couple chapters we're going to learn about receivables well what do we do with receivables we do journal entries when we learn about inventory we do journal entries of inventory when we learn about long-term assets journal entries journal entries will just come back again and again and again in any Financial Accounting course so you really need to understand them the good news is there not too hard there's a lot of harder topics but the bad news is if you haven't understood it well it's just going to haunt you for the rest of class so I'm glad you're here I'm glad you're watching this video this video assumes no prior knowledge of journal entries maybe you've been to a class or tried to do some readings and you're feeling very shaky you are in the right place so let's begin let's start talking journal entries and when I think about journal entries funny enough I don't think about accounting at all I think about physics now I didn't study a lot of physics in my life I think I took a grade 11 physics class that's it um but I know enough to know that like if you took a grade 11 physics class in Canada where I'm from um the star of the physics class if you could name a star is this guy Isaac Newton uh here's his Wikipedia page very important person in the world of physics apparently discovered a lot of important uh uh rules about how the the world works I guess and uh so you know he's very famous for like sitting under an apple tree and an apple falls on his head and he apparently discovered gravity I I don't exactly know how that works but obviously a lot of the math behind gravity he uh is thought of as one of the early um people to understand that um but if you take an a an again first year physics class or an early physics class you've learned about Newton's Laws so there's one like Force equals mass times acceleration or an object in motion wants to stay in motion an object at rest wants to stay at rest but it's his I think it's his third law that I want to talk about here and Newton's third law I think it's his third says for every action there is an equal and opposite reaction every time one things happens something equal and opposite is happening and that's what I want you to think about when we talk about journal entries there's there's not just one thing happening there's always kind of equal and opposite forces acting in a journal entry and uh this is core to the concept of journal entries and let me give you an example so let's say I go to the car dealership and I buy my dream car it's a Volkswagen Golf I think GTI I don't know I'm not a car guy but I really like the Volkswagen Golf it's my uh favorite car so I go and buy a Volkswagen Golf so my Volkswagen Golf I'm just going to say car here for short my car the amount of cars I have actually let's call it cars goes up by let's say it cost me $30,000 so I now have $30,000 in car assets I didn't previously have right my cars have gone up by $30,000 well at the same time something else has to happen I either have to take a loan or let's just make this as clean and simple as possible let's say I showed up with $100 bills you know $300 $100 bills so that's $30,000 in cash and I hand the car dealer $30,000 in cash they hand me the keys to my nice shiny red Volkswagen Golf well something simultaneous has happened then from an accounting perspective right and accounting is all about tracking Financial events uh and this is a financial event that has happened what has happened simultaneous to my car going up my cash has gone down I've lost $3,000 cash I no longer have that cash that cash belongs to the guard dealer so my cash goes down by $30,000 okay well we have followed a transaction this is business being transacted and it happens hundreds and even thousands of times in a day for many businesses no not buying cars every day but uh certainly you know Walmart will have hundreds and hundreds of sales transactions just one branch of Walmart not let alone the whole corporate entity so there's lots of little transactions every day and it's you know an accountant's role is to keep track of it all right we want to keep track of all of this in a logical way that's not going to drive you crazy right because the company wants to keep track of its assets its liabilities its shareholders Equity accounts it also wants to keep track of revenues and expenses to manage the business right just to understand what's happening with your own business let alone to prepare financial reports for you know investors and things like that which bigger companies absolutely want to do so uh starting with this micr level transaction we bought a car for cash cars went up cash went down this we've kind of recorded the transaction but this isn't how accountants record transactions maybe you're telling somebody you going to take an accounting course and they said watch out for those debits and credits well this is where debits and credits come in and again when I'm reviewing let's say a student has failed my class and they come into my office and they say you know I want to know why I failed and we're looking at their final exam nine times out of 10 it's journal entries it's this topic that syncs them so really you need to have your aame here so anyway let's talk about how journal entries work uh I'm going to make a little table and I'm going to make this table all the time uh and I hope it's going to be helpful to you so I write the accounting equation here a equal L + SE then I write an