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	Hello and welcome to the session. This is Professor Farhat and this session we're going to be starting an introductory course in financial accounting and in the topic we're going to look at what is accounting. You know what accounting is and who are the users of accounting information. Once again, the topic is covered in financial accounting and also it's helpful if you're studying for your CPA exam. Here we are talking about the basics of your starting. This is as basic information as it gets. So as always I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have over 1,600 plus accounting, auditing, finance and tax lecture. I have managerial accounting, cost accounting, intermediate accounting, income tax, governmental auditing. I have all sorts of courses. So if you're an accounting student, please let your classmate knows about this. Light my videos, share the videos, put them in playlists. If you're benefiting from my videos, it means other people might benefit as well. On my website you'll have additional resources such as through false multiple choice PowerPoint slides. If you're studying for your CPA exam 2000 plus CPA questions. I have a list of courses over 12 courses, different courses covering various accounting topics. So what is accounting? Accounting is a system that does three things in an nutshell. It identifies records and communicate financial information to certain users. And we're going to talk about who are these users and what do they use the information for. So let's start with the term identify. What does it mean identify? It means if something happens, if it if it transaction, if an event happens, the accounting system captures. Like take a picture of it capture the event. For example, Walmart sells a pair of shoes. This is a transaction. It's a sale transaction. They sell it and they either receive cash or they sold it on credit. So that's an event. The next thing we do is we're going to record this event. We're going to record this event now for a place like Walmart and most business places. They capture the transaction by scanning the item. Once you scan the item, once you sell it at the register, it captures the transaction. It automatically record that you made a sale for $30. So and those sales are kept in a chronological order. Chronological means by time and they are also organized by group, for example, all the sales together, all the purchases together, all the purchase returns together, so on and so forth. But we have some sort of an input. So we have to log in the transaction that most of the time it's logged in automatically by a computer system. Then we're going to have to communicate the information. What does it mean to communicate? We're going to have to prepare, analyze and interpret reports that's going to help the users make a better decision. Now think about Walmart. How many sale you think they make per day or per hour? If not millions of transactions per day, if not per hour. So what we're going to have to do, we're going to have to make sense of all of this. How do you make, how do you make sense of all of this? We're going to have to prepare financial statements. We have to prepare reports that's going to communicate this information that's going to talk about the information in a way that makes sense to the users. For example, here, let's assume those are the managers. They don't have to be the managers. Users can be anyone will talk about the users shortly. But the point is we have to prepare reports. So we have to prepare what's called financial statements. And that's something we're going to have to learn about in this course. Now why do we prepare reports because the users and we'll talk about the users in the next slide. They need to make a decision. How do they make a decision? They rely on us on accounting people because accounting is the language of business. It tells them what's going on. What is the total sales, what's total purchases is sales increasing, the sales decreasing. And here we're talking about sales only, but we can't keep track of any and every single transaction or account in the company. So simply put accounting is an information and measurement system that identifies, records and communicate an organization business activity to users. Again, important is to users. And we'll talk, we're going to talk about those users on the next slide. Now, users of accounting information accounting is the language of business because all organizations set up accounting information system to communicate data to help people make better decision. Well, let me tell you something about accounting accounting. It's not only the language of business. Accounting is the oxygen of the business without accounting. We will not have large companies without accounting. We will not have Microsoft will not have Google will not have the apples of the world. You might be asking why here's why. People with ideas, Bill Gates as an example, the founder of Microsoft or Steve Jobs. Often time don't have the money to expand your idea. So when Bill Gates found his company and his garage, that's great. It's a great idea. But Bill Gates cannot expand without the money. So Bill Gates need to have access to the money. People with money. Now people with money, they need to know they need to learn about the business. Now, to learn about the business, there's only one language and that's the accounting language. So that's why we called accounting is the language of business because people with money, people on Wall Street, investors. The only way they can find out what's going on at your company is if you prepare for them, prepare properly accounting reports, proper accounting reports. So that's why the accounting is the language. That's how you communicate. It doesn't matter who you are as long as you prepare an income statement for me, as long as you prepare properly prepare an income statement, as long as you properly prepare a balance sheet, I can read what's going on at your company because accounting is that language. And that's what happened when we have accounting, it breaks that barrier between people with money and people with ideas. And this is how the economy grows and all these companies grow larger and larger because they need the fund to expand and accounting is the oil of the economy is the oxygen of the stock market, the oxygen of capital raising. Okay, so, but we're going to break the users into two groups because we always talk about users, we're going to break users into two groups. We have external users and we have internal users. Obviously external external external to the company internal is internal to the company. Now, we need to talk about those two users a little bit, little bit further. Okay, who are the external users? Here's a list of them, lenders, external auditors, shareholders, board of directors, regulators, but I'm going to focus on two groups. I'm going to focus on lenders and I'm going to focus on shareholders. So when we prepare accounting information, frankly, we are focusing, we are targeting those two groups, lenders and shareholders. Why? Because lenders lend you money, shareholders invest, invest money. So both of these groups, they provide what we call capital. They are capital providers. And this is important because without those capital providers, we can survive as a business. Therefore, accounting information mainly target those two groups to be more specific when we say external users for external users, we prepare financial accounting, accounting report or for short financial accounting, financial accounting. Also external auditors might be interested, not might be interested, external auditor use those reports, board of directors use those reports, regulators, government agencies use those reports. But when we prepare the reports, we're mainly targeting lenders and shareholders in a sense, we are trying to give them as much information as possible. Now, the discipline of external users is called the discipline is called financial accounting. And most likely, the course that you are taken right now is called financial accounting. And this is what we do is we prepare financial accounting reports for external users for internal users who are the internal users, people who are inside the company are in the managers research and development managers purchasing managers, human resource managers, marketing managers, production managers. So notice all of those, they have the word manager or something internal to the company. Now, can you be an external and internal at the same time, sure you can, you can be the marketing manager and you can own some stocks. Okay, it doesn't, you are an external and an internal, but the point here will try to separate them to make the point. Now, the reports that you prepare for internal users is called the discipline is called managerial accounting versus financial accounting. Now, for managerial accounting, most likely, if you are a business student or if you are an accounting student, so you'll take financial accounting first as a course and you'll take managerial accounting. So there's, it has its own discipline. So managerial accounting is, is a discipline of preparing reports for users, for internal users to make better decision, but those users are internal to the company. For example, the R&D, they want to know how much money they can get from the budget, from the annual budget. You know, we, they have to prepare a report showing their expenses, showing their expenditure, how much money they need in order to develop that new drug purchasing managers, the same thing. They want to know how much, how much, what was our total sales for specific product, then they need to know what to buy. If we are a manufacturing company, they need to know how much you are producing so they can buy raw material, human resource managers, they want to know how many employees do we need and they need to stand the market to find out how much we should pay so that they use this information for internal decision making. So very important to differentiate between those two groups, they're both users of accounting information. One is considered external, one is considered internal. Now this is not a comprehensive list for both, but remember anyone that's inside the company, we called them internal users outside the company external users. Now let's take a look at this exercise to illustrate the concept of internal and external users. Identify the following questions as most likely to be asked by internal or external user of accounting. So who would be asking this question, is it an internal user or an external user to the company, which inventory item are out of stock? Do you think that an external or an internal outside, that's an internal. A manager might be asking about this or a supervisor in a certain department. Should we make a five year loan to that business, who make loans to the business bankers, lenders, creditors, those are external users to the company because they are outside the company. What are the cause of our product ingredient, who'd be interested in this, the production manager, the production supervisor, the general manager for that division. So that's an internal user. Should we buy, hold, or sell a company stocks? Well, that's an external, that's the investors or potential investors. Those are external. Now they could be internal, but to make our life easier, we're going to consider them external. Should we spend additional money for the redesign of the product, who might say something like this, maybe the head of R and D, maybe the head of engineering, okay, maybe the production manager, those are internal users. Which firm reports the highest sales and income? Now notice, we're looking at which firm reports the highest sales and income. A full looking at different companies as investors, that's an external, external user. Now if we assume in the firm as a division within a company that will be an internal user, but here we're going to consider an investor is asking this, which firm report the highest sales and income because we want to, we wait, we wait, we make, we make one invest in them. What are the cause of our services to customer? How much does it cost to serve one customer? Well, that said budgeting, budget budgeting decision within the company. Those are internal users, internal users. B, identify the following users, users as either internal or external R and D executives. Well, that's an internal because research and development help the company create new product, human resources executive. Same thing internal, they help hire, train, fire people, politicians. Well, those are external users. They have nothing to do with the company. They look at the company and they use the information for their own political end, but they're not internal users. Shareholders, an important external users. Shareholders are the investors, are the people that give money to the company to invest and grow. Distribution managers, manager, internal people who work for the company. Creditors are like shareholders. They provide capital, but they lend money. Those are external. They give you the money that you expect to give it back to them. Now shareholders expect to get a profit, expect to get a profit from the company. Creditors, they expect, they expect interest, they expect, interest payment plus they expect or money back as well. Production supervisor, well guess what, those are internal. They are supervising the process. Purchasing manager, manager works at the company, internal. They want to be, they are interested in how much we need to buy in order to produce or in order to sell what we need to sell. So very important to understand the difference. In the next session we would look at additional resources. As always I would like to remind you to go to my website, if you are an accounting student and you want additional resources, you can subscribe, there's additional practices. Good luck, study hard, accounting is a rewarding career, but you have to work hard. It's a challenging because it's rewarding, it's difficult. If it was easy, everyone will be an accounting student. I'm here to help you, my YouTube, here to serve you, my website here to serve you, invest in your career and good luck.
	Hello and welcome to this session. This is Professor Farhat in this session. We would look at Gap and the setting standard bodies for accounting. This topic is covered in financial accounting, so this topic is designed as an introductory course. And also could be used for the CPA FAR section, but here we are talking about basic stuff. If you want to learn more about this topic, visit my intermediate accounting course where you will have the material covered. Now as always I would like to remind everyone that's listening to me to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance and tax lecture. This is a list of all my resources, including if you're studying for your CPA exam hundreds and hundreds of hours of CPA lectures. On my website you'll have access to additional materials such as PowerPoint slides through false multiple choice. If you're studying for your CPA exam 2000 plus CPA question, this is a list of the resources that I cover. So we're going to start to talk about generally accepted accounting principle and specifically we're going to be talking about the US generally accepted accounting principle. So what is gap? So when we say the word gap, what does gap represent? Well, the gap are concepts basically rules and regulations that we follow in regulation rules to follow when we are preparing financial statements. So basically gap is the reference for the accounting. So simply put financial accounting is governed by concepts and rules known as gap generally accepted accounting principle. It's pronounced like the store gap, but it's a GAAP and notice it's generally accepted. It's not set in stone. It's generally accepted. Gap aims to make the information relevant, reliable and comparable. It has other characteristics other than relevant, reliable and comparable. But today since this is an introductory course, we're only going to talk about three characteristics of gap and just discuss them briefly. But if you want more of this, go to my intermediate accounting. What does relevant means when the information is provided? It has to be relevant. What does relevant means relevant means it affect the decision of users. It means it helps the user make a decision. It's not it's not irrelevant to what they are doing. For example, if you if you want to invest in the company, you want to know about the company's profit, about the company's debt, about the company's ability to sustain its current operation. Well, that's relevant information. So the accounting information that you provide has to be relevant has to help them make a decision. Well, that's good, but also the information has to be reliable. What is reliable? It means I can't trust it. It's not biased. It's not favoring one group over the other. It's complete. It's given me everything I need to know. This is when the information is reliable. Of course, think about it. If the information is not reliable, how good is it? It's not good. Even it's relevant, but if it's not true, how good is it? Also, the information has to be comparable. What does it mean comparable? Comparable means it's when I am looking at this information. I can take the information that you gave me about company A. And I can look at company B and be able to compare the performance of company A versus company B. Why? Because we are all using gap. We are all using the same rules. Therefore, the information has to be reliable. So the information has to be relevant, reliable and comparable. Are these the only three characteristics? Absolutely not. But for a financial accounting course, that's all we have to know about. Now, the question should be who sets gap? So who are the standard setting bodies? Here we go. FASB, the financial accounting standard board. And this is a private organization. Private means it's not governmental. It's not public. In the US, FASB sets gap, the financial accounting standard board. Now, bear in mind that we do have government oversight. And the government oversight comes from the SEC, securities and exchange commission. The SEC oversees the financial market. And by product also oversees the accounting standard. So if the SEC doesn't like something, they can object. And if the SEC object to something FASB created and what FASB created as gap, then it has to be changed because the SEC is a public or a government or a federal government or a federal government organization that you have to comply with. And the SEC came about after the Great Depression to monitor the financial market. Therefore, you have we have to be, we have to follow the SEC. So technically, the SEC has the first priority in setting the rules, but they don't. They give this to the private sector. Actually, to be more technical, Congress can set the accounting rules if they want to, but they don't. So think about it. Accounting rules are self-governed. It means the private sector sets the own rules for their accounting record. Now, this is in the US. What about globally? Well, globally, you have to remember. In today's word, companies operate across the globe. Therefore, they have to assure reports across the globe as well. So what do they follow? Well, everybody else other than the US, other than the US, they follow different sets of rules. They follow different sets of rules. What rules do they follow? Well, they follow something called the international financial reporting standard. So this is the equivalent of gap. So in the US, we use gap. Everybody else uses the international financial reporting standard. Now, in this course, we would learn about gap. I do have a course about IFRS. Under my YouTube channel, you know, teachers about the IFRS, they're very similar. They're 80 to 90, if not more similar. Similar, the way we do accounting for both, but there are still some differences. Okay. Now, the IASB, IASB is the equivalent of fast. The organization that sets the rules internationally called IASB. They issued the IFRS, which are for us, they are called gap. And that's all what you need to know about international standards, the organization that sets the rules and IFRS. And over the years, there has been a lot of conversion, a lot of conversion between the two. And recently, there was a conversion about the conceptual framework. And what's the conceptual framework? Both the fast V, the US organization and the IASB, the international organization, they're attempted to converge, to bring the rules to be very similar to enhance the conceptual framework that guides the organization. What is the conceptual framework? It's basically the background that we need, the background that we need to issue new accounting rules. So they're trying to basically agree on sorting, on sorting principles. For example, one of them is the objective. Okay. For example, they both agree that the main users of accounting information, and we talked about this in the prior sessions are investors and creditors. So those are the main users. Okay. Now we do have other users, but the main users are investors and creditors. They both agree to that. Okay. They both agree that the characteristic, the qualitative characteristic of accounting information has to be relevant, reliable and comparable. They both agree to that. Okay. Also, we're very close to defining the items on the financial statements. What are the items on the financial statements? We'll talk about those later, like how to define revenues, expenses, assets, liability, so on and so forth, they're coming close to this. Also recognition and measurement, set the criteria that an item must meet for it to be recognized as an element and how to measure the element. Simply put, when to record the transaction and how to record the transaction, they're trying to agree on this. So