Understanding the Accounting Cycle Process

Okay, welcome to hour seven and eight. Today we're going to talk about the accounting cycle and what that actually is and then we're going to get right into doing it and walk through an accounting cycle ourselves. So again, just like last class, you're going to need a piece of paper and a pen or something to write with so you can actually do these questions as we go. Because again, it's practice, practice, practice, practice. That's how you're going to learn this stuff. Today's class we're going to do a quick review of the basic stuff we're supposed to know already. I'm going to keep hammering this stuff home because it is so incredibly critical that you understand this stuff. and you just know it, you're going to find the rest of the course a lot easier if that's the case. So I'm going to continue to hammer that home. So we'll start with a quick review. Then I'm going to look at what posting to T-accounts means, talk about what the accounting cycle actually is, then talk about what a trial balance is, and then we're going to start a practice example, which we won't finish today, but we'll get on and finish it next class. Five basic words you need to know. Got to know these by now. When you own something, that's an asset. When you owe something, that's a liability. The difference between these two is called your equity. That's essentially, again, there's no great definition. That's just kind of the size of the business or how much of the business the owner, essentially from an accounting standpoint anyways, has a claim to. And the two more difficult words, which you really do need to know, revenue is when we've provided the good or the service. We've earned it by providing the good or the service. And expense is when we've used something up. And again. Both of those have nothing to do with actual cash. We've looked at the basic accounting equation. That's our AL, our assets equal our liabilities. I can't talk today for some reason. Assets equal our liabilities plus our equity. Doing our different financial statements, we have to do our income statement first. Our income statement is our revenue minus our expenses. Again, revenue, our different accounts. Not named revenue, but sales revenue, service revenue, licensing revenue, interest revenue, lesson revenue, different types of revenue, but there's no account called just revenue. You add those all up, that gives you your total revenue minus all your different expense accounts. Same idea there. No account called just expense. That gives you your total expenses. One minus the other one. All of these numbers come from your financial records. You do one minus the other one on this piece of paper. You do it on the income statement. That gives you your net income, hence the reason it's called the income statement. And that is not an account. This does not show up in your accounting records. It only shows up as a number we've calculated on this piece of paper called the income statement. Once you've calculated it on the income statement, you then take the net income number and you use it on your second financial statement, which is your statement of owner's equity. This is the one that starts with your opening balance of capital. which is just called whatever the owner's name is capital so j capital it'll have a balance in it that balance is actually made up of two different numbers or two different totals the opening number that's in there is the opening balance anything else that's gone in there during the year is actually an investment so when the owner puts money or assets into the business it counts as an investment but it gets recorded into this account so there is no account called investments but these two numbers come from the one account called J Capital, which is an account. You then take your net income from your income statement, and then you minus your J Withdrawals number, which is an account. So that's coming from your financial records. And from there, you're going to calculate a number called J Capital or Owner Capital Closing Balance. It does not come from the account because the account has this number in it. You're just calculating what that number needs to be at the end of the year. And you're doing that on this piece of paper called the Statement of Owner's Equity. Once you've calculated J capital ending balance, you then take that number and put it on your third financial, your final financial statement, which is your balance sheet. And that is the only account that shows up under the equity section. And that plus your liabilities, which there are different liabilities account. Those two things need to add up to whatever your total assets add up to. And those come from accounts as well. I've talked previously about why these are blue and orange. And generally the blue ones up here all move in the same direction as equity. The two orange ones up here move in the opposite direction of equity. We haven't talked about why these are orange and blue. However, now that we finished last class, I can tell you why they're all orange or blue. And while everything I said about the equity accounts up here all moving in a certain direction compared to equity, the overall equity, that still holds true. The real reason why I sell these are all orange and blue. Is that the blue ones all get bigger with a credit So credits make these ones bigger The orange ones get bigger with a debit So this is actually a debit and credit idea here. So there's only three types of accounts. You actually make them bigger with a debit. And if you go back to your asset, liabilities, equity