up arrow down arrow down arrow up arrow down arrow up Arrow then beneath I write Dr CR Dr CR R Dr CR um okay so it's a little bit convoluted so far as looks like a hieroglyphic but believe me by the end of this video and certainly by the end of this module you'll know what this hieroglyphic means um so a asset L liability SE shareholders Equity we're getting pretty good at identifying accounts by now right it was all module one and if you didn't do module one go back and watch those videos I think think they'll be useful to you but anyway we should be pretty comfortable with all that jargon drcr is new Dr well I mean cr makes great sense CR stands for credit CR credit and Dr makes lots of sense Dr stands for drebit wait a minute debit with no there's no R in the word debit why do we put Dr for debit um I I've done some research on this and it's uh unclear actually is conflicting reports the one like the best is just that like look accounting has existed for thousands of years and this was Latin or some foreign language where the word for debit was a Dr what I don't want you to think is that debit and credit mean like debit card and credit card or uh you know you have a credit on your account maybe you've heard that phrase don't even worry about that what I want every student to do is especially if you were in banking this is especially true for you forget what you know about the word debit and credit uh it's not going to help you here accounting has very specific use for the term and if you sort of bring some previous baggage in and go well I actually kind of know what this means forget it like it's going to help you just to work from a clean slate here so um let's look at this transaction my car for cash transaction I purchased a car for cash um what is a car in you know this uh chart here is it an asset liability share's equity car is an asset okay we have a car increasing by $30,000 therefore an asset is increasing by $30,000 therefore I should I was trying to highlight but it didn't work very well I should debit that asset because it's going up right I should debit that asset so let's debit our car now how am I going to debit my car well if I were If This Were My like piece of paper right if I were a student and I had like a spiral notebook and you know here's some whole punches on the side well this isn't to scale but you're getting the idea here's like the margin do it in red this is like the margin uh Etc okay I don't need to do this um uh at the top of the page I would write Dr with an underline and then CR with an underline then below I would write the date so uh today's date is July 17th so I would write July 17th 17th okay what happened on July 17th I I bought a car and I I've just said I want to debit that car so on the left side sort of close to the margin here I'm going to write the word car and under the Dr I'm going to write [Music] 30,000 that's saying I'm debiting my car by $330,000 I Don't Need a Dollar C uh now what's happening with cash well what is Cash Cash is going down but what is Cash Cash is also an asset to make an asset go down we credit it so let's credit cash so when I write the word cach I want to encourage you to write the word cach kind of over almost like we've uh hit enter on a computer and hit the space bar five times like write it over here is uh so okay I've written it over there now the number 30,000 goes on the credit side finally I have to describe what's happened and to describe what's happened I write purchased a car for cash and I might write some more details I might write like you know Volkswagen Golf you know these are the features or whatever you know you might write more details here but that's the gist of it right you're just trying to describe what's happened um Okay so we've done it we've done our first journal entry I'm looking for a few things one I'm looking for an account to be debited an account to be credited I'm looking for the value of the debits and credits to match so $330,000 worth of debits $330,000 worth of credits I'm looking for a date and I'm looking for a description I'm also looking for their not to be dollar signs so at this point I've got myself a very good journal entry and we are on our way to understanding journal entries I want to do a second version of this transaction so so um yeah I'm just going to what am I going to do I'm just going to redo things okay so uh transaction two I buy the car so my car goes up by 30k and rather than cash I just get a loan so I get a car loan to pay for it now when I get that financing and let's just say no money down right let's make this really simple it's purely a car loan 100% financed with a car loan um what's happening with my car loan is it going up or down well yesterday I didn't have a car loan today I do so my car loan is going up by 30k now I know what you're thinking you're skeptical right now you're saying Tony didn't you just say Isaac Newton and every action there's an equal and opposite reaction we got two things going up well this is absolutely a possible thing in accounting but I'll explain what I mean by equal and opposite in a sec let me just copy down my table in fact I can just move it down the page here so what's happening I got a car going up by 30,000 so this is an asset increasing by 30,000 I'm going to debit that asset so I'm going to put car again debit credit uh car going up by 30,000 car debit 30,000 car loan what is a car loan loan to me well a car loan is a debt right