basically, this is major stuff that they are working on, which is trying to have the same conceptual framework and the conceptual framework doesn't mean the same rules. It's mean this creates rules within the same spirit. This is basically the conceptual framework. And anyhow, these are beyond the scope of this course. So if you want to learn more about the conceptual framework, go to my intermediate accounting course. That's all what you need to know for now as an introductory financial accounting students. Now, we talked a little bit more about principles of accounting assumptions and constraints that you're going to see throughout the course. Okay. So what are the general principles? We're going to have general principles. There are the assumptions, concepts and guidelines for preparing financial statements. And we're going to talk about those general principles today, not all of them, but the majority of them. There are also specific principles that there are detailed rules used in reporting business transactions and events. So they were going to talk about generally general principles. Okay. Like the revenue recognition expense principle, full disclosure principle measurement. And we have certain assumptions going concern assumption monetary unit assumption time period will talk about this later business entity business entity as well as constraint, which are called cost and benefits. So we're going to look at each one of those very briefly today. And that's going to do for a financial accounting course. But again, those topics are covered a little bit more and intermediate accounting. And I keep saying this is because if you are listening to this and you want more, go to my intermediate accounting. Okay. The first principle that we need to be aware of and it's an important principle called the cost principle. And what does it's very simple, but it's very powerful or very important principle simply put accounting information is based on actual cost actual cost is considered objective. What is actual cost? Actually, it's when you buy something for $500, you would record it if you paid $500, you would record the item at $500. Now you bought for $500, but it's worth $500. It's worth $600. It's worth $700. It does not matter. It's what you paid for it. You paid 500, you recorded at 500 because this number is considered objective. The second principle, very important, very important principle. This is the revenue recognition principle. What does it mean revenue recognition? And we're going to see this in future chapter recognition means when do you record? That's basically what we're saying. When do you record revenue? Well, here we go. We have recognized revenue when goods or services are provided to customers and an amount expected to be received from the customer. They don't have to pay you now as long as they're going to pay you in the future. It's revenue. So what does that mean? It means when you provide a service, let's assume I hire you to paint my home. So I hired you painted my home and you build me again. We're going to go with $500. You build me $500. Well, as soon as you build me because you did finish the work, you have revenue as a painter. You have revenue of $500. Why? Because you did the work. So revenue recognized when goods or services are provided. You provided the service to me. Now I'm not going to pay you until 60 days later. That's irrelevant. As far as you are concerned, you have revenue of $500. It's not in cash. Nevertheless, it's revenue. And we'll talk about this later on, but this is an important principle in accounting. Expense recognition principle, very similar to the revenue recognition principle. When you have an expense, you have to recognize the expense. So a campaign report, it's expense incurred to generate the revenue reported. Let's go back to my painting example. Let's assume you hired an employee and that employee cost you $100. So that employee worked for you. Now you're not going to pay this employee until 30 days later for whatever reason. Now although you did not pay the employee now, you have an expense. Why? Because you hired that employee. The expense was incurred to generate revenue. So because the expense was incurred, it means the expense did happen. As long as the expense happened, as long as the expense happened, you have an expense. You may not pay this employee until 30 or 60 days later or that contractor, you have an expense regardless. So basically similar to the similar in concept, the revenue recognition, it means record expense before you pay them in cash. Fold disclosure principle, basically a company reported details behind the financial statement that would impact users' decision in the notes of the financial statements. What does the fold disclosure means? It means when you have additional information other than the numbers that you need to make the users aware of. I'll give you an example just to illustrate the point. Let's assume the company is being sued. There's a lawsuit against that company. Maybe that's relevant to the users of the financial information. In addition to the numbers, they want to know about this lawsuit. So anything that's relevant, and there's a lot about the fold disclosure, which accounting method you are using because you would learn later that you have many accounting methods you can use. You have to tell the users which one you are using and any relevant information, any information that you think it's important, you'll have to disclose it. But this is again, just know the principle, but in the real world, this is much more complicated than just tell them everything that's required. Other things that we need to talk about, let's go back here to this picture. We talked about the principles, few principles. Now we need to talk about certain assumptions. This is all under the app, certain assumptions. When we do accounting, we have to make certain assumptions. What are those certain assumptions? The first assumption is something called the going concern assumption. And what does that mean? So what is the going concern assumption? And it's simplest for it means we are going to stay in business forever. So once you start the business, we're going to stay in business forever. So business is presumed to continue operating instead of being closed or sold. Why is this relevant? This is relevant because when we prepare financial statements, we have to prepare financial statements under the assumption that we're staying in business. Why? Because if we make the opposite assumption, if we are making the assumption that we're going to be closed or sold, it means we're not going to be in business anymore, then we have to report the numbers in a certain way. Do you remember we talked about the cost principle? Let me show you here this cost principle right here. Cost principle means everything should be reported at cost. Well, if you're going out of business, the information about your cost is irrelevant. Now you have to use what's called market value. Well, we don't because we're going to assume we're going to stay in business forever. Now if we happen to go out of business, we have to change the accounting method, but that's way beyond the scope of the scores. So the first assumption is we're going to be in business forever. That's the going concern assumption. Assumption number two transaction or event are expressed in monetary or money unit. What does that mean? That means when you prepare financial statements, you have to tell me whether it's US dollar, euro, yen, so on and so forth. So the monetary unit you are using has to be expressed. I have to know which one because a thousand US dollar is different than a thousand yen. So you have to tell me which currency you are using and you will state this in the financial statement. Another assumption that we make is the business entity assumption. And what does that mean? It means a business is accounted for separately from the from other entities, including its owners. So the first thing is we have an owner and we have a business. Those are two separate entities, the owners and the business are separate. Now we might have a bit an owner of business and many other businesses. Okay, maybe three separate businesses. They are independent. They are owned by this individual or this business owned this business and owned this business or this business owned this business and this business owns this business business. The point is each one of them we account for each one of them separately. Okay, including we don't include the owner as well. So each business is an entity for accounting purposes. Okay. Time period assumption. Well, what does that mean? And we're going to be seeing this much, much more in details and action later on. It means the life of any company is broken down by period. For example, the life of the company could be broken down by quarters. Q one, Q two, Q three and Q four orders, no, Q four. It's the fully yes, the fourth quarter or the life of the company could be breaking down into into periods every six months or the life of the company could be breaking down by monthly. All we're saying is when we prepare financial statements, we have to determine a period. We have to stop at some point and prepare the financial statement based on that particular period. And this is going to become this is a very powerful. This is very powerful assumption and very important assumption that we're going to see later on when we prepare adjustments. For example, doctors, medical doctors, they're interested in knowing on a monthly basis. What's going on in their clinic? Why because they don't have time to to to keep up with their finances, but they may ask someone to prepare financial statement on a monthly basis. And I used to do this all the time when I was in practice, our CPA firm had many clients that are medical doctors, dentists or MDs. And we prepared financial statements on a monthly basis. For example, if you are publicly traded company, it means like Microsoft Apple, one more company that have those stock traded, they have to report, they have to report on quarterly basis. They don't have an option. Now, for small companies, for example, medium size companies, they may want to know what's going on halfway throughout the years. If you're an investor, you want the company to report on a quarterly basis on a mid-year basis. And if you want to, you can ask them to report quarterly. So simply put the life of the company, you can take it and break it down into semi-pieces. Now, all companies, they have to report on at least a yearly basis because they have to prepare their taxes. So at least even small store, you know, mom and pop store, they have to report on a yearly basis because they have to report their financial statements. Last but not least, we have to account in constraints and that's cost benefit and materiality. Cost benefit means only information with benefit of disclosure greater than the cost must be disclosed. So in the end of the year, you don't have to disclose every single thing if the cost of something, overweight its benefit, not benefit to you, benefit to the users, not benefit to you. Well, obviously, you know, everything that's going to, as far as benefit you will take the benefit over the cost. But what I'm, what I'm trying to say is the benefit to the users. If you think it's relevant to the users, then you have to provide it to the users. Okay, but if you think the cost generated is, it doesn't add value to the user, then you have to take this cost benefit into consideration. Also, materiality, only information that would influence the decision of a reasonable person need to be disclosed. You don't have to disclose every single thing. You have only to disclose only the information that's considered material. Now, materiality is a very subjective concept because it depends on the company, the size of the company, the nature of the business, the nature of the event. So all we need to know for now is materiality is whatever influence a reasonable person. Now, what is a reasonable person? We don't have to worry about this here because, you know, you could have a reasonable person that's a regular investor or you could have a reasonable person that's a multi million dollar hedge fund that's using that's open at the same information. What's reasonable to one may not be reasonable to the other, but the point is we don't have to discuss this in here because again, beyond the scope of the course, just know that materiality is one of those constraints. So don't report everything. Only the information that's considered reasonable to be disclosed for a reasonable person. Now, this is all I'm going to cover in this session. The next session I might look at the various form of businesses, especially that we talked about business entity assumption because the business entity assumption. When you run a business, you can you can have the business as a sole proprietary ship, which is one individual. You could run a business as a corporation. You could run a business as a partnership. You're in many type of business organization. So we talk about this just to kind of illustrate this business entity concept little bit further as always. I would like to remind you if you are an accounting students or a CTA candidate, I strongly suggest you visit my website. Consider subscribing and invest in your career. If you have any questions, please email me study hard accounting is a rewarding career study hard. It will pay off the under road. Good luck.
	Hello and welcome to the session. This is Professor Farhad and the session we've looked at the characteristic of various forms of businesses. This topic is covered in financial accounting, basically an introductory accounting course. This topic is covered on the CPA exam, but this is a basic review of the topic. The reason we're learning about this topic is because in the prior session, if you remember, we talked about something called the business entity principle. Let's take a look at the business entity principle again just to see where this fits together. We talked about the business entity principle and we said a business is accounted for separately from other business entities, including its owners. So what we need to explain here is when you run a business, you can run a business under various characteristics, various forms. And we're going to be looking at those characteristics of those forms. As always, I would like to remind you to connect with me only then if you haven't done so. YouTube is where you would need to subscribe. I have over 1,600 plus accounting, auditing, tax and finance lectures. If you like my lectures, please like share, put them in playlists. That helps me tremendously and it helps reach other students as well. This is a list of all accounting courses that I covered, practically all accounting courses that you can think of on undergraduate level. On my website, you'll have resources to additional material such as PowerPoint slides, notes, through false multiple choice. And if you're studying for your CPA exam, 2000 plus CPA questions. So let's take a look at the form, the different forms of businesses and specifically we're going to look at proprietary ship, partnership and a corporation. And this is an introductory course. Therefore, I'm not going to go into details about this, but we're going to look at few things, the number of owners any particular business could have. How is it taxed? What is the owner's liability, legal liability and business life starting with the sole proprietary ship. The word sole means one. So you have one owner by the term by the definition of the term. The good thing about sole proprietary ship, it's easy to set up. You don't need any paperwork. You just open a place, but assign and start your business. For example, this individual starting attack service business business taxation simply put how is the business tax? Well, guess what? The sole proprietary ship no additional business income tax. What does that mean? It means you have the owner that assume the business you have the owner here. And you have the business. Two separate entities. The business makes a profit by the business makes a profit by generating revenues by generating revenues minus expenses. You know, 150,000 of revenues, 100,000 of expenses. We have a profit of 50,000. Guess what? The business don't pay taxes. The 50,000 goes to the owner. Then the owner pay taxes on that profit. So no additional business income tax. So who paid the tax on this profit? Who paid the tax on this 50,000 profit? The owner will pay the tax owner's liability. If you are the owner of a business and it's a sole proprietary ship, you have unlimited liability, which is risky. Risky. Why is it risky? It means you could be responsible for everything owner is personally liable for proprietary ship debt. So if there's any debt involved, the owner is liable for that legal entity. It's not a separate entity. As far as legal, not accounting as far as legal, those two individuals are the same under the law. And that's why you have unlimited liability because they're the same individual. The business life, how long does a sole proprietary ship last? Well, the business end with the owner death or choice of the owner decided to close the business. They can close it or if they die, the business technically no longer exists. Partnership two or more two or more, you need two or more people to form a partnership. These people are called partners. It's easy to set up easy. Yes. And now we have many types of partnership. We have general. And we have limited now. I'm not going to go on to the difference between general and limited because it's the young the scope of discourse. But just need to know there are many type of partnership. So and here we are talking about a general partnership. No additional business income tax. What does that mean? The same concept as the sole proprietary ship. Basically a partnership in general partnership are technically the same. The profit goes from the business to the owners or to the partners. Same thing, unlimited liability. If we are talking about the general partnership partners are jointly liable for partnership debt. Legal entity, same thing, no separate legal entity notice. It's the same characteristic, the same characteristic. And what when does the business end with the partners death sometime or the partners choice they decide to let go. Now again, I did not talk about limited partnership because a limited partnership owners liability will change some owners liability will change. But again, it's the young the scope of this course. Corporation, you could have one owner or more could have hundreds of thousands of owners called stockholders can get many investors by selling stock or share of corporate ownership when the corporation is only one class of stocks. We call it common stock or capital stock business taxation. This is different. This is little bit different than the prior to what happens here is this you have the owners. Here we go. And you have many owners and you have the corporation. Now the corporation makes a profit. The corporation pay taxes on the profit. Then after paying taxes the money goes to the shareholders because the shareholders are the owners. Then these individuals they pay taxes again. So we have here is something called double taxation the fact that the tax is paid twice on the same amount of money. What does that mean? It means the corporation paid the taxes first time on the income. The corporation paid the taxes. Then the owners of the corporation paid the tax on the same amount. The benefit of a corporation is limited liability in contrast to the other two limited liability means if something happened to the business. The owners the shareholders are only liable up to the amount that they invested. They're not liable for corporate acts and that they can only lose what they invested in the business. That's different than partnership. That's different than sole proprietorship. It's a separate legal entity with the same rights and responsibilities as a person. The world corporation comes from the Latin world corpus. Corpus means a body. And that's why it's as far as the law is concerned. It's a legal entity. That's why it's a corpus. It's a body as far as the law is concerned. Business life it haven't indefinite business life. It it it haven't indefinite business life. Now we're going to talk about limited liability company or LLC limited liability company. One or more so you could have one or more they are called members not partners not owners. They're called members under LLC limited liability company. No additional business income tax they are they they get treated like partnership they get treated like a sole proprietorship for taxes so the taxes are paid by the owners. Notice just like the corporation it has a limited liability for the owners also called members. If you think about LLC it's a hybrid has it's a hybrid. What do I mean by hybrid it has the benefit it has the benefit. It has the benefit of a corporation when it comes to the liability and it has the benefit of a sole proprietorship and a partnership when it comes to taxes so it has it both the both of good the both of good words. It's a separate legal entity with the same right and responsibilities as a person. It's a kind of it's a corporation. It has a limited liability and the life is indefinite. So notice LLC is a hybrid LLC is hybrid and no wonder why they are popular form of business. Now this is an overview again this is an overview for a financial accounting course. As always I would like to remind you to go to my website for additional resources if you're an accounting students invest in your career if you're a CPA candidate. It's you study one time in your lifetime for your CPA exam also as an accounting students invest in your education and the next topic we would look at the important account in equation which is assets equal to liabilities plus owners equity good luck in study hard.