it's something I have to pay back it's a liability we said the car loan is going up I've got to credit my car loan so I credit car loan maybe I'll even write the word payable in there because I like to write the word payables after liabilities and again it's a liability going up so we credit it 30,000 so when I talked about Isaac Newton saying for every action there's an equal and opposite reaction what I meant was every transaction will have a debit and a credit at least one debit at least one credit and the values of those will be equal right the debits will equal our credits at the end of the day um we need to uh date this thing so again July 17th and we need to describe it purchased a car financed with a loan Okay so we've done our second journal entry time to move on to the third and final journal entry of this intro and then we're just going to do lots and lots of practice journal entry so let's do the third journal entry the third scenario scenario 3 I buy a car my car goes up 30,000 uh but I put 10,000 down and finance the rest with a car loan so my cash goes down 10,000 and my car our loan goes up 20,000 okay we should be able to do this so again let me bring this little thing down I like to have this close at hand uh maybe I can bring it down a little more okay there we go I've left the D in debit there we are um so what's happening here well my car is going up 30,000 it's an asset going up let's debit car car again debit credit now if I were doing all of my journal entries at once I wouldn't write drcr every time I would write it at the top of the page and that kind of holds for the call so anyway debit car 30,000 now what happened to cash cash went down cash is an asset going down it's an asset decreasing so credit cash 10,000 and car loan is an uh liability increasing and to increase a liability we credit it so we credit car loan payable or just car loan 20,000 so again we need to date this July 17th and we also need to describe it purchased a car put 10K down financed the rest with a car loan all right so we've got our third entry one final note regarding these entries because we haven't done any Equity transactions most companies there's not a lot of equity transactions but there are transactions that affect equity and those transactions involve revenues expenses and dividends so let's think about how revenues affect Equity revenues if you earn a revenue means you're more profitable you have higher retained earnings if you're earning more Revenue so it makes Equity go up revenues help shareholders Equity so revenues because they always make Equity go up they're always a credit expenses because they always make Equity go down they're always at debit and dividends the same because they always make Equity go down they are always a debit this little table is the key to the whole thing this is the key to your week this is the key to well however long you're working on this but this is the key to your understanding of journal entries uh this is the most important topic of the semester period Baron I don't think it's the hardest although I do think it's hard but there'll be harder things yet to come but if you struggle here you're going to struggle with everything in the course so it's worth taking your time worth practicing I've got I think it's eight really long problems giving you lots of chances to practice practice practice your uh uh journal entries it's like I said the most important thing okay that's all for this video if you stayed tuned this long I hope you've liked it and if you know again if you're watching this on YouTube I totally appreciate if you can share sh with your friends you can give me a thumbs up uh and just comment let me know what I can do to improve so anyway I appreciate that you're here I appreciate that you hung in there to The Bitter End that's all for this video see you next time bye for now in this video we are going to explore problem 22A this is a very important video it shows us how to do journal entries in the second part we'll make tea account and finally we'll do a trial balance um as mentioned in my previous video though if you don't understand journal entries you will be in trouble in an intro Financial Accounting course so if you haven't watched the intro video for this module please watch it we go over um the rules of debits and credits when we make a debit and when we make a credit but there's this little cheat sheet I'm going to keep referring to on the side of my page I encourage students to write it in the corner of their exam papers um and here's the rule uh if we have an asset that's increasing we debit it if we have an asset that's decreasing we credit it liabilities are the opposite debit them to make them go down credit them to make them go up shareholders Equity same as liabilities debits make them go down credits increase them now because of the way revenues work revenues always help our shareholders Equity so revenues always take a credit expenses and dividends always hurt shareholders Equity so they make shareholders Equity go down they take a debit so those rules are going to hold here let's go through the problem and see how we do in August Maria Chen started her new Taxidermy business the right stuff Inc the business focused on preserving family pets after they passed away the following transactions occurred during August okay August 1st Maria invests $1,000 cash in exchange for 250 common shares now remember Maria is separate from her company