	Hello and welcome to the session. This is Professor Farhat and this session we're going to be looking at the famous accounting equation. I'm going to cover the accounting equation as you would cover it and a financial accounting or introductory course. You don't need any prior background. I'm going to go ahead and break the accounting equation for you. And hopefully by the time you are done, you'll be good to go. This topic also could be used if you're studying for your CPA exam. This is basically basic. You need to know this if you're studying for your exam. As always, I would like to remind you to connect with me only in if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance and tax lectures. I don't only cover financial accounting. I cover all these courses as well. Please like this recording if you like it. Share it with others. If you're benefiting from this recording, it means it might benefit other people. So share the wealth. On my website for hatletters.com, you will have access to additional resources if you're an accounting students or CPA candidate PowerPoint through false multiple choice and 2000 plus CPA questions. Check it out. It's an investment in your career, investment in your education. So let's take a look at the basic accounting equation, the basic accounting equation. And here's the equation. It's state that assets are equal to liabilities plus equity. That's the that's the account and equation. Okay. Now it's very important, very powerful equation. And once you understand the account and equation, it's easier to always see the big picture. And that's why that's the first thing with each and accounting. So now you're going to learn about basic concepts that you need to have a good understanding about because it's going to help you throughout your accounting courses throughout your accounting career. So most likely there's a good chance. This is the first time you are listening to this topic or you never learn it before. And this is the first time you're going to learn it and learn it well. So let's get the one. So the first term is assets. So you need to need to know what is an asset. Simply put, asset is a resource. Assets is a resource. Assets is a resource that will provide future benefit to the business. So that's basically what is an asset. And that's almost you need to know for now. It's a resource or assets are resources resources that will provide future benefit for the business. So what does that mean? It means you have something you have something. Now you don't have to own it. It's good if you own it own or control. You don't have to own an asset. Let's think about the real world or think about yourself personally. What could you have that will benefit you in the future? What could you own or control? Think about the car. If you own or control the car, if you could use the car, you can go to work. Do you have a computer? Do you have a cell phone? Okay. Those are all assets. Now we're not talking about personal assets. We're talking about business. Remember when we do a accountant, we do accounting for a business perspective. Now that's what assets are. But the most important asset that you could have or a company can have. And I'm hoping you are thinking about it. And that is cash cash in your pocket. If you have cash in your pocket, it's the best resource that will do anything that will provide future benefit for you in any way shape or form. What can you do with cash? You can pay bills. You can pay your employees. You can buy supplies. You can pay dividend, which is some of the terms you may not understand now. But you can do anything. Cash is an asset. Think about land. If you own a piece of land, it's an asset. If you own or control a building, that's an asset. If you have office supplies, it's an asset. If you have car or vehicle, it's an asset. If you have truck, it's an asset. If you have a machinery, it's an asset. So notice all of those, all these that I named cash, land, building, office supplies, truck, machinery, vehicle, car, all these items, they fit the definition of providing future benefit. You can use them in the business to get benefit. So that's basically what an asset is in an archa. And that's all that you need to know for now. Now there are many other assets that we would learn about later many other assets. But for the purpose of this session, just we need to know what an asset is. So that's what that's what's an asset. So we are done with assets. Let's talk about liabilities. If you want to use one word for liabilities to make it easy, liabilities are that. Now what is that? Hopefully we are all familiar with that. You might have, hopefully we are not, but we are. Okay. So you might have credit card debt. You might have student loan debt. You might have, hopefully not personal loan loan that you took out. You might have a card loan. So notice you have debt or loans. Those are all liabilities. Now what is the definition for a liability? Well, the liability is something. It's something that's going to use up resources to settle simply put liabilities. It's an obligation. Obligation that will require the future, the future sacrifice of assets, generally speaking cash, generally speaking cash, we need cash, we need to use cash to settle the obligation. So obligation that would require future sacrifice of an asset, usually cash liabilities, something happened in the past liabilities occur liabilities occur because something happened in the past. What do I mean by this? Think about it. When do you have a liability is when you did something in the past? Like what? You borrowed money. If you borrowed money in the past, you have a liability today that you have to pay in the future. So basically a liability is today, a liability is today for something that happened in the past and in the future, you have to pay. So it has it has it has a past, a fact, occurred in the fact and a future effect. And once you pay it, it goes away. Once you pay the liability, it goes away. Now we talked about personal liabilities like card loan, credit card debt, personal loan, student loan, so on and so forth. Now for businesses or a mortgage for a house for businesses, you do have also that. Now for the purpose of today, we're going to only cover two types of debts, just kind of illustrate the point. The two that we're going to be defining today for businesses are accounts payable. And what is accounts payable is when the company buys goods or services on account. What does that mean? It means when the company buys goods and services when we buy inventory, when we buy supplies, when we hire someone to do some work for us, what we tell them we tell them we're going to pay you later. We're not going to pay you now. So the company buys those goods and services on account on account means we don't pay now. If we don't pay now, we have a liability called accounts payable. We have another liability that's called notes payable. And what is notes payable notes payable is a fancy word is a fancy word for loan. So notes payable is a fancy word for a loan. And what is alone is when is when the company is when the company borrow money and the company always borrow money company borrows money. They always borrow money. Most companies as far as I know, you know, it's borrowing money is part of doing business. So that's those are two liabilities. Okay, that's what a lie that it is. Now we know what a lie that is we know what assets are. Let's see if we can determine what is an equity. So let's use some numbers to start to kind of explain equity here. Let's assume as a company, I have 200,000 worth of assets. So I have 200,000 worth of assets. And we know what assets are. We have all sorts of assets. And we have 200,000 worth of those list of many things. And we happen to have 80,000 of liabilities. We have 80,000 of liabilities. Now can you complete this account and equation? If I told you we have assets of 200 liabilities of 80, well, I can kind of find out my equity is 100 and 20. Why? Because if assets equal to liabilities and equity, you're telling me I have 80,000 of liabilities. Therefore, I can fairly assume my equity should be 120. Now let's rearrange this formula and make a little bit more sense of this equation. Another way to look at the equation is to say equity equal to assets minus liabilities. That's what equity equal to. If I rearrange the formula, if I simply put if I say my equity is 120 equal to assets of 200,000 minus 80,000 of liabilities, all is fine and dandy. That's what equity is. So what does that mean? Well, another way to look at equity, we can call equity net assets. We can call equity on a personal level net worth. We can call equity residual value. All these words can be used for equity net asset means the difference between asset in your liabilities net worth means after you look within your asset and pay off your liabilities. Those are three words for equity that doesn't help us. So what is equity really? Well, equity is what's left in the company, the value of the company after you pay off your liabilities. The question becomes we know how you we know how we can obtain assets or kind of we know how to obtain assets, how to obtain liabilities if we borrow money, we have assets and liabilities. But what is what the fact that we can't get the money? What is what the facts equity? So what can think about it? What can increase my net asset? What can increase my net worth? What can increase my residual value? What can increase my equity? Oh, well, let's think about it. There are four things that you need to be aware of. Four things you need to be familiar with. Four. Four things we need to be familiar with. Those four, two of them, two of those four will increase equity and two of them they will reduce equity. So we need to know about the account that increases equity and the account that reduces equity. So now we are working only with equity. We're only working with this part of the equation. What are those two things that increase equity and the two things that reduce equity? Well, think about it for a moment. If you want to increase your net worth, if you want to have more assets than liabilities, what would you do? Well, I need to get more assets without increasing without increasing my liabilities. What can I do? How can I get more assets? Well, guess what? If I work if I get a second job or a better job, or if I can generate a second job, I can get a second job. If I can generate more income for myself, I can increase my assets without increasing my liabilities. So what do we call this? We call this a new term called revenues. What is a revenue? A revenue is what the company does to generate more assets. Each company does something different. For example, your university, where you, where you are attending, a generate income by tuition. So they charge you tuition and that's the revenue. If you go on Amazon.com and you buy that sales for Amazon, if you go to your local shop and you buy something from your local shop, that sales revenue for your local shop. If you are, let's assume you are an engineer and someone hires you, then they pay you. That's your revenue, engineering revenue. So each individual, they'll have a different type of revenue. So revenue is what the company does to generate assets. What does on a day-to-day basis? That's what they do for a living. Basically what the company does for a living. So revenues increase equity. Now that's good. So revenues are good. So let's look at something that decrease equity. What could decrease equity? Well, think about it. If you have a business, you're going to generate revenues. But as you're generating revenues, you're going to have to incur expenses. Well, what are expenses? Well, expenses reduces equity. Expenses reduces equity. Revenue increases equity. So what are expenses? Expenses is the cost to run your business. Cost to run your business. So no company can generate revenues without incurring expenses. It'll be great. It will be excellent. It will be excellent. If I can just generate revenues without incurring expenses. For example, when I teach at the university, I have to drive my car over there. So yes, I am generating revenue. But I also have to pay for gasoline. I have to pay for parking. I have to pay for other expenditure. So those are expenses. For example, a company might have to pay for their utilities. They have to pay for their cell phone. They have to pay for the internet service. They have to pay for insurance. They have to pay for rent. So what is an expense? It's the cost to run the business. So that's the second item that affect equity. And it's kind of think of it as the opposite of revenue. Now here's what we need to know about revenues and expenses. We have a formula that says if we take our revenues minus our expenses, it's going to give us the difference between those. It's going to give us net income or net loss for that matter. When that income. So it's the first thing I want you to learn or loss simply put if we have revenues of 80,000 expenses of 30,000. We have a net income of 50,000. And that's what net income is. Okay net income is the difference between revenues and expenses. They are both equity account. Both revenues equity and expenses are equity. One increases equity the other one decreases equity. Now those are the two equity account. Now I said there are four. So we have to look for the other two. So let's think about if you like a company, what can you do if you like a company if you like a company you can invest you can contribute capital. So you can give the company money. So if you like my company, you'd like to like your company. Great. If you like my company invest in my company. Give me money. Give the company money and I'll give you shares in the company. So we need to understand is we have something called. Kind. Tributed. Capital. Or we're going to see it the account is called common stock. What is that account? Well, if you like a company and this is going to increase equity. This is going to increase equity. So we already identified the two accounts that increase equity revenue and common stock. What does the common stock represent? It represent how much the investors invested in the business. What does that mean? If we want the investors give you money when the investors give you money. Okay, they invest in your business. It means they want to be owners. If they want to be owners, they have to give you money. When they give you money, your assets go up when they give you cash and your common stock goes up. So that's another way to increase your equity is to try to convince people to invest with you. To invest in your company invest in you. It's the company. That's what contributed capital is now. Why would people invest in your company? So why would you like a company? Well, you like a company for one reason is because the company is good. Good in a sense that it's making a profit. And what it makes that profit. They're going to give you part of the profit. So what's going to happen is this we have another account that when they give when they make a profit. Let's go back to this actually to this example. You remember this fictitious company here. They made 80,000 of revenues 30,000 of expenses. The company made 50,000. Well, the company might decide to give 30,000. To the owners when they give 30,000 to the owners, this is called the term is called dividends. So we're going to say we're going to say dividend 30,000. So they pay the development of 30,000. Well, if they pay the dividend of 30,000, that means they take they took the cash from the business and they gave it to the owners. Well, guess what? The equity of the business will go down. So when the company pays out dividend, the equity of the business will go down. Now, let's go back here and expand this a little bit further. Let's go back. So we made an income of 50,000. Then we paid dividend of 30,000. No reason why I put an in parentheses. What's left in the company is 20,000. Well, what's left after we pay out the dividend? The dividend is called retained earnings retained earnings. It's what the company kept after after they pay out the dividend. So the company made a profit of 50,000. They pay 30,000 in dividend. What they left is 20,000. So net income minus dividend is retained earnings. And but all of those all these accounts revenues, expenses, common stock and dividend. They're all under the umbrella of equity. Now, let's look at what we called the expanded account and equation. I'm going to erase everything that's on the board. So let's look at the expanded account and equation as that's equal to liabilities minus equity. Common stock minus dividends. So remember equity. So now we have the umbrella of equity under equity. We have contributed capital and contributed capital is common stock. Then we have revenues minus expenses. Remember everything under equity here. Everything under equity revenues and expenses gives us net income. And remember what we were doing. We said revenues are 80, expenses are 30. And for the purpose of our example, we had income of 50,000. Then we paid dividend of 30. I should have used a different number. That's fine. And what happened after we pay out the dividend to retain earnings is 20. So notice dividend revenue and expenses. They are all retained earnings account. Then we have common stock. So simply put all in all equity is composed of contributed capital. One retained earnings to now retained earnings can be broken down further into revenues minus expenses, which is not income net income minus dividend equal to retained earnings. So this is basically the expanded accounting equation. Now the only the only reason you're going to learn how to do this is to first understand the big picture. And what we're going to do in the next session. We are going to analyze business transaction using this accounting equation. Now as always, I would like to invite you to connect with me also like this video if you like it. Cheer it. Please visit my website if you're looking for additional resources and serious about your accounting education, especially if you're studying for your CPA exam study hard. Good luck. And like the videos and share them if they benefit you it might mean they might benefit other people. Good luck.
	Hello and welcome to the session. This is Professor Farhat and this session will analyze business transaction using the accounting equation. Now if you don't know what the accounting equation is, I did cover this in the prior session in details. You want to make sure you are familiar with the accounting equation because the assumption here is you know what your assets are, your liabilities, equities, which are these accounts here. If not, please review the prior session. This topic is usually covered in a financial accounting or introductory financial accounting course. Obviously you need to know this for the CPA exam, but this is really basic material, but it's always good to go back and review if need be to make sure you know the basics. As always, I would like to remind you to connect with me only then if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance and tax lectures. I don't only cover financial accounting. I cover many other accounting courses. So please subscribe if you like this recording, like it, share it. If it's helping you, it means it might help other people. So share the wealth. It's free. On my website, you will have additional resources such as through false multiple choice, CPA questions, CPA quasi CPA simulations. If you're studying for your CPA exam and you're serious about success, I have 2,000 plus practice questions. Let's go ahead and start to analyze transactions and what do we mean by analyzing transaction? Let's learn some rules about analyzing transaction. All what analyzing transaction means it means you read the transaction and you know what happened. So the first thing you want to know is, and if you're not copied this down, you want to ask yourself what happened. Simply put, you read a statement. Do you understand what happened in that statement? If you don't understand, then that's it. You are stuck. You are lost. Okay? 2. Then you have to, once you understand the transaction, then you have to identify the accounts. And I put accounts plural because we're going to have at least 2 accounts. We could have more than 2, but we're going to have at least 2 accounts. So that's the second thing you have to do. And when you identify those 2 accounts, you have to tell us the type of the account. What is the type? Is it an asset? Is it a liability? Is it revenue? Is it expense? Is it common stock? Or is it dividend? So the account will fall one under one of those 6 categories for now. Either an asset, a liability, a revenue, an expense, a common stock and dividend. And the third thing you have to know is did the account go up or did the account go down? So remember you identify 2 accounts. What happened to each account? Did it go up? One go up, one went down, both went down. It could be that both went down or they both went up. So one could go up, one could go down, both go down, both go up. It could be any combination of these. So this is how we analyze transactions. Make sure you copy these notes as I'm going to go through them real quick after each transaction. And after each transaction, we confirm the the account and equation holds. Let's look at the first transaction. C Taylor invest $30,000 cash to start the corporation name fast forward. So first thing is what happened? What happened is this? C Taylor, this individual decided to start a company called fast forward. So the start of the company, you need to invest money. So what did C Taylor did? C Taylor invested $30,000 cash. Now, which accounts are involved? Obviously, and here's a tip for you. When you are starting to learn this, if you see the word cash, if you see the word paid, if you see the word received, meaning you paid cash, received cash or the word cash, it means cash is involved. So that's the first account. So that's that's easy, but I already identified one account cash. What is the other account? Well, when I, when I, when the owner invest money in the business. So the owner gives cash. What do they get in return? Cash is considered contributed capital. It's their mean their investing in the company as we learn about in the prior session. They get in return common stock. What is common stock is ownership interest. So the company's cash will go up and the company's common stock will go up because the company would issue more cash. I'm sorry, will issue more stocks. They would receive the cash. Therefore, the accounts involved is cash. Cash is the account asset is the type of the account. It's an asset and it goes up. Common stock is the account. Equity is the type. Okay. Now we could also call it common stock because under, you remember under equity. If you remember from the accounting equation, remember under equity. We have four accounts. We have common stock. One, dividend two. Three is revenues. Four is expenses. Now you can call all these four equity. Equity account. I like to have their own classification. I would like to say common stock equity, dividend equity, revenue equity, expense equity, but I like to name them by their own account. So what you do now, what the company will do. Now we're going to keep track of these accounts. So if you're not working and you'd like to follow this example, the best thing to do is to have an Excel sheet where you have cash supplies, equipment, accounts, table, notes, table and common stock. Something like this, a grid like this or you could do this in Excel if you want to. It's up to you. It's up to you. But make sure you have, you know, those are the accounts we're going to be using. So make sure you have enough space so you can work. We're going to have work in eight or nine transaction. So what happened in this transaction cash went up. Therefore, this is the transaction number one cash went up. Okay. What else went up? Common stock, common stock went up. Now we now we need to run the balance. How much cash do we have? This is the balance line. This is called the balance. You have $30,000 in cash. The business has $30,000 in cash and how much equity the balance is 30,000 is 30,000 of assets equal to 30,000 of liabilities plus equity. And the answer is yes, the account and equation holds assets equal to liabilities plus owner's equity. We just analyze our first transaction. Let's look at transaction to the company, which is fast forward purchase supplies, paying 2500 cash. So ask yourself what happened. You went to an office supply store and we bought supplies. How much supplies worth 2500 and we paid cash. Good. So cash is involved. Cash is an asset. Cash is going to go down. What did we buy? We buy office supplies. So here's what happened. We gave them cash. They gave us office supplies. Supplies. This is what happened. So the accounts involved is cash cash is an asset. Cash is going to go down office supplies. Supplies is an asset. We have more supplies supplies. Gonna go up. Okay. So let's take a look now on the grid to see how this all fits together. Now from the prior transaction. Remember we have $30,000 in cash. $30,000 in common stock. Now we're going to look at transaction to and transaction to notice cash is negative notice the parentheses to reflect its negative. And supplies went up. So cash went down supplies went up. Now we need to run the balance. Now 30,000 minus 2500 equal to the balance of 27,500. 2500 plus zeros 2500 zero equipment zero accounts payable zero notes payable zeros common stock. We still have 30,000. Now we need to make sure our assets equal to liabilities and equity is this plus this equal to 30,000. Yes. So the account and equation hold and remember those are the balances this line here. Let me highlight the balance line. This is the balance. It means how much you have of things. This is the balance. Okay. Transaction three we purchased equipment for cash. We purchased equipment and we paid 26,000 dollar cash. It's quite an expensive piece of equipment. Okay. We paid cash. So what your accounts are involved easy cash is involved cash is an asset cash is going down. So we gave cash. What did we get in return. We got equipment. So cash is going to go down. Equipment is going to go up. Cash will go down. Equipment will go up. They're both assets. So we exchange one asset into the other. Let's take a look at the grid now. Now this is the prior to this is transaction one. This is transaction to know what work on transaction three cash will go down 26,000. Equipment will go up cash when down. Equipment went up. Let's look at the cash balance now. The cash balance now if we take 30,000 plus minus 2,500 minus 26,000. The cash is 1,500 supplies 2,500. Now we have equipment balance of 26,000. No counts. No notes. No notes. We still have common stock of 30,000. Now we add all the assets equal to 30,000. We add liabilities and equity equal to 30,000. Okay. So far so good. All we did is we contributed money to the company and we took this money and we bought supplies and we bought equipment. Let's take a look at this transaction. We purchased supplies. We said, yes, we need more supplies of 7,100. And here's how we did it on credit. So this is extremely important here. On credit means what it means we did not pay for the supplies. And this is what happened in the real world. In the real world you buy some stuff. You buy material and you don't pay. It's called you bought it on credit or on account. Sometimes it's on credit. Sometimes it says on account on credit or on account. Now which accounts are involved. Obviously you bought supplies supplies as an asset. So here's what happened. You bought supplies. You have more supplies. They gave you supplies. What did you do? Did you give cash? And the answer is no. You did not pay cash. What did you give? You gave them promise to pay. You say, I'm going to pay my bill. Don't worry. I'm going to pay my bill. You gave them a promise. That promise is called accounts payable. That promise is a liability because you have to pay it in the future and it becomes a debt. So supplies is an asset. Supplies goes up and accounts payable as a liability. Now we have more liabilities. We have more promises to pay liabilities go up. Let's take a look at how this all fits together on the grid or on the running the balance. So these are my, this is transaction one transaction two transaction three transaction four. I'm going to have more supplies. And I'm going to have for the first time a liability called accounts payable now that that's run the balance. We take the cash still as the prior balance 1500 now we have more supplies. We have 9,600 of supplies 26 of equipment 7,100 of accounts payable. So this is new. We have no noticeable payable and we still have common stock of 30,000. Now if we add all the assets equal to 30,100. If we add the liabilities and equity if we add the liabilities and equity 37,100. So notice now we have more assets. But we have more liabilities to so now we did is we generated more asset we bought more asset. But that asset came from a liar ability is this good? Yeah, not that. But you want to generate more assets from revenues. Okay. Now let's take a look at transaction that affects revenues expenses and withdrawals and what are these account called equity account. The only thing that's not there is common stock and we already work with common stock. The first transaction was common stock. So let's take a look at the first transaction provided consulting services to a customer and received 4,200 right away. Excellent. So what happened is we did some work. We provided consultant work to one of our customers and guess what they paid us 4,500. So which accounts are involved if they paid me cash. I received cash of 4,200. What did I give in return. I provided a service. What did we call this? We call this revenue. So I gave them revenue. They gave me cash. So cash will go up and revenue, which is an equity account will go up. Now you're saying I gave them revenue. Yes. But I record the revenue. I have more revenues now, which is good. So cash went up revenues went up and this is called an equity transaction. Why it involved an equity transaction because it involved an equity account, which is revenue. Now let's take a look at our balances. Remember, this is the prior balance from the prior screen. This is what we had the prior screen 1500 cash 96 supplies, 9600 equipment, so on and so forth. Now we're going to have more cash, which is good. And now we're going to have more revenues for the first time, 4,200. Now our cash is 5,700 supplies is 9,600 equipment, 26,000 accounts, payable, common stock and revenues. Again, if we add up all the assets, now we have more assets, 4,300. If we add liabilities and equity, we have 4,300. Now we have more assets, but part of it is because we were generated more revenues, which is good. This is what we want to do. We want to generate more revenues. Payed rent of a thousand dollars and salaries of 700 dollars. Now we paid once he's once he had the word paid, it means we paid cash. So what happened? We paid cash. Okay, so we gave cash. And what did you get in return? We in return, the employee worked for us. And we have a rental prop. We have a rent. We have a rent. Okay, so we received rent and employee services. So cash will go down, obviously, cash is an asset will go down. And now please note, our expenses, which is an equity always go up. So make sure you notice expenses, write this down expenses, always increase. Now expenses reduces equity. Remember, we talked about this in the prior session expenses reduces equity. So don't confuse this arrow going up to this arrow going down. The arrow going up is for the account. Your expenses don't go down. Your expenses always go up. They stop, but they don't go down. As you have more expenses, your equity goes down. Okay, we have rent expense and salaries expense. Now remember that the balance and the expense account actually increase always. But the total equity decreased because expenses reduces equity. So let's take a look on the grid about this transaction. So cash is going to go down 1000. Expenses will go up 1000. Now this negative is for equity. Cash will go down by 700. Expenses will go up by 700. Now we're on the balance again. Now we have cash of 4000. Supplies of 9,600 equipment of 26,000 accounts, payable 7,100. No notes, payable comments, stock revenues and expenses. Now when we, when we net these, we take 7,100 plus. Plus 30,000 plus 4200 minus 1,700. And it's going to give us 39,600. Notice our assets went down from the prior transaction. Notice the prior transactions from the prior, from the prior balance. We had assets of 41,300. What we did now is we spend some of our assets on expenses. And as a result, our assets went down, which is makes sense. Now we provide services and facilities for credit. So here's what happened. We provided consulting services, which is good of 1,600. And we provided rent facilities for 300 to a customer. However, it was on for credit or on account. What does that mean? It means we provided more consultant services. However, the client says, I'm not going to be able to pay you now. I'll pay you in the future. So here's what we did. We gave services. We gave services. Our services, our service revenue will go up. I mean, we provided a service and return will receive a promise to be paid. We received a promise to be paid in the future. Now what do we call this promise to be paid because we provided the service? We call this accounts receivable, which implies that we are going to receive money in the future. That's what implies. It implies we are going to receive money in the future. So, so this is the new account. This is a new account account receivable account receivable as an asset. It's going to go up. And we have consulting revenue revenue is an equity and we have rental revenue because we have to type of revenue. We provided consulting services and we provide rental services as well. So consulting services go up, which is equity rental revenue goes up, which is actually now. Let's take a look at the grid here. So our account receivable go up. These are the prior balances from the prior screen. If you're not sure, go back. Here's what happened here. Account receivable goes up and we have two type of revenue. We have consulting revenue and rental revenue now cash 4,000 account receivable 1900 supplies 9,600 equipment accounts payable comments stock. Now we have more revenues and expenses 1,700. We do the same thing. We add up all the assets. This is the balances. We add up liabilities and owners equity remember to deduct the expenses. They're the same. And notice our assets went up wide because we provided a service. Let's look at transaction 9 transaction 9 client and transaction 8 pays. What did they pay? They pay us cash 1,900 for the consulting services. Excellent. So they pay us. So what happened to our cash account? Well, we received cash. Okay, which is good. Cash is going to go up cash is an asset. Why did they pay us cash? Because for transaction 8, what happened in transaction 8? We provided consulting and rental revenue. Now they promised the pay. Well, guess what? They gave us cash. We're going to have to remove the promise. So the account receivable has to go down. We have to remove the receivable. We can no longer say you still owe us money. Why because they paid the full balance? So cash will go up and account receivable, which is an asset will go down. So they're both assets 1 go up. The other one goes down. Let's take a look at the grid here. I have more cash. I have less account receivable. Now notice I did not change my revenue. My revenue is still the same. Now I have more cash. What is my balance and receivable now? Nothing zero supplies, equipment, accounts payable, common stock revenue still the same and expenses still the same. Again, nothing have changed from the total asset did not change. All what happened this 9,900 became cash. Payment of accounts payable fast forward pays 900. What did they pay? They pay cash as a partial payment for supplies purchase in transaction 4. Let's go back to transaction 4. Just to kind of show you what happened in transaction 4. In transaction 4, this is what happened in transaction 4. We bought supplies, but we bought them on credit. We bought 7,100 on credit. So we have the supplies, but now we have to worry about the payment. Guess what? We are going to make a payment. Are we going to pay the full amount? No, we are not going to pay the full amount. How much are we going to pay? We're going to make a partial payment. We decided to pay. Let's see. We decided to pay. We decided to pay. Let's see transaction 10 I believe. There we go. We decided to pay 900 dollars. So it's only we owe them 1 7,100. We're only going to pay 900. Okay. So what happened to the cash? Cash will go down. So we gave them cash. And as a result, we are going to reduce our liability accounts payable. So this is what we receive and return the benefit of reducing the liability. Okay. So here's what's going to happen. Cash will go down. Cash will go down and the liability will go down as well. Now that's run the balance. Cash is 5000 receivable zero supplies, 9600 equipment, 9600. What is our balance and accounts payable? 6200. So we still owe 6200. Common stock is the same. Ravino the same and expenses are the same. Notice our cash went down and our liabilities went down. Therefore our assets went down and our liabilities went down by the same amount. Therefore the account on equation holds transaction 11 payment to cash of dividend to owners. So the owner took money out to remember she's C Taylor invested money in the company. Now they took the money out. So cash is going to leave the business. 200 dollar cash is going to go down. And what's going to happen? The owner is going to get a payment for personal use. The payment for personal uses called dividend. Okay. So let's take a look at this. So cash will go down. Obviously cash will go down and dividend equity and dividend equity. And dividend equity like expenses equity like expenses as an account. It will always go up. It will always goes up as an account. But as a result, it will always reduces equity. So as an account, it will go up. In regards to equity, it comes down. Remember that dividend actually increase just like expense, but total equity decrease because dividend causes equity to go down. Now this is the let's run the transaction cash will go down by 200 dividend will go up by 200 let's run the bad the balances. Now cash is 4,800 receivable zeros of lies 96 equipment 26 it comes 62 common stock. We have now 200 of dividend 6,100 of revenues 1700 of expenses total assets equal to total liabilities plus equity. Obviously our asset went down because we paid off. We paid dividend. Now these are this column here. This column here we call the balance. This is the ending balance of each account. So if I ask you how much cash do I have, well, you would say your balance in catches 4,800 zero and accounts receivable 9,626,000 in equipment 6,200 accounts payable 30,000 common stock 200 dividend 200 not negative 200 200 6100 revenue and 1700 expenses. Now we're going to summarize this. This is everything that we did. This is the transaction transaction one transaction two balance transaction three balance. Transaction four balance transaction five balance transaction six balance transaction seven balance and this is the ending balance for that period that period could be a month. I don't know what that period is could be a year. It doesn't matter. Here are the balances. Now what's the next step? What's the next step after you have your balances? Once you have the balances at the end of the period the next step is to prepare financial statements. So in the next session, I'm going to be using these these these balances to show you how to prepare financial statements. So as always, I would like to remind you to like the video if you like it share it. I strongly suggest you visit my website for additional resources if you're studying for your exam or studying for your CPA exam you want to invest in your career you want to invest in your education. Check out my website that might help you. Good luck study hard accounting is worth it. It's challenging but it's worth it.
	Hello and welcome to the session. This is Professor Farhat and the session we would look at how to prepare financial statement. This topic is covered in financial accounting, basically an introductory course. Also the topics are covered on the CPA exam, but this is very basic explanation of the topic. As always I would like to remind you to connect with me only and then if you haven't done so, YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance, and tax lectures. This is a list of all the courses that I covered, including hundreds, if not thousands of CPA questions. On my website, FarhatLectures.com, you will have access to additional courses, material, PowerPoint slides, through false multiple choice. And if you're studying for your CPA exam, 2000 plus CPA questions, I strongly encourage you to check out my website. So the first thing we're going to look at is the four major financial statements and purposes that I'm going to illustrate in an example, how do you prepare each financial statement? So the first statement we're going to look at is called the income statement. What is the income statement? Simply put, the income statement looks at your revenues minus your expenses. So your revenues minus expenses. It described the company's revenues and expenses in compute, net income or loss. So if you have more revenues than expenses, let's assume you have 10,000 in revenues, 7,000 in expenses, then you have 3,000 of net income because your revenues are greater. But if you have 10,000 of revenues and 12,000 of expenses, then you have and that loss of 2000. Simply put, it tells you whether you are profitable or not for a particular period, over a period of time. Period means not at point in time, it's for a period of time, for example, a month, a year, a quarter. So this is what the income statement and obviously we can look at an income statement in a moment. The second financial statement we're going to be looking at is called the statement of retained earnings. And if you remember, we talked about retained earnings. And what did we say? Let's go, let's go with this example. If revenues were 10,000, expenses were 7, the company made a profit or net income of 3,000. Now what can the company do with this net income? They can distribute some of it. For example, they can, let's do 50, 50. They can distribute 1,500 individend and they can keep the 1,500. So the amount that they keep is called retained earnings. The amount that you keep from your earnings is called retained earnings. So the statement of retained earnings is explained to changes and retained earnings. So it's going to start with retained earnings and we're going to look at it, look at a look at an actual retained earnings. But basically it's going to start with retained earnings. It's going to be beginning, VEG, beginning retained earnings plus net income minus dividend. And that's going to give us ending retained earnings. So this is the whole purpose of this statement of retained earnings. It's going to explain to you what happened. Those are the changes and retained earnings. So that's the purpose of retained earnings. And obviously we can look at an example. The third financial statement is called the balance sheet. A balance sheet. And by the way, retained earnings also for a period of time, just like the income statement. The balance sheet described the company's financial position. It tells you how much assets you have liabilities and equity at a point in time. Point means 1.1 day, a point in time, a point in time. So what does what does the balance sheet chose us? The balance sheet chose us the assets equal to liabilities plus equity. That's the balance sheet. And those two should equal to each other. Now what is equity? You're going to see that earnings a sport of equity. We'll see that in an example. What we're going to look at a balance sheet. The last financial statements, which I don't cover in financial accounting, it's called the statement of cash flows. It identifies the cash inflows and the cash outflows. If you are looking to learn about this statement, you have to go to my intermediate accounting course, specifically chapter 23. There's a one whole chapter about the topic or Google or YouTube for had statement of cash flows or for had chapter 23 statement of cash flows. Okay. So to prepare the financial statements, we're going to be looking at these summaries of transaction that we prepared in the prior session. And in the prior session, what we did is we looked at all these transactions, all of them. We looked at all these transactions. And what we end up is with the ending balances of these accounts. Cash account receivable, zero supplies, equipment, accounts, stable, common-stod dividend revenues and expenses. So we're going to be looking at these ending balances. And from these ending balances, we will be preparing the financial statements. Which statement do we prepare first? First, we're going to prepare the income statement. So for every financial statement, you're going to have three headings. It's going to be name of the statement, fast forward, the name of the statement, income statement, and the date. Notice, it's a period of time. So the the the income statement is for a period of time. And this is for the month and that December 31. So it's not a point in time. It's not December 31. It's four month ended. It means it covers the whole month of the summer. Now, what goes on the income statement? Well, what goes on the income statements? Your revenues minus your expenses. So first, you have your revenues heading. And under revenues, you could have one or more revenues. In this example, we have two revenues. We have consulting revenue. And we have rental revenue, a total of 6,100, 6,100. Now, what did this what were these numbers came from? Well, they came from here. They came from the transactions. And this is the this is the rental revenue and the consulting revenue. Okay. So we have rental and consulting. And this is what we did. So all these numbers are coming from that from that exhibit in case you are wondering. So this is our total revenue 6,100. Then we deduct our expenses. Then we have an expense heading. Then we have a bit before I proceed, single underline means we are performing a computation. So 5,500 plus 300 equal to 6,100. Then we have expenses. Then we indent a little one. We have a list rent expense. We have salaries expense. Those are those are two expenses. Then we add them up. 1,700. Notice we add them up equal to 1,700. Now we are going to take a difference between revenues and expenses. And that is going to be net income. So notice under net income, the 4,400 is double underlined to indicate this is the last number on the financial statement. So this is the income statement. What does that tell us? It tells us that during the month of December of 2019, we generated more revenues than expenses. 4,400 more revenues and expenses. How so? Well, the revenues were 6,100. The expenses were 4,700. The difference is positive 4,400. Is that good? Of course, it is good. We want to generate we want to generate positive net income. We want to generate more revenues than expenses. So that is the income statement. In the real world, sometimes this is called the PNL profit and loss statement. Then we are going to look at the statement of retained earnings. Same thing. The name of the company, just like the income statement. The name of the statement statement of retained earnings, then the date. The date is the same as the income statement. It is for a period of time, for a period of time. Now, how do we how do we prepare the statement of retained earnings? The statement of retained earnings explained the changes in retained earnings. What does it mean? It is going to look at the beginning and look at the end and tells you what happened in between. So the beginning was zero. When we started this company, we did not have any retained earnings. It happens to be zero because the company was brand new. Then we had income of 4,400. Income increases retained earnings. Then we paid out dividend less dividend of 200. So they made a profit of 4,400 and they only took a small amount out of the profit. So the ending retained earnings is 4,200 and noticed this number is underlined to indicate this is the last number on this financial statement. Simply put, we had no retained earnings. Now we have 4,200 and retained earnings. So this is the statement of retained earnings. The third financial statement is the balance sheet. And on the balance sheet, we're going to have the name of the company, the name of the statement balance sheet and the date. Now, I want to make sure you understand that the date is for a point in time and contrast to the other two statement. It's important. It's only a point in time. The balance sheet is going to show us our assets and our liabilities inequity. So our assets are 4,800, 9,626,000. Total assets of 40,400, notice 40,400 is double underlined. In case you're wondering where these numbers are coming from, again, it's from the previous slide when I started. So you list all your assets in order of liquidity. Later on, we would look at a classified balance sheet. Then we looked at our liabilities. We only have one liability accounts payable. Then we look at our equity. Now, our equity is composed of two things. Common stock is one, what the investors put in the company and retained earnings that's coming from the statement of retained earnings. Then we have total equity of 30, 34,200 liabilities plus equity equal to 40,400 assets equal to liabilities plus equity. Now notice we have to prepare those financial statement in order. First, the income statement. Then the statement of retained earnings because it feeds into the income statement feeds into statement of retained earnings through the income statement. Then the balance sheet last because we need to retain earning to complete the balance sheet. So this is in a nutshell, how we prepare financial statement. Now, in an intermediate accounting course, you're going to have one whole chapter about the income statement, one whole chapter about the balance sheet. It's going to be going to be a little bit more involved. If you have any questions, any comments about this please let me know. As always, I would like to remind you to visit my website for additional resources, especially if you are studying for your accounting courses or CK exam. Invest in your career. It's worth it. It's a lifetime investment. Study hard and good luck.