The Right Stuff Inc and we are the accountants for the company this class is all about corporate accounting so uh we are looking at this from the company perspective and uh the first question I always ask when I think of these journal entries is did any money change hands did cash change hands and the answer is yeah $1,000 of cash change hands changed hands so Maria invests $1,000 in cash in exchange for 250 common shares now this is Maria starting her company she's buying the initial shares just to begin the company the company is getting cash and Maria is getting common shares in this transaction so the company is getting cash so looking over at this table on the left cash is an asset the company's cash is increasing therefore debit cash so let's do that uh I'm going to date this because it's a journal entry Aug one and then under August 1st on the left I write cash and and thecr headings up here we're going to debit cash for $1,000 I don't put a dollar sign there uh now what's the other piece of this well she invested $1,000 of cash in exchange for 250 common shares this one is a little confusing as a first entry but just know that her equity in this company is growing right common Shares are one of our two Equity accounts we're worried about here so this is absolutely shareholders equity and before she had no piece of the pie now she has a thousand piece of the pie so her shareholders Equity is growing sometimes students can tie themselves into knots here thinking oh common shares aren't those assets and are our assets going down no no common Shares are always an equity account for us um and uh uh they are her Equity is increasing so let's credit common shares a th000 bucks now something that many professors will require I don't is to write a description if you wanted to write a description for this you would say Maria invested $1,000 cash in exchange for 250 common shares you would just write this underneath uh one other question I frequently get here is this number this 250 why haven't I written 250 anywhere in here and the reason is journal entries are all about the dollar amounts so again if I bought four C cars for $10,000 each I would go debit car 40,000 I wouldn't go debit car four right because there's four cars well here there's 250 Comon shares the number of shares doesn't matter it's the dollar value that's being exchanged so uh there we have it August 1st in the bag I'm going to try to work a little more quickly because that was four minutes for one entry uh let's move faster next rented workspace paid $600 for the month of August okay so first thing paid $600 that's telling me cash is changing hands so on August 1st I'm going to credit cash I'll leave room for a debit here and I should be clear here cash is of course an asset and it is an asset that is decreasing that's why I'm crediting cash I credit cash for 600 I don't need to write drcr on every entry it can sort of follow through for the rest of the page um now the debit here is a debatable one I think the most logical one most companies will use as they'll say look this is a cost of doing business rent is an expense so we should debit rent expense and I do think that's the most logical choice however if companies pay for multiple months of rent in advance certainly prepaid rent is not an unreasonable thing to say here prepaid rent is actually an asset account we'll learn all about it in chapter 3 but for now I think rent expenses is logically what most companies would do uh and so that's what we'll do here August 2nd the company borrowed $500 in the form of a long-term bank loan uh uh the money was planned to purchase much of the equipment that would be needed okay so first of all whenever it talks about the money being planned for something who cares what the plans are right plans fall through all the time this is financial accounting it's all about what happened it's not about what's planned to happen that's a managerial accounting thing financial accounting is like just give me the facts what happened so what happened we borrowed $5,000 so did money change hands the answer is yes we got cash we received cash so cash again is an asset it is an asset that is increasing let's debit cash so August 2nd we'll write cash on the left here and the amount was uh $5,000 the credit well what's the other piece of this it's long-term bank loan right we we have a liability here yesterday we had zero bank loans today we have $5,000 worth of bank loans our liability is indeed increasing that means we need to credit bank loan or bank loan payable I always like the word payable at the end of my liabilities whoa something crazy just happened payable there we go 5,000 bucks okay I think we're doing well let's continue on to August 5th it's a funny thing making these videos because in class I would always pause and say oh do anyone have any questions and there might be a question or two and I keep going but in the videos there's nobody to ask questions so I just I try to come up with typical student questions but that one I think that's straightforward purchased equipment $4,000 paid $1,000 with the rest payable at the end of August okay so we bought some equipment we B $4,000 worth of equipment cash did change hand so let's deal with that paid $1,000 that's all I need to see uh so I'm going to date this August 5th we've got an asset that's cash and we've got an asset that's decreasing so therefore we'll credit cash uh so I'm leaving room for a debit bec