	Hello and welcome to the session. This is Professor Farhad and this session will be looking at the famous debits and credits. It's that concept that gives students some headaches. This topic is typically covered in a financial introductory accounting course and obviously you would need to know this if you are setting for the CPA exam. Now as always I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting or a thing finance and tax lectures. For example this lecture goes under financial accounting which I already have over 150 lectures but I do cover other accounting courses. Now if you like my lectures please like them, hit the like button. It helps me tremendously. Share them with your classmates, with your friends and please connect with me on Instagram. On my website, FarhadLactures.com you will find additional resources if you are studying for your accounting courses or you are studying for your CPA exam especially if you are studying for your CPA exam. You'll have through false multiple choice practice exercises and 2000 plus practice CPA questions. If you are studying for your CPA exam or you are an accounting student that looking for additional resource please consider visiting the website. So let's take a look at Debits and Credits which is what we are going to be talking about is first something called the T account. So the T account comes with Debits and Credits. What is the T account? It looks like a capital B which we are going to see in a moment. It represents basically a ledger account and is used to show the effect of one or more transaction. So where is the Debits and Credits come from? Where is the idea? It comes from this T account. Why is that a call the T account? Because it looks like a capital T and this T account has two sides. One we call it the Debits side and one we call it the credit side. Now the first confusion that student experience when they are learning about Debits and Credits they think about Debits card and credit cards. Let me just clarify this and get this out of the way. Here's a debit card and here's a credit card. They have nothing to do with the Debits and Credits that we're going to be talking about today. I'll tell you the story. When I started teaching accounting, which I still teach accounting, when I have expired credit cards and debit cards I bring them to class and I bring a scissor and I cut them in front of my students to remember that what we are talking about today has nothing to do with debit card and credit cards. I'm accent them out. So this way you forget about this. So let's go back to what we need to know. So what is a debit and what is a credit? So if I ask you on the exam what is a debit and what is a credit from a T account perspective, debit means left. So the right answer is the left side. That's all what debit is period. Credit means right side of the T account. That's all what it means. Debit means left credit means right. That's all what it means. Now through debits and credits we're going to keep track of the various accounts. Now how do we keep track of the various accounts? Now remember that we have six different categories of accounts. We have assets and we learn about those in the prior session liabilities. If you don't know what these are or the accounts that comes underneath them under these categories, you want to make sure you want to go through the prior session. And we have a third category called equity. Now under equity we have the expanded equity equation. We have common stock, dividend, revenue and expenses for different categories. Okay. So those are the basic categories. Now what you need to know is this each account will have a debit side and a credit side a debit and a credit. So one and so forth. So each of these accounts. So under cash we could have many cash accounts. We could have as a cash we I'm sorry under assets. We could have many accounts cash land account receivable supplies property, plant equipment, so on and so forth under liabilities. We could have accounts payable notes payable so on and so forth. Okay. Common stock usually it's one account dividend usually one account revenues. We could have more than one account and expenses. We have many accounts, but it doesn't matter. We're going to learn about the debit and credit that applies to each category of accounts starting with assets. Here's what you need to know assets. The increase on the debit side notice the plus sign is on the debit side. So you need to memorize that assets increase on the debit side. Well if they increase on the debit side it means they decrease on the credit side. So if you know it's an asset you know it's gone up we're going to increase the asset liabilities. They increase on the credit side. Well if they increase on the credit side they reduce on the debit side. Common stock the increase on the credit side. If they increase on the credit side it means they get reduced on the debit side. And for a financial accounting students if you are just starting accounting just cross out the debit side under common stock. What does that mean? I'm going to tell you right now common stock don't go down although it might go down in the real world when the company closes but generally speaking you don't debit common stock. Common stock always go up. Dividend it increase on the debit side. It reduce on the credit side. Also if you want to for now if you are starting accounting students we don't credit different although we are going down the road but normally we don't only under special circumstances we credit dividend. Therefore if it's a dividend you know you know dividend is involved think about a debit. Revenue it increase on the credit side. Obviously it reduced on the debit side. Also what I want you to notice what I want you to note is revenue don't go down just for now. It's going to go down eventually at some point at the end of the accounting period but don't worry for now as you are starting to learn about debits and credits revenues don't go down for now. Expenses they go up on the debit side. Also for the sake of simplicity for now expenses don't go down so we don't credit expenses. Do we ever credit expenses? Passable yes we might and we will at the end of the accounting period though but normally we don't credit expenses. So notice what I just did under the equity notice those are the four equity account they're kind of one directional they they all they all go up and they don't go down now would they go down? Sure they will everything goes down but for our purposes think of them they'll always go up for now until you learn them then you will eventually learn about something called the closing process and during the closing process we'll reduce them down but for now they don't go down to make your life easy for now okay now so what do you need to do about these debits and credits well you need to memorize them well you might be saying hold on a second so just how do I memorize this well here's I'm going to give you an harmonic help you to memorize this I want you to notice that assets dividend and expenses notice they all increase on the debit side so this is how I learned it I said the four dividend the four dividend the four expenses and A for assets DEA drug enforcement administration these account they go up on the debit side and to make it easy D for debit so all we need to memorize is this if it's a DEA drug enforcement administration account dividend assets and expenses these account increase on the debit side so if they are not DEA they increase on the credit so ask yourself is this a DEA account is this account an asset an expense or dividend and is it going up if it's going up and it's one of these accounts I'm going to debit that account so this is a way to memorize this harmonic okay DEA now you might be saying why do assets dividend and expenses work a certain way then liabilities, comments stock and revenues increase on the credit that's a normal question why that's the case now I'm going to tell you why you may or may not understand why for now you don't have to understand why you just have to know why for now the reason is this revenues, comments stock and liabilities they kind of work the same way assets dividend and expenses they also work the same way and that's why the debits and credits are that way okay what does that mean well here's what it means when we generate revenue we increase assets when when the company generate revenue when we incur revenue assets go up when we contribute money to the company when we contribute comments stock when we contribute to comments stock asset goes up when we incur a liability also asset goes up so when we borrow money asset goes up now we could also incur liability for an expense but if we incur liability for an expense we're not using up assets kind of we're conserving assets let's take a look at dividend expenses and assets when dividend goes up asset goes down because when when we pay dividend we pay dividend out of cash when we eventually settle expenses when expenses go up asset goes down and specifically eventually how do we settle our expenses we pay cash how do we settle our dividend most likely cash and when we acquire more assets when we acquire more assets cash goes down eventually we either bought the asset with cash or bought it on account so that's why they work the same way but anyhow as I told you a second ago you don't have to worry about why they work the same way for now as a financial accounting student you just need to know that dividend expenses and assets the increase on the debit side now you need to know one more thing about these accounts and that's important for your understanding of how the tea accounts work we have something called the normal side of an account assets they will have the normal side of debit liabilities will have a normal side of credit comments stock will have a normal side of credit dividend will have a normal side of credit I'm sorry debit revenues will have a normal side of credit and expenses will have a normal side of credit and hopefully you know this one thing that the normal side is the increase side what does that mean it's the side that the account increases on is also called the normal side also called the normal side all the normal balance what does that mean it means when we run the balance for all assets they would have a normal balance of a debit in other words we'll have more debits than credits even if we have zero we'll put the zero on the debit liabilities when we run our liabilities balance at the end of the day the normal balance will be credit because we're going to have more credits than debits and even if we have zero as a balance we put it on the credit same thing with comments stock dividend revenues and expenses those are the normal balances so you need to know what's the normal balance and it's easy if you remember DEA increase on the debit DEA will have a normal balance of debit while liabilities comments stock and revenues the other accounts the increase on the credit they have a normal balance of credit that's something you need to know and you'll see why later on it's going to make your life much much easier now let's take a look at an account just to see how a t account would look like so for the sake of illustration we're going to have the cash account remember the cash account goes up on the debit goes down on the credit so let's take a look at this let's assume we have a debit of 30,000 4,200 and 1900 so we invested money in the business we earned revenue and we collected some money it doesn't matter cash went up we add up all the debits we add up all the debits and they add up to 36,100 which is this number here what we do now we add up all the credit we add up all the credits and they will add up to 31,300 so cash increase by 36,100 the cash balance and the cash balance balance went down by 31,100 we purchase supplies purchase equipment paid rent paid salaries so on and so forth now the difference between the increases and the decreases is called the balance of the account give me one second please so let me just this one was let me just fix this so the difference between the debits 36,100 and the credits 31,300 the difference between them what's left so if we receive 36,100 of cash we paid 31,100 and cash the remaining cash balance is 4800 notice the balance is a normal debit balance we put the balance on the debit side so this is how we analyze a t account we have a debit side for cash it's going to go up we have a credit side the cash will go down the difference so either positive 30,000 4,200 I would do all these amounts well guess how much cash do I have I'll take the difference between them and I'll put the difference as a debit because cash is an asset and the normal balance is a debit balance now everything that I told you is very important for the next session in the next session you would learn how to journalize and post to the ledger so when I start to journalize and post to the ledger I'm going to come back up here and say you need to know how debits and credits work now if you're studying for your CPA exam which I highly doubted and if you are for this at this level that's a good idea learn your basics if you're an accounting student I strongly suggest you learn this by heart because this is critical for your success if you want additional practice resources about the stop and go to my website invest in your career invest in your education accounting this work study hard and good luck
	Hello and welcome to this session. This is Professor Farhad and this session we would look at journalizing and posting. The topic is covered in introductory financial accounting course and it's helpful if you are basically starting to study for the CPA exam. As always I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is what you would need to subscribe. I had 1,600 plus accounting, auditing finance and tax lecture. This lecture goes under financial accounting but I do cover other accounting courses. If you like my lectures please like them. Click on the like button. It doesn't cost you anything. Share them with others. If you're benefiting, it might benefit other people. Please connect with me on Instagram. On my website you'll have resources to additional materials such as PowerPoint sites, two false multiple choice. If you're studying for your CPA exam, 2000 plus CPA questions check it out. The first thing we're going to go over is the double entry accounting system and the T account that we learn about in the prior session. If you don't know the T accounts go back to the prior session and look at the T account otherwise you're going to be confused. Let's go ahead and review. We have assets, the increase on the debit side, the reduce on the credit side, liabilities, the increase on the credit side, comment stock increase on the credit side. I told you to cross out the debit side. The dividend increase on the debit side, you can cross out the credit side for now. Revenue increase on the credit, you can cross out the debit, expenses increases on the debit and you can cross out the credit. Also I talked about the normal balances for each account and I said the the side that the account increases on is also called the normal balance and this is where we put the balance for the account. It's the same side. I have almost a 15 minute recording explaining this equation. This is just a review for the people who viewed it but if you haven't viewed it and you want to know all about this so view the prior session. The first thing we're going to learn is how to journalize. This is a general journal that's empty. This is a general journal that's empty. The first, let's assume you are giving a transaction where the owner invested money in the business. The owner invested $30,000 cash in the business. What did you learn in chapter 1? You learned that cash will go up by 30,000 and comment stock will go up by 30,000. Now what we're going to do, we're going to look at the account. Well, if cash goes up, it means we debit cash 30,000 because cash is an asset and cash is going up. Common stock, when common stock going up, common stock will take a credit. Total debits equal total credits, 30,000 equal to 30,000. Now how do we journalize this transaction? The first thing is we post the date and the ledger. This transaction took place December 1st. Second, the account that's being debited listed first. In this transaction, cash is being debited, cash is listed first, cash, debit 30,000. The account that's being credited is listed next and we invent a little common stock. Then we put the title of the accounts and we credit common stock 30,000. Then we post the that make sure the debts and the credits equal to each other. Then we post an explanation received investment by the owner. This is the first transaction. This is how we journalize. Let's look at the second transaction. It took place on December 1st. We bought supplies for cash. Supplies went up, supplies is an asset, we debit supplies and we credit cash because cash is going down. Supplies is listed first because supplies is the account that's being debited. Now we're going to learn to practice those transactions. This is just an overview. Those are the general rules. Let's go ahead and practice more questions to see how we journalize. After we journalize, we post the ledger. What is posting to the ledger? Well, this is what a ledger and each account has a ledger. This is the cash ledger and it's the cash is number one or one. Here's what's going to happen. On December 1st, we received 30,000 in cash. This is the cash ledger. This is like the T account. Notice this is the T account. You have a debit column and credit column. In this is on the side, we have the balance. This is the balance. So if I receive 30,000 dollar cash, how much how much cash do I have? 30,000. So that's my balance now. On December 2nd, I paid 2500 cash. Therefore, cash is credited. What's my balance in cash? My cash went down. My balance is 27,500. On December 3rd, I paid 26,000 dollar cash. So my cash went down. Get credit. What's my balance now? 1500. On December 10th, I received 4,200. What's my new balance? 5,700. So this is keeping track of my running balance. Now, this is only a cash ledger. Each account will have its own ledger and we're going to see this in form of T account. So we're going to have a T account for each account. And we're going to see this when we work the example next. So this is running balance. So what we need to do is this. You remember this transaction we journalize. We debit it cash, credit it, comments stock. After we journalize, we post to the cash ledger. If we debit it cash, the same date, we bring down the date to the cash ledger December 1st. And if we debit it cash, we're going to debit cash therefore we debit cash 30,000. And this is the T account for cash. Now the balance is 30,000. Since we credit it comments stock, again, we bring down the date, comments stock December 1st. Since we credit it comments stock, we're going to credit comments stock. And the balance in comments stock is 30,000. Again, this is the T account for common stocks. So we're keeping track of the T account for common stock. We're keeping track of the T account for cash. Now, when we go ahead and we go through the entries, I'm only going to show you the T account. I'm not going to show you the balance because this is an official general ledger. It's going to work with the T account. Now, a few things, you want to know on the slides of this way, you kind of move, move, move, move ahead. One is each general ledger has an account. For example, cash is 101, comments stock 307. And we talked about this in the prior session. Those are the charts of accounts. Now, what we do after we post the ledger, after we take this 30,000, bring it down here, what we do is we write here PR post reference 101. What is 101? It's this number here. Why do we put 101 to indicate that this 30,000 was transferred? Now, in this column, we put G1. What is G1? It means this is general page 1. So this 30,000 coming from the general journal page 1. Notice, for common stock, also coming from J1, and the account number is 307. After we post, we go back here and we put number 307. This is what the PR is post reference. That's all what it is. Now, we're not going to be using those because it takes a lot of time to do the post reference. In the real world, this is done automatically. What we're going to go over is the general journal journalizing transaction. We're going to start from the beginning. We're going to identify the transaction from any source document. We're going to analyze it as we did in the prior chapter. Record the transaction in the journal entry, applying the double entry accounting, the debts and the credits, and post the entry for simplicity. We're going to be using the T account to represent the ledger. So when I said, you know, this is the ledger, you're going to see it's a T account. Then I just showed you that the ledger is a T account. Except the formal ledger will have to have the running balance on the side. For our purposes, we don't have a running balance. We have to compute the running balance ourselves. So starting with the first transaction first, we are going to analyze the transaction. Fast forward received 30,000 dollar cash from Chase Taylor in exchange for common stock. What did we learn in prior session? We learned how to analyze this transaction. We learned that cash went up and common stock went up. Now we need to look at it from a T account perspective. So from a T account perspective, the two accounts affected are cash and common stock. So this is the cash account, and this is the common stock account. Cash is going up. If cash is going up, I'm going to debit cash. Because when cash goes up, cash is an asset. Cash is going to go up. I'm going to credit common stock. Also common stock going up. I credit common stock. Now I journalize. I debit cash, 30,000. I credit common stock, 30,000. Now, technically, you journalize, then you post. What I'm doing, I'm using the general ledger as the T account. But you journalize debit cash credit common stock. So simply put on the side, you do this T account cash. You do this. You put, okay, cash, common stock, 30,000, 30,000. Then you journalize, then you post. But I'm using the general ledger as my on my side T account. Okay. So now if I ask you, what is the cash balance? The cash balance is 30 debit balance. What's the common stock? The common stock is 30,000. So we just journalize and we post it to the ledger. Transaction to fast forward pace, 2,500 for supplies. Well, if I pay cash, cash is going to go down and supplies going to go up. This is what I learn when I analyze the transaction. Now I need to take this information and turn it into a T account. Well, if I increase supplies, supplies is a debit, supplies is an asset, I debit. If I reduce cash, cash is a credit. So this is the 30,000 is from the prior balance, from the prior entry, from the prior transaction. So if you see those, so only look at the red ones from the prior transaction. Okay. So what I'm going to do, I'm going to debit supplies on the general journal and I'm going to credit cash on the general journal. Now, if I ask you, what is the balance in the cash account? Well, I started with 30,000 and I paid 2,500. My balance is 27,500. My balance in the supplies, 2,500. Let's take a look at this transaction. Fast forward pace, pace cash, 26,000 for equipment. So we gave cash, they gave us equipment. Cash will go down, equipment will go up, they're both assets. So cash will go down, it's a credit. I'm going to credit cash and debit equipment. So on the side, I do this. Debit cash credit equipment. Now I journalize, I debit my cash in the general journal and I credit my equipment in the general journal. Now, what's my balance in cash? My balance in cash went down by 26,000. So my cash is 1,500. My equipment is 26,000. Let's take a look at this transaction. We purchased 7,100 of supplies on credit from supplier. Well, I have more supplies, but I have more accounts fable because I bought them on credit. I did not pay cash. So supplies going up is an asset. I debit supplies 7,100 accounts fable is a liability. I have more accounts fable. I credit accounts fable. So I debit my supplies and I credit my accounts fable. That's the general journal. Now if I ask you, what is the balance in supplies? It is 9,600. And you're going to see later on that we're going to reduce supplies when we use them. And what's my balance in accounts fable? 7,100. You're going to see later on when I pay my payable, it's going to go down. But right now I owe 7,100 and I owe it to staples. So this way we make it a little bit realistic. Fast forward, provide consulting services and immediately collect 4,200 cash. What did we learn earlier when we analyze this transaction? We received cash because we generated revenue. So cash will go up. Revenue will go up. So cash will go up. Cash takes a debit. I'm going to debit cash. Revenue always go up. It takes a credit. 4,200 credits. So I'm going to debit my cash. Credit my revenue. Now if I ask you, what is the cash account? Cash account went up by 4,200 from the prior balance. So you add up all the debit, add up all the credit, take the difference. What is my consulting revenue? My consulting revenue is 4,200. Transaction 6. Fast forward pays 1,100 cash for December rent. Why did I pay the cash for December rent? So my cash is going to go down. My rent always go up. My cash is going to go down and my rent expense is going to go up. Rent expense always go up and always takes a debit. So I'm going to debit rent expense and I'm going to credit cash. So I'm going to credit cash debit rent expense. This is going down and this is going up. So I'm going to debit rent expense in the general journal and credit cash. What's my balance and rent expense? A thousand. What's my balance in cash? It's this amount minus this amount and the answer will be here. Transaction 7. More payment of expenses. Pay 700 cash for employee salary. My cash is going to go down. My salary expense is going to go up. So this is going up and this is coming down. Well salary expense always take a debit. So I'm going to debit salary expense. I'm paying cash. Cash is credited. Again, the journal entry debit expense credit cash. Transaction number 8. Fast forward provide consulting services. That's good of 1,600. And rent its facilities for 300. The customer is built 1,900. Now we did more work. We did two type of work. We did some consulting work worth 1,600. And we rented some equipment to someone for 300 for the same client. So in total, we have revenue of 1,900. Unfortunately, the customer did not pay for the revenue. The customer, the customer build us, I'm sorry, we built the client. They did not pay we built them. Therefore, we're going to have a count receivable. It's going to go up because we received a promise to be paid in the future, which is an asset. Consulting revenue always go up. Revenue always go up and rent revenue goes up. Now from a tea account, the count receivable is an asset. I'm going to debit account receivable. I need credit of 1,900. So I credit consulting revenue 1,600. And I credit rent revenue 300. Now I just need to do the journal entry. I debit account receivable credit in credit revenue. Now if I ask you what is the balance in account receivable 1,900. What's the balance in consulting revenue? 5,800. What's the balance in rent revenue? 300. Those are the balances. Transaction 9. Receive of cash on account. Fast forward receives 1,900 cash from the client billing in eight. Well, this client pays really quick. We build them here. This is when we build them. Now they paid the bill. If they paid the bill, they paid the bill with cash. Cash will go up. The count receivable will go down to both assets. If cash goes up, I'm going to debit cash. Account receivable is an asset. It's going to go down. Now my balance and account receivable back to zero. Now they don't owe me anything. And this is the entry. I debit cash credit account receivable. Transaction 10. Fast forward pays. We said staples. The company was called Caltech Supply 900 cash toward the payment in transaction for the payment in transaction the what we did in transaction for payable and transaction for not payment. We bought 7,100 of supplies on credit. Now we paid 900. Our cash will go down and our accounts payable will go down. They both go down. So cash will go down. Takes a credit and accounts payable go down. Takes a debit. So I'm going to debit my accounts payable and credit my cash. Now if I ask you what is the balance and accounts payable? So how much do I still owe? What I still owe 6,200. What's my balance and cash? You add up all the debits. Add up all the credit takes the difference and the difference is a debit. And this is the journal entry. A debit accounts payable credit cash. Transaction 11 fast forward pays 200 dividend. Well, whether I learn when I analyze this transaction, I learned that cash goes down because I paid cash. Why did I pay cash because of dividend dividend goes up. So cash goes down dividend always go up like an expense but dividend reduces equity. So dividend is part of my DEA. Dividend is increase on the debit. Cash reduce on the credit. Let's journalize. I'm going to debit dividend and credit cash exactly what I did here. Dividend and credit cash. What's my balance and dividend? 200. What's my balance and cash? Add all the debit at all the credit takes the difference and it's a debit balance. Transaction 12. So this is a new transaction. Fast forward received $3,000 cash. Cash will go up. In advance of providing consulting services, we received this money in advance before we did the service. When we received the money before we do the service, we're going to have something called a liability called unearned consulting revenue. Unearned means we have not earned the money. We have the money but we haven't earned it. Therefore it's a liability. So cash is going to go up. Cash goes up on the debit. So I'm going to debit my cash. Unearned red consulting revenue is a liability liability. Goes up on the credit too. I credit liability. So by accepting the $3,000 cash, we have an obligation to perform. This obligation to perform is called a liability. Now you're going to see later on this liability will go down. When does it go down? When we perform the work and we're going to see this later on. So we're going to debit cash, credit consulting revenue, debit cash credit consulting revenue. Transaction 13 fast forward pays $2,400 cash. Cash will go down. Insurance premium for 24 months. Insurance coverage start December 1st. If I pay cash, cash is going to go down. What did I pay cash for for insurance? Now I paid in advance for two years. This is called the prepaid insurance. So this is a prepaid, prepaid are assets. Okay. So cash is going to go down. Prepaid, this is an asset. Asad goes up by a debit. Asad goes down by a credit. Cash goes down. Now what's my balance in prepaid? My balance in prepaid is $2,400. And what did I say about the prepaid earlier in a prior session? That prepaid eventually go down and they turn into an expense, which we'll see later on. Okay. So this is the journal entry. I debit prepaid credit cash. Transaction 14 I purchase supplies for cash. So I use cash to buy supplies. What's going to happen to my cash? It's going to go down and my supplies is going to go up. Supplies will go up on the debit because supplies is an asset and it's going up. Now I have more supplies. Cash is an asset. It's going to go down. It goes down on the credit. Now what's my balance in supplies? $7,220. That's $7,7777720 if my math is right. No, it's more than that. It's $9,699,720. So my balance in supplies, $9,720. What's my balance in cash? Add all the debits, add all the credits and the difference is that. So I'm going to debit supplies, credit cash. Payment of expense in cash. Fast forward pays $305 for the December utilities. If I paid cash, cash goes down. If I paid for my utility expense expenses go up. Cash goes down, expense goes up. I debit expenses because expenses always go up on the debit. And since cash going down, I credit cash. I debit expense, credit cash. What's my balance in utilities? 305. What's my balance in my cash? Add all the credits, add all the debits and the difference is a debit. Payment of more expenses in cash. Pay $700 cash and employee salary for work performed in the later part of December. I paid cash, cash will go down for an expense, expense goes up. Expense takes a debit. Now my salary's expense so far is $1,400. $1,400. And I paid in cash, cash will go down once again. If I add up all my debits, subtract my credit. The balance in cash will be a debit. So I debit expense, credit cash. And this is a summary for all the balances. So after I add up all my debits, add up all my credits, the balance in cash was $4,275. The balance in account receivable, zero debit balance. The balance in supplies, $9720. The balance in prepay, $2,400. The balance in equipment, $26,000. All these balances are debit balances because assets increase on the debit and they will have a debit balance. Liabilities accounts pay $6,200 credit, unearned revenue, $3,000 credit total, credit total balance of total liabilities of $9,200. Common stock, a credit balance, dividend debit balance, consulting revenue, $5,800 credit, rental revenue, $300 credit, salaries expense, $1,400 debit, rent expense, $1,000 debit, utilities expense, $350. If I add up, common stock, minus dividend, plus revenues, minus expenses will give me equity of $33,195. Liabilities plus equity should equal to your assets. Now what we do, we take this information, the ending balances and we're going to prepare a trial balance. In the next session, I will discuss this trial balance. All the numbers from the trial balance, now you know they're coming from the general ledger for each account. There's a debit column, there's a credit column. This is what I'll pick up next session talking about the trial balance and the financial statements. As always, I would like to remind you to visit my website if you're interested in additional resources and you're studying for your courses or especially if you're studying for your CPL exam. You're going to study for your exam once. It's a lifetime investment. Visit my website, study hard, accounting is worth it. Good luck.
	Hello and welcome to the session, the SIS Professor Farhat and the session with luck at the idea of accounts, which are the building blocks of the financial statements and basically the building blocks of our accounting information system. This topic is covered in a financial accounting course or simply an introductory financial course. Yes, it will help you if you're studying for the CPA exam, if you are looking for basic knowledge. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is what you would need to subscribe. I have 1,600 plus accounting, auditing, finance and tax lecture. If you're an accounting student, not I only teach financial accounting, I teach all accounting courses. Make sure to subscribe, connect with me on Instagram. On my website, you will have additional resources such as PowerPoint slides, through false, multiple choice, exercises. If you're studying for your CPA exam, 2000 plus CPA questions and exercises, which are quasi CPA simulation, I strongly suggest you take a look at my website. So we're going to have to look at the idea of accounts and what is an account? The account are again, they're the basic blocks of the accounting information system, the basic blocks of our financial statement. So what is an account? If I ask you to define an account for me, how would you define an account? Well, think of your checking account. Well, well, I'm sure you might have some check in account. So what would your check in account do for you? Well, what it does to things, it keeps track of increases and decreases. So every time you make a deposit, your check in account goes up and value. Every time you go to the ATM machine, or you would draw money, if you go and you would draw money from the ATM, your account goes up. So it keeps track of increases and decreases. Now, it's easy for you to think of the check in account, but all accounts in the accounting information system keeps track of changes either up or down an account might go up or an account might go down. Now, hopefully you know at this point that you have, we have three broad categories of accounts. We have asset accounts, liability accounts and equity and assets equal to liabilities plus equity accounts. If you don't know this equation, see my prior lecture. What I'm trying to define here is to take a look at each account in the assets, liabilities and equity that you might see in a financial accounting course that you'll be comfortable using with as the time progresses. So the first account we're going to look at is cash and we're going to look at the asset category. First, cash is an asset. We define asset in the prior lecture. Assets are things that's going to provide future benefit. So when we look at the cash account and we see a number there, we see like, you know, $50,000. What does this number represent? Well, simply put, what does cash represent? It represents money and funds that the funds, the bank except as the positive judges coins, checks, money orders, etc. So what is the cash account? It's how much money we control. Usually it's at the bank. That's the cash account. We look at account receivables. We see that we have 10,000 of account receivable. What does this number represent? What does accounts receivable represent? Well, when do we have an account receivable? Well, account receivable is created when we provide a service. So here's how it works. We provide a service. When we provide a service, we expect to receive cash. Well, sometime the customer don't pay cash. So what the customer would say, they will give us a promise to pay. That promise to pay, my friend, is account receivable. It's an asset. So it's an informal promise by the buyer to pay for services or goods provided on account. For some time we say provided on credit. So we gave it to them on credit. It means we're going to give them some time to pay. This is what an account receivable is. Okay. Promise to pay an event. You'll pay us notes receivable. Sounds very similar to account receivable except it's a formal promise. And the reason I use the word informal so I can use the word formal here. Formal means it's an official promise by the borrower. Usually what we call when we have a notes receivable, technically the person that signed the note is a borrower. Although they might be buying the stuff from us, but when we make them sign the note, it means we are lending them money and they're paying it back to us. They're like the borrower to pay in the future at a specified date and plus interest. So the main difference between account and note is the interest and notes receivable, which will will cover on later on in a different chapter. We charge them interest not only that we're going to give them time to pay, but we want interest. We want to finance the transaction, but we want to be compensated with interest on that account receivable. There's no interest. We don't charge them interest supplies. That's another account that are considered an asset. Well supplies are assets. Why? Because we can use them to run the business. They give us future use office supplies, store supplies, paper, spends, etc. Now we have to understand that supplies will get used up. So eventually we're going to see later on that supplies will go down and supplies will turn into supplies expense eventually once we use them. Prepaid account. We see those pre paid account are very kind. They give a lot of hard time to students. Prepaid accounts are assets until they are expired. What's a prepaid represent prepayment of a future expense? Like when you prepay for your phone if you prepay your phone. Well guess what? You have an asset. You can use your phone for a month or two month. You could prepay your rent. You could prepay your rent for the full year. You can live at that place for a full year. You don't have to worry about rent. You can prepay any expense. Prepaid are expenses and what happened to them just like supplies. They are eventually expense. They get consumed over time. They get consumed. Now the other thing I'm going to tell you about assets assets are listed and we talked about this in the prior session on the balance sheet. Just they are listed on the balance sheet. They are balance sheet account. They are balance sheet account. Now we're going to look at the second category of of accounts, which is lia, but at these well actually we're not done with assets. We still have buildings. What are buildings stores office warehouses factories buildings are assets that benefit future periods more than one period maybe two three years assets that provide many benefit for many years they get depreciated. What's the appreciation? We'll talk about this in chapter three in future chapter equipment office equipment store equipment computers also they have the same. Characteristic as the buildings they benefit future period therefore we depreciate them we're going to see what that means later on then we're going to have an account called land and what does the land represent it's represent the amount that we paid for the land and land is a separate account separate than a building. So if we bought a building and we bought the land the land and the building are two different assets land is not the appreciable. So in contrast to these two we don't depreciate land now why well follow the course and you'll find out why. The second category of accounts are liabilities what are liabilities simply put you owe something their form of that the most common liability is accounts fable and what is an accounts fable it's a promise to pay for goods and services purchase on account on credit. Simply put it's the mirrored image of an account receivable so we have company a and company B if company a provide service the company B and company B promise to pay. So company B gave them up so we provided a service company B promise to pay in the future in 30 days company will have an account receivable because company is expecting to be paid company B will have an accounts fable AP. Okay so company A will have an account receivable AR because they're going to be paid company B will have an account receivable which is the mirror image of each other. Let's take a look at another similar sounding account called notes receipts notes fable well it's a notes fable. Simply put it's alone it's a loan it's a loan simply put we are all familiar with the concept of a loan. Okay it's a loan it's a promise to pay the money back at a specified date plus interest so what happened is you borrow money you have to pay it back and you have to pay it back plus interest again if we have a and B. Let's assume a lend money to be B signs a note gave them a note a promise to pay well guess what A will have a note receivable because they lend them the money and expect to be paid B they gave the note they gave the promise they will have a notes payable. So they're the mirror image of each other unearned revenue well it sounds like something like revenue but it's unearned when does that happen when money is received in advance of providing goods and services sports team like when sports team sells their season ticket they receive the money in advance. So they receive the money from the fans so the fans the fans pay up front before the games now when you are paid up front before you perform your service no revenue because you haven't performed yet so what's going to happen we received the money we have the cash now also we have to increase an account called unearned revenue. Now you might be saying okay this is unearned revenue what would the fans have the fans will have a prepaid ticket so their cash goes down they send the cash to the sports team they have a prepaid ticket did sports team will have an obligation to perform well eventually the team will perform in this unearned revenue will turn into burned revenue okay. Let's look at the last liability which is accrued liability what are accrued liabilities accrued liabilities are created when you when you have expenses that are incurred but not yet paid the best example let's assume March 1st your your your rent is due which is a thousand dollars just for the sake of illustration so you have to pay a thousand dollar on March 1st well March 1st came and you don't have the money do you see the money. You still have the expense yes you still have to pay your rent you have an expense now since you don't have the money you have an expense and you have a liability because now you owe you owe your landlord a thousand dollars any time you have an expense that you have not paid yet it's called accrued liability any expense that you owe but you haven't paid yet it's an accrued expense example will be the crude wages and you have to pay the money. If you owe any interest if you owe any rent if you owe any taxes any any time you owe money as an expense it's an expense but you owe the money it becomes called an accrued expense or accrued liability so if we call this accrued expense or accrued liability they're the same thing okay and we have many of them we're going to see them later on in future chapters. The last category of accounts are the equity accounts and under equity we have four accounts common stock is the first one what does it represent if we have a million dollar in common stock this represent what the owner invested in the business what the owner what the investors what the shareholders invested in the business common stock increases equity and by the way liabilities also go on the balance sheet liabilities go on the balance sheet. Then we have an account called dividend dividend what does dividend represent account for distribution to owners which are the common stockholders from profit so when we make a profit we might distribute some money now how do we make a profit well we're going to generate revenues first what our revenues revenues are accounts for proceeds from sales of goods and services like sales revenue rent revenue consulting revenue so what we do whatever our businesses if you're business is not going to be a good thing. This is teaching you teach and you generate your revenue if your business is selling you sell and you generate revenues you call sales revenue if you have an office building you rented and you have rent revenue so you have revenues but the bad news is when you have revenues you might have to incur expenses what are expenses account for the cost to run the business you need your utilities you need to pay taxes salaries rent insurance there are many expenses you have to pay now if you take your revenues minus your expenses the difference between those two gives you net income or net profit hopefully we have more revenues let's assume we have 10,000 revenues 6,000 and expenses we have a net profit of 4,000 then from this net profit we might pay some of it so if we pay the 4,000, we pay the 1,000,000,000,000 and the company kept 3,000 what we kept is called retained earnings it's what the company made and kept retained earnings now the 4,000 minus the thousand equal to 3,000 this is retained earnings this is how we compute retained earnings now revenues and expenses they go on a financial statement called the income statement and we saw this in chapter 1 income statement minus dividend goes on the statement of retained earnings common stock goes on the balance sheet and retained earnings goes on the balance sheet so simply put common stock and retained earnings what survives from all these three accounts to go on the balance sheet last but not least few other terms we need to be familiar with the ledger is a collection of all accounts and their balances for an accounting system so this is the ledger right here the all the accounts now how big should be the ledger well the company size and diversity will determine how many accounts do we have and what is a chart of account well it's a list of all the accounts and with each account we're going to have an identifying number something like this cash is number 101 accounts receive a 106 supplies 126 prepaid 128 equipment 167 notice all assets start with the number 1 liability start with the number 2 equity with 3 revenues for expenses with 6 you wonder worse 5 well could be gains or losses so this is the chart of accounts now this this lesson basically help you understand the basic idea of an account in the next session I'll have to introduce the basic idea the important concept of habits and credits as always I would like to remind you to visit my website if you are interested in invest in more in your career invest in more in your education you're going to study for your exam once you're going to study for your CPA exam once take your take this investment seriously it's paid out it's going to pay down down dividend down the road profit means down the road it's for you this is an investment not an expense good luck stay motivated and study hard
	Oh, and welcome to the session. This is Professor Farhat. In this session, we will look at the trial balance and the debt ratio. These topics are typically covered in a financial accounting introductory course. Yes, you will need to know them for the CPA exam, but this is basic knowledge. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance, and tax lectures. This is a list of all the courses that I covered, including many other courses other than financial accounting. If you like my lectures, please like them. Click on the like button. Share them. Put them in playlist. Let the word know about them. If they're benefiting you, it means they might benefit other people. And please connect with me on Instagram. On my website, you will find that you will find access to additional resources, such as through false multiple choice PowerPoint slides. And if you are studying for your CPA exam, 2000 plus CPA questions. I strongly suggest you check out my website. So we're going to start by looking at the summary transaction in a ledger. Now, you might be asking, where is this information coming from? All these accounts with their balances. I suggest you check the description. In the description, I have the link to build up to this summary of transactions in the ledger. So that's the first thing I want you to know. But let's review. We end up with a cash balance of 4275 debit account receivable debit balance of zero supplies 9720. It counts, stable, not 60 200 liability. I learned consulting, grabbing with 3000 liability. Common stock, common stock 30,000 dividend 200, so on and so forth. So those are the balances. And if we add up all the assets, they're up to 42,395. We add up all the liabilities, 9200. And all of common stock dividend consulting, revenue and expenses, which is dividend with a doc, expenses with a doc. We end up with 33,195 assets, equal liability plus equity. So all this information is coming from the prior session, but we're going to be using this general ledger to build the trial balance and explain what a trial balance is. Now, this is a trial balance. What does it look like? The name of the company, trial balance and the date. Now, here's the first thing I want to tell you, students confuse the trial balance with financial statement. So the first thing I need to tell you, it's it's not a financial statement, which we look at the financial statements, or we're going to look at the financial statements again very briefly. But the trial balance is not a financial statement. Well, if it's not a financial statement, so what is that trial balance then? Well, here we go. The trial balance is a list of all the accounts with their normal balances. Okay. So the trial balance list all ledger accounts and their balances and with their normal balances, what do I mean by normal balances? For example, assets will have a normal of the debit. Liabilities will have a normal of a credit. Common stock credit dividend debit revenue credit expenses debit. You remember the DEA? Those are the normal balances. Okay. If the books are in balance, the total debit should equal total credit. So it's proof to us that total debit is equal to total credit. So we could still be wrong, because we've still made mistakes. Okay. But at least we know that the total debit is equal to total credits. Now, the trial balance is prepared in a certain way. What do I mean by this? Let's go over it. So this way, you know how it what it looks like. Assets are listed first. So notice cash, accounts receivables supply, spray paid and equipment. They're listed first and they have a debit balance. Then liabilities are listed next. They have a credit balance. Then common stock credit balance dividend debit balance, consulting revenue and rental revenue credit balance. Then expenses are listed last and they have a debit balance. So this is what a trial balance is. A list of all the accounts would do normal balances. Okay. Usually we put the dollar sign at the beginning of each column and at the end, we don't we don't put a dollar sign everywhere because it would look like a clock. Now what happened if you made a mistake and your trial balance doesn't balance? Now, under your word, most trial balances nowadays are generated by accounting information system. And most accounting information system, they will not allow you to enter an entry that's total debit as not total credits. Generally speaking, because it just it doesn't say, for example, if you're using QuickBooks, QuickBooks will not let you save a transaction. If the transaction doesn't have total debit equal total credits. So if that's the case, your debits will equal to your credits. But the point is you could have made other mistakes. But let's assume you are looking, you are preparing a manual trial balance, which you will be doing something like this in your regular course. First thing you want to check, make sure that the trial balance column are correctly added. So make sure you go back and add them up. Make sure you add up all your debits and all your credits. Notice the 45,000, 45,300, all what this number is total debits equal total credits. It's meaningless other than that. Okay. That's the first thing we do. Then make sure balances are correctly entered from the ledger. What does that mean? It means, for example, here my cash is 4275. Make sure I entered my cash here 4275 and not 4257. For example, this could be a problem. Okay. That's the second thing you do. See if debits and credits are mistakenly placed in a trial balance. Make sure, for example, all cash will have a debit balance. Make sure it's not on the credit. All liabilities should have a credit balance. Make sure it's not on the debit. That's also a common mistake. Guess what? Recompute each account balance in the ledger. Go back to each account and go through their balances, debits and credits, which what we saw on the prior balance and make sure the total is correct. Maybe the total is not correct. Verify that each journal entry is posted correctly. Remember, maybe you did not post correctly. When you journalized, then when you posted, for example, a number was 150, you did it 1500 or 1500, you did not post it correctly. Verify that each original journal entry has equal debits, equal credits. So this is the last thing you do. Total debits, equal total credits because basically you're going backwards from the trial balance, making sure the accounts are listed all the way back to the journal entry, which is the original entry. And if you don't find that you should find if there's any error, you should find it on the original entry. This is how you go about finding an error. Now, once you prepare the trial balance, the reason we prepared the trial balance, it's that step before you prepare the financial statements. And what are the financial statements? We already learned about the financial statements in the prior session. And what I did also see the description for the financial statements. Those are the three financial statements we prepared. Okay, income statement statements, everything in earning and the balance sheet. And this is a picture of them. And the reason I'm flipping through this because if you really want to know how to prepare financial statements, just look in the description. So in the description, you're going to have two links. One for how we got to the general ledger balances and one how to prepare the financial statements. I don't want to do it again, because it's useless just doing the same thing again when you can go to the description and view it. Last but not least, what we need to learn about in this session is something called the debt ratio. And what is the debt ratio? Well, first of all, it's a ratio. What is a ratio? It's x divided by y. We're taking two figures and dividing them by each other. This is what a ratio is. And we call this ratio the debt ratio. Now, if it's the debt ratio, it's mean somehow liabilities are involved. So this is how we compute the debt ratio. We're going to take total liabilities divided by total assets. So let me throw some numbers just to kind of start to think about this. Let's assume that I'm going to throw easy numbers. You have 500 in liabilities, 500 in liabilities, and you have one, let's make it 400. You have 400 in liabilities, total liabilities, and you have 1000 in total asset. Did that ratio equal to 40%? 400 divided by 1000 is 40%. Okay. What does that mean? It means you have 1000 of assets of that amount, 400 coming from debt from liabilities. Obviously, the other 600 without mention it is coming from equity. Now, let me ask you this. Do you want your assets to be coming from debt, or do you want your assets to be coming from equity? Well, generally speaking, you want your assets to be coming from equity and specifically from retained earnings, which is your earnings. What does that mean when you have a higher proportion of your assets coming from debt? The higher amount of debt you have, the more that you have, and listen to me carefully, the more that you have, the higher is the risk. That is risk. Why? Because that requires you to make payments. And if the company doesn't do well in a certain year because the economy doesn't do well and you cannot pay off your debt, then you'll get into trouble fairly quickly. So that is risky. So what does this ratio evaluate? That evaluate the level of debt risk? Now, you might be saying, so tell me, is 40% high? I can't tell you. Why? Because different companies will have a different level of risk. But generally speaking, the higher that ratio, the higher is the risk. Now, for example, airline companies, airline companies might have a debt ratio of 80%. And that's normal. Why? Because they finance their assets, their airplanes. They don't buy them. They have a lot of debt. Maybe a consulting company, they will have a debt ratio of 15%. Well, you cannot compare 80 to 15. Why? Because consulting companies are in a different industry. Also, ratios, they have to be compared from one period to another. So if the prior period, so if the prior year, the debt ratio was 35%, well, guess what? Now, we are accumulating more debt in relationship to assets. What if in the prior year, the debt ratio was 45% then we improved. So you cannot look at a number 40% and make a statement. Always these numbers will have to be taken within a full picture. So basically, what you can say about this, a higher debt ratio indicates there's a greater probability that a company will not be able to pay its debt in the near future. The more that you have, and that's also on a personal level, the more that you have the risk here you are. And that's why I always tell my students, and I'm telling you now, avoid debt. That is trouble. That's all what that is. That will enslave you. That will take options away from you in your life. So avoid that at all costs. That's all what I can say. Avoid debt. Okay. And for companies, we can measure how much that they have in relationship with their assets. So by looking at that alone, it doesn't need anything. For example, if I say $1 million, you would see that's a lot of debt. Well, if I have $100 million assets and I have $1 million in debt, that's really nothing. Okay. That's 1%. So that's why we use ratios to put things into perspective, to put things into perspective. As always, I would like to end up by saying, as always, study hard. Visit my website for additional resources. Accounting is worth it. It's a rewarding career. I strongly suggest you pursue it. Check out my website. Like the lectures, share them. Good luck and study.
	Hello and welcome to the session. This is Professor Farhat and the session would look at introduction to adjustments. This topic is typically covered in a financial accounting course as well as intermediate accounting course also covered heavily on the CPA exam. What I'm going to do first, I'm going to lay the groundwork for adjustments. Why do we need adjustments? Why is that necessary? Then in the next following sessions, I would look at each adjustment separately and explain them. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting auditing, finance, and tax lectures. Please, if you like my lectures, please like them. It doesn't cost you anything. Click on the like button. Share them. Put them in playlists. If they benefit you, it means they might benefit other people as well. And connect with me on Instagram. If you need additional resources, please visit my website forhatlactures.com. You will have access to material, multiple choice through false, the notes, the PowerPoint slides, and if you're studying for your CPA exam, 2000 plus CPA questions. So let's take a look at the idea of adjustments. Why do we need adjustments? Why do we need to prepare adjustments? Well, we have an accounting something called the accounting period concept or the periodic the city concept. Simply put, what is this concept? And how does it fit into the spectrum? Well, the life of any company can be broken down artificially. For example, we can take the company and usually even if you are not a medium or a large company or publicly traded, at least annually, you have to sit down and prepare your taxes, at least annually. So basically, most businesses, at least they have to prepare their financial statements or they have to report annually on their performance, even though they don't have to report to a bank or investors or anybody else, they have to report for taxes. So some companies might report their financial statements annually, so that's their period. Some companies, they may break down the life of the company into two artificial period in might they might report semi-annually. So every six months, they will prepare the financial statements. Okay, here we prepare the financial statements once a year. Why would you prepare the financial statements on a semi-annual basis? For example, you have investors, you have creditors, they want to know how well the company is doing or not doing, so you prepare financial statements for them. That's why you want to do it on a semi-annual basis, but they're okay, they can wait six months, but at the young six months, they don't want to wait. Some businesses guess what? They want to report, they want their financial statements on a monthly basis. Every month, they want the financial statements. Well, a case in point is what I used to practice accounting. What I used to practice accounting, we had a lot of customers that were MDs, medical doctors, dentists or just general doctors. And what they wanted, at least my partner convinced them that having monthly financial statements will be beneficial for them. Which is, because you know what's going on on a monthly basis, what's going on with your practice. So what we did is we'd prepare financial statements every month. That's fine, it's going to cost more money, but it's going to give them more value. But as we prepare those financial statements constantly, we get efficient at doing so, and the timing that will take us to do so, it will go down. But that's a monthly reporting period. Or, or we can do it quarterly. Now quarterly is very common for not common, it's mandatory. It's common in a sense that everyone has to do it. It's mandatory for publicly traded companies. So publicly traded companies, they have to report on a quarterly basis. Then there is no release such thing as a fourth quarter, they have to report the annual. So for the whole year, so publicly traded companies, they have to, they have to report their financial statements on a quarterly basis. Now, any period other than, other than a full year, it's called interim financial reporting, interim financial reporting. And let's talk about annually. You could be annually January 1st, the December 31st, we call this the calendar year, or you could be any 12 months, other than January 1st to December 31st, we call this the physical year. Now, we need to, we need to talk about another term that's important. It's the difference between a cruel and cash accounting. So we have a cruel basis and cash basis of accounting. So we need to know what is a cruel and what is cash basis. Well, we're going to start with cash basis. It all has to do a cruel and, and the, a cruel and cash basis has to do with when do we recognize? Revenue, when do we recognize when when do we recognize revenue? And when do we recognize? Expenses. So simply put at what point do we recognize revenue? At what point do we recognize expenses? Starting with the cash basis, very easy. We recognize revenue when cash is received. Very simple concept. If I have the revenue, if they paid me its revenue, that's it. Expenses are recorded when the cash is paid. Obviously, cash, cash in cash out. So the cash basis is basically based on the cash. If you paid cash, it's an expense. If you received cash, it's a revenue. And that's very simple and easy to understand. However, that's not that, that's not the method that we learn. Nor that's the method for generally accepted, accepted accounting principle. The method that we need to learn is, which is we already kind of learned, learned it without even calling it a cruel is the gap basis, which is a cruel basis. So under a cruel basis, when do we recognize revenue? We recognize revenue when the product or services are delivered. Simply put, when we earn it, earn it means we did the work. If we earn something, it means we completed the work. I cannot bill you for something if I did not do the work for you. So once I can bill you, it means I did the work. It means it's revenue for me. You may pay me immediately. Okay? So you may pay me now. Or you may pay me later. Regardless, whether you pay me now or pay me later, I have revenue as long as I can bill you, as long as I did the work for you. Now, when do we recognize expenses under the cruel? We recognize expenses when they are incurred. What does it mean incurred? It means that if they happened, if we have the obligation for the expense, then we have an expense. We don't have to pay it in cash yet, but we still have an expense. I always ask my students to, I always ask my students to kind of think about this. For example, we are in January, February. And let's assume you paid your rent for January. You paid your rent. You had rent expense, but you paid it. In February, you don't have money to pay your rent. No money. Do you still have an expense? Yes, you do. Although you did not pay it, you still have an expense, because now you are responsible for paying it. Although you did not pay it, you still have an expense. We're going to see what do we call this later. We call this accrued expense. We'll hold on that on the terminology. But the point is, you have an expense as long as the expense that was incurred. And the best way to illustrate the accrual versus cash is just to look at a quick example. Then we're going to work with this further one, we'll work with the adjustments. But the adjustments are based on the accrual basis. And based on the periodicity principle, where revenues and expenses have to be reported in the correct period. So let's take a look at this transaction. First, it's treated as an out-of-cash basis. Then we treat it as an accrual basis just to see the difference. Let's assume a company paid 2,400 for 24-month insurance policy beginning December 1st. Here's what's going to happen. Under the cash basis, what do I do? Under the cash basis, I paid, therefore I have an insurance expense, 2,400, credit cash, 2,400. I have an expense. This is exp or expense, let me just... Under the cash basis, I have an expense. So on December 31st, I paid 24-hundred cash. Using the cash basis, the entire 24-hundred with your recognizes an insurance expense in 2019. And notice this, month is highlighted in yellow to tell you, the insurance expense took place on in December of 2019 when I made the payment. So no insurance expense from the policy would be recognized in 2020-2021. Which is that's how we learned. We learned that when we prepay for something, it's an asset initially, then we expense it later. So let's look, this is the cash basis. Let's look how we treat this transaction under the accrual basis. Under the accrual basis, what's going to happen is this. We have we paid 2,400. We're going to divide this by 24-month and we're going to expense it 100-dollar a month. Therefore, for December, we're only going to expense 100-4-2019. For 2020, we're going to expense 100 each month. In for 2021, we're going to expense the remaining 11 months. So on the accrual basis, 100 of insurance expenses recognized in 2019, 1200 in 2020 and 1120-2021. So what we did is we took the expense and we spread out the expense over the period that covers. Because this insurance policy doesn't only cover 2019, because under the cash basis, it's as if it only covered 2019. That's all where the expense took place. Well, the expense should take place over 2019, 2020, and 2021, 11 months and 2021, because it's serving those periods. So the expense must be matched. The expense is matched with the period benefited by the insurance coverage. Therefore, what do we do when we buy the policy initially? When we buy the policy initially on December 1st, we're going to debit a prepaid insurance, 24-100, and we're going to credit cash. Versus and expense when we debit it earlier. So this is prepaid insurance. Remember, this is an asset. Then we're going to learn later on. We need to adjust this account. We'll work on that shortly. Two more topics. I just want to make sure we cover them one more time. Although we kind of covered them directly or indirectly recognizing revenue. Okay, revenue recognition required that revenue must be recorded when the goods or services are provided to customer. And at any amount expected to be received from the customer. Simply put, you let the work, how much do you expect to receive? This is the revenue recognition, which is the revenue recognition under a cruel. Expenses, expenses or the expense recognition or the matching required that expenses be recorded in the same accounting period as the revenue that are recognized as a result of those expenses. This is matching of expenses with the revenue benefit as a major part of the adjusting process. Remember for the insurance policy, we did not expense the whole thing in December of 2019. The reason is because we're going to give all the expense for one period. And that's not true. We have to match the expense to the period at the generating revenue, which is one month in 2019, 12 months in 2020 and 11 months in 2021. So we are here complying with the recognizing expenses or the matching principle. So having said all this information, we're going to learn about four types of adjusting entries that help us comply with the time period assumption with revenue recognition and expense recognition. That's why we have those, we want to make sure the revenue is reported in the prior period, expenses are reported in the prior period. To do so, we're going to deal with four types of adjustments. And the four types are the furl of expenses or prepaid expenses. This is also called prepaid expenses. The furl or revenue, or this is called un-earned revenue. Okay, so those two are called the furls. The furls. Then we have two more. One is called accrued expenses and one is called accrued revenue. Those are called the cruebles. Okay, so we have four types of adjustments to the furls and to accruals. What are we going to do? We're going to go over each one of them separately. Each one of them separately. And those adjustments, they will help us make sure our financial statements are properly reported. So how do we prepare the adjustments? Well, it's a three-step process, which I will go over one. We'll do in this, but if you want to copy this down, first determine what the account, what is the current account balance? So what is the balance now that's showing on the trial balance? And we have to determine what is the balance should be? What is the balance should be? What is it now and would it should be? If it's now 100 and it should be 100, I have no adjustment to make. If it is now 100 and it should be 80, then I have to reduce it by 20. If it's 100 and it's supposed to be 120, I need to increase it by 20. So this is how we prepare adjustments. We need to know what's the balance now and what's the balance should be? What's the correct balance and we make the adjustments? So we take the difference between step one and step two and prepare the proper adjustments. Now this will not make any sense unless we look at actual adjustments. And the first adjustments we're going to be looking at is the third level of expenses or pre-paid expenses, which we'll see in the next session. As always, I would like to remind you if you're looking for additional practice exercises, additional help studying for your CPA exam, visit my website, invest in your career. It's a long-term investment. Study hard, accounting is worth it, and if you like my lectures, please again, like them, share them, subscribe, good luck, and study hard.
	Hello, and welcome to the session. This is Professor Farhat and this session would look at the Federal of Expenses or Prepaid Adjustments, which are one type of adjusting entries, a topic that give accounting students some issues. This topic is covered in introductory course. Obviously, the CPA exam. As always, please connect with me only then if you haven't done so. YouTube is what you would need to subscribe. I have 1,600 plus accounting auditing finance and tax lectures. This is a list of all my courses. If you like my lectures, please like them. Share them, put them in playlists. If they benefit you, it means they might benefit other people. Share the wealth. Also connect with me on Instagram. If you need additional resources such as PowerPoint sites, through false, multiple choice, CPA. If you're studying for your CPA, I do have on my website, 2000 plus CPA questions. I strongly suggest you check it out. Framework for adjustments. In the prior session, we looked at introduction to adjustments. We determined there are four types of adjustments. The Federal of Expenses, the Federal of Ravinew, the crude expenses, and the crude revenue. In this session, we're going to focus on the Federal of Expenses except depreciation, which I would have liked to have a one session for depreciation. Sometimes, when you blend it with all the other prepaid, it confuses students, so I'm going to keep it separately. Let's go back and see how we prepare adjustments. So how do we prepare adjustments? The first thing is, do we know what the current account balance is? What is the current account balance that we are adjusting? Then step to what the account balance should be. So, if the current balance is 100, and it should be 100, no adjustment. If the current balance is 100, and it should be 80, reduce it by 20. If the current balance is 100, and it should be 120, increase it by 20. So, what is it now, and what it supposed to be? Then take the difference between 1 and 2, and that's your adjusting entry. So, let's take a look at specifically at prepaid. So, this is where we can illustrate the concepts. Now, I'm going to be working with this trial balance. Now, you can look at this trial balance as giving, but if you want to know really how this this trial balance came to life, I have this from scratch. You can click on the description below to find out exactly how we build this whole trial balance. Now, it's given to you. You can work with it. But you know what? I want to know where this amount coming from. I want to know where this amount coming from. I want to know where this amount coming from. Please, look in the description. I build this trial balance step by step. But for now, we can work with it. So, the first type of adjustments we are going to be working with are prepaid or the furls. So, are prepaid or the furls? Prepaid expenses are assets paid in advance of receiving door benefits. Let's come back to the trial balance. And we already determined that supplies is a form of prepaid in prepaid insurance is prepaid. So, those are the two accounts that we need to adjust. Examples are prepaid insurance, prepaid rent, supplies, anything that we prepaid. Any prepaid expenses is a prepaid. Supplies also are form of prepaid. Now, what's going to happen to the prepaid? I want you to think of it for a logical perspective. Let's go back to supplies. What's going to happen to our supplies account? If we have 97.20, our supplies account eventually will go down. Why? Because we use the prepaid insurance as time goes by. It should go down. So, at the end of the accounting period, we have to determine if these numbers are still correct. If they are still correct, then we don't have to worry about anything. Otherwise, we have to make the following adjustment. We have to reduce the asset. We have to decrease the asset. And we have to turn it into an expense. Simply put, we're going to debit an expense, and credit an asset to adjust the prepaid. We're going to reduce the asset because that's what happened to assets. They go down, assets go down, and expenses go up. Okay? Asset goes down, expenses go up. Let's take a look at this example. Fast forward paid 2400 to cover 24 month insurance policy beginning December 31st. And this is properly reflected in the trial balance. So, this is the current balance as of December 1st. And on December 31st, it still showed 2400 unless we do something about it. Now, what happened now? A month later. Well, remember, this policy covered 24 month. So, what does that mean? It means if it covers 24 month, it means if we take 2400, divided by 24 month, it's going to give us 100. Simply put, 100 dollars of this policy, it's going to expire. It's going to go down, and it's going to increase insurance expense. So, every month that goes by, this policy goes down by 100. So, show that to me in a journal entry. Well, I'm going to reduce the asset. Reduce the asset by 100 and increase the expense by 100. So, I credit prepaid, which is an asset, and I debit an expense, which is an expense. Now, what's my balance in my prepaid? My balance is 2300, and this is the correct balance. And what's my balance in my insurance expense? It's 100, and it's correct. So, notice we prepare the adjusting entry to reflect this. Otherwise, the balance would have been 2400, which would be overstated. And the balance here would have been 0, which is also overstated. So, the balances would have been overstated for assets, and I'm sorry, an understated for expenses, understated by 100. Okay? So, we would show more assets and less expenses. So, adjusting entry for prepaid, we debit, just going to show you the debit and the credit. We debit insurance expense, expense goes up, and we reduce the prepaid. Again, without those adjustments, assets are overstated, expenses are understated. Now, let's take a look at another prepaid account, prepaid account, and happens to be supplied. Fast forward, purchase 9720 of supplies in December. Some of these were used in December. So, we're starting with 9720. That's a step one. This is the current balance. What is the step two? Step two, what the balance should be. A physical account that unused supplies equal to 8670. So, we counted the supplies, and what we find out is we no longer have 9720. We use some of the supplies. Now, we only have 8670. Do we need to make an adjustment? Yes. How much is the adjustment? The difference. The difference is 150. So, we need to reduce our supplies by 150, increase our expense by 150. Now, our supplies account showed the proper balance based on the count of 8670. Once again, what we did here is we properly adjusted supplies, which we brought supplies down, and we brought supplies expense up. So, our supplies is correctly stated. It's not overstated, and supplies expense is correctly stated, not understated. And this is the journal entry. And this is the journal entry for supplies expense debit, goes up, supplies goes down. And again, those adjusting entries are done at the end of the year because the financial statements are prepared at the end of the year, or at the end of the period, whatever the period we're assuming here is December 31st, whether it's monthly or yearly, it's December 31st. Once again, if we don't prepare those adjustments for the prepaid notice, if we don't prepare them, assets are overstated, are overreported, which is not, we don't have 9720, we have 8670, and supplies expense are underreported. So, if expenses are down, it means your net income is up, it means your equity is up. So, you don't want to misstate your expenses, you don't want to misstate your income, and you don't want to misstate your equity, and you don't want to misstate your supplies. Now, in the next session, I would look at depreciation, which is a form of deferrals, which is a form of prepaid, that I like to keep depreciation separately. As always, if you like this recording, please like it, share it. I strongly encourage you to visit my website for additional resources. If you want to invest in your career, improve your grades, do better in school, give it a shot. Good luck and study hard, accounting is worth it, it's difficult, but it's worth it.
	Hello and welcome to the session. This is Professor Farhat and the session would look at depreciation, which is a form of the thorough or prepaid adjustments. Now I like to cover depreciation separately because it's a little bit different than prepaid expenses and a little bit different than supplies. This topic of depreciation is typically covered in financial accounting course and introductory course. Obviously you need to understand this on the CPA exam. As always, I would like to remind you to connect with me on LinkedIn if you have not done so. YouTube is what you would need to subscribe. I have 1,600 plus accounting auditing, finance and tax lectures. This is a list of all the courses that I covered. If you like my lectures, please like them. Click on the like button. It doesn't cost you anything. Share them. Put them in playlist. If they benefit you, it means they might benefit other people as well and connect with me on Instagram. On my website, you'll have resources such as additional questions for the CPA, through false multiple choice. If you're looking for something to supplement your courses, check out my website. So what is the depreciation? What's the idea of depreciation? Well, we have to understand that we have assets and hopefully we know that the definition of an asset asset is a resource that provides benefit to the business, provide benefit. Now, we have certain assets that provide benefit for one year or one period and certain assets that provide benefit for many periods. For example, if we bought a vehicle or a truck, well, a vehicle or a truck will be with us several periods. What do we call those assets that service the company many years? Plant assets. Those plant assets like a truck, like a building, like a warehouse, like equipment. Those assets, they service the company for many years, for many years. We call them plant asset. Now, what do we have to do with plant asset? Well, eventually, eventually, eventually, all assets, no exception, all assets, all assets eventually get expense. So when you buy a truck, when you buy a truck, let's assume you bought a truck for $10,000. That's the truck. Now, this truck, let me just go through the whole process. So let's assume I bought a truck for $10,000. When you buy the truck, you debit a truck $10,000 and we're going to assume you paid cash $10,000. Now, we're just what's going to happen. The truck is an asset. And on the balance sheet, you're going to have a truck that's worth $10,000. That's on the balance sheet. Now, this truck, it's going to be used. It's going to be used. And I'm going to tell you, it's going to be used for five years. We plan to use the truck for five years. One, two, three, four, five. Now, what's going to happen if this truck is going to be used up for five years, therefore, we have to expense it. It has to be expense because remember, we have to comply with the matching principle. We have to match it with the period in which it's benefiting. So what's going to happen every year, we're going to expense. I'm going to make it easy for you because it's said $10,000 over five years. So every year, we are going to expense $2,000. So every year of this $10,000, $2,000 goes to the income statement as an expense. Now, did we use this truck exactly for $2,000? No, we might have used it for more or for less. But to make our life easy, we're going to give every year you got it $2,000 of expense. And by doing so, we would expense the truck over a period of five years. This process is called depreciation expense. And this is what depreciation expense. Expense in this truck over the cost of the truck, the $10,000 over five years. So let's look at the official definition. Instead of expense in the cost of a plant asset, in the year it's purchased, we would allocate, we will expense it or spread out the cost, which is $10,000 over the useful life of five years. This is what depreciation is. So the proper formula is this. We'll take the asset cost for our example, was $10,000. Mine is something we call the salvage value. Now, the salvage value we're going to assume is zero. I'm going to explain the salvage value in a moment, divided by the estimated useful life I said five years. And now we have what's called the straight line, depreciation expense. Why is it that? Why is it called the straight line? We'll talk about this when we get to the depreciation chapter. Okay. Now, so useful life. You remember we divided by the useful life for our purposes was five years. This is an estimate. Useful life is a period of time that an asset expected to help produce revenue. We just estimated it made, we might sell it after two years or we may keep it for 10 years. Okay. But we have to estimate a useful life. And we'll talk about those scenarios if we sell it early or we got into an accident or we throw it away or we exchange it later on. The useful life expires as a result of wear and tear or because it's no longer satisfied the needs for the business. If we don't want, if we don't want that truck again, we don't have to wait five years. We can cut it out at three. It doesn't matter. That's the useful life and we'll deal with that later on. The salvage value, again, it's an estimate. I told you it's zero. Basically, the salvage value is the expected market or selling price of an asset at the end of its useful life. So simply put after five years, how much can you sell this asset for? People don't know how much you're going to sell something five years later. You don't know how much you can sell something five months later and sometime five days later. Therefore, you estimate in the real world, we always estimate zero because it's easier. This term is called also called scrap value or residual value. Same thing if you see the word scrap value or residual value, it's the same thing. So the best way to look at depreciation is to work an example using the formula. So let's take a look at this. We bought equipment on December 31st, 426,000. We estimate this equipment to have a useful life of five years. And we expect that the equipment to have a salvage value of $8,000. This is how much we expect the sell it after five years. And we purchased this equipment December 1st. Now it's December 31st. What happens is we have to depreciate, we have to record an expense, the depreciation expense of one month because one month went by and this asset kind of was used up. It's provided services. It provided services for one month. Therefore, fast forward, expect the equipment to be worth $8,000. Okay, that's fine. If it's going to be worth $8,000, it means we are only going to expense because remember, we bought it 426. We expect to have $8,000 left. So what are we going to expense? We are going to expense only $18,000. Not the full amount because we cannot, we don't expense. So this salvage value, we don't expense why? Because we expect the sell it. We expect to get our money back. That's why we don't expense. Okay, so $18,000. So the amount that we're going to be expensive over five years is $18,000. And we're going to spread it over $16,000, why $16,000 because it's five years and we're computing the depreciation per one month. Okay, so let's take a look at the formula here. So we're going to take the original cost of the asset, which is $26,000 minus the salvage value of the asset, which is happens to be $8,000. And that's going to give us something we call net cost. Sometimes we call this the, and other textbook they call it the depreciable base. How much we are going to depreciate. We are only going to depreciate $8,000 over five years. Not $26,000. Why not $26,000? Because this amount of $8,000 is not depreciable. We cannot depreciate $8,000. So let's compute the depreciation per one month. So let's go through the formula. So if we take cost $26,000 minus $8,000 divided by 60 month, the depreciation per month, it's going to be $300. So let's take a look at the adjusting entries. The first thing we're going to do is we're going to debit depreciation expense because we have to record depreciation expense. Then for every debit, we need a credit. What are we going to credit? We are going to credit a new account called accumulated depreciation. Now this is a new account. Okay. Now generally speaking, when I ask the questions in class, what should we credit? Usually, students says we need to credit the equipment. We don't credit the equipment. We keep the equipment at its value cost, historical cost of 26 pounds. So this account here, this accumulated depreciation, serve the purpose of reducing the equipment without touching the equipment account. So accumulated depreciation is what type of an account? It's a new account. The type is Contra Asset. And specifically, the Contra Asset here is for the equipment. So we created this account to service the equipment. How does it service in the equipment? It's reducing equipment. It's reducing the equipment account. So we don't credit the equipment account. We credit accumulated depreciation. Okay. So now we record the depreciation for one month. Now from a journal entry, we debit depreciation expense goes up. Accumulated depreciation equipment goes up. Again, this is a Contra Asset account. Now, how do we show the Contra Asset on the financial statement? Contra Asset goes on the balance sheet. This is a partial balance sheet. And every month Contra, Contra, the accumulated depreciation at accumulates. After three months, so December 300, January 300, February 300. So far, this is the third month. That's why we have 900. First of all, Contra accounts are kind of a reduction in the assets. So notice, we'll take the cost of the asset, we list the cost of the equipment at 26,000. Less 900 will give us 25,100. Now, this account here, we call it the book value. We call this the book value of the asset, the book value of the asset. Okay. So this is the book value after three months. And every month that goes by, every month that goes by, this account goes up by 300 and this amount goes down by 300. Okay. So this is what happened every month. This is what happened every month. Now, in the next session, now we looked at the depreciation. In the next session, we're going to look at a new type of the third rule, which is the third rule of revenues or unearned revenues. Again, it's part of the adjustments. As always, I would like to remind you, if you like this recording, please click on the like button, share it, put it in playlist. If you're looking for additional resources, please visit my website. You'll have access to additional material and you will benefit yourself, especially if you're studying for your CPA exam. 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