T-charts, where I had you put in the pluses and the minuses on either side, you will see that the only one that gets bigger with pluses are the assets. So then why are these two orange? Well, the answer is equity gets bigger with a credit. But these two move in the opposite direction of equity. So they don't get bigger with a credit. These two actually get bigger with a debit. Even though as they get bigger with a debit, you're actually making your equity smaller. All right, let's move on to some new stuff here. And that is last class, we were going through an example. And I had you keeping things in T accounts in the last example we did at the end of class. Let's talk about how to go ahead and add up our T accounts. When you are done a period, so this is, I believe, what our cash T account should look like. When you are done a period, draw a line underneath the last number. So whatever the lowest number is. So if this was D and this was E, even though this was the last number we put in, this is the lowest. number here because in terms of vertical so draw a line on whatever the lowest vertical number is it's got to go all the way across so don't just put it on one side even if there are only numbers on one side the line needs to go all the way across and you need to have this middle part continue on down right so it can't end right here it needs to continue on down It's then kind of like a game. Like if you were playing a card game or darts with a friend and you were keeping a running score for both of you, you would have your score on one side and their score on the other side. That's exactly what this is. It's the two sides of the accounting books competing against each other. You need to figure out which side won. And so in this example, the left-hand side, the debit side, scored $70,000 in total. The credit side scored $52,000 in total. So which side won? Well, the debit side won. 70,000 beats 52. It's bigger. The real question then is how much did it win by? And the answer is this side won by 70 minus 52. It won by 18,000. And that's the final balance in your T-account. It's how much the bigger side won by. So in this case, the left-hand side won by 18,000. So I'm just going to write 18,000 down here. It needs to be below the line that you just drew across, and it needs to be on the correct side of the line in the middle. Again, the left-hand side won, so I'm putting it on the left-hand side. You'll notice in accounts payable, which you also have, that when you draw the line across, you've got 2,000 on the left-hand side and 2,630 on the right-hand side. So in this case, the right-hand side won. So your final answer needs to go on the right-hand side. And the right-hand side won by 630. So go ahead and do that for all of your different T accounts. Pause the video and do that for all your different T accounts and come up with what the final balance needs to be in each one. And make sure you do the correct form. I don't need you to do this double underline. Technically, double underline kind of means that's the final number and we're done. I don't need you to do that. So go ahead and pause the video and try this out and then come back. Okay, you're back. Let's see what you got for all your T-accounts. At least in the example I did, this is what it all looks like. You've got cash, $18,000 on the left. Accounts payable, $630,000 on the right. Notes payable, $20,000 on the right. Notice that even one with only one number in it, we're still drawing the line across. We're still putting what the ending balance is. So $20,000 on the right. Supplies, $630,000 on the left. Equipment, $52,000 on the left. And your name capital, or J capital, $50,000 on the right. Now again, if you called equipment two different things, you would have two different numbers and two different balances. I don't remember what these were in this example, but if these were two different types of assets and you didn't call them equipment, you give them more individual names, you would have one account with a $42,000 balance and another account with a $10,000 balance. It doesn't affect our overall balancing, it just changes the names of things. So now that we have this, We are now going to take these numbers. We don't need to really, we don't need to go back to our journal entries anymore. Once you have your T-account balances done, we're done with our journal entries. But how do we get from these T-account balances to our financial statements? Let's go and look at the accounting process. We've looked at it briefly, but we're going to make it a little more expanded this time. So we're going to start with transactions. Things happen in the business. As we've seen, we go ahead and we record those. We write them down into our general journal. That's known as journalizing the transactions. Remember, the journal is done all by day, which is great for entering them. It's not great for summarizing things. So we took the same information that we put into the journal, and we rewrote it into a separate book, so no longer in the journal, but in a separate book called the general ledger, and that's called posting those numbers to our general ledger. In this case, we were being lazy because we were doing it by hand, so rather than using a full ledger, we were just using things called T-accounts. T-accounts are just a summary of what's in the ledger. It's just a simplified version of the ledger. So we were posting things to our T-accounts. Then the step we just did is we footed our T-accounts. Footing your T-accounts means you're just adding up your T-accounts and coming up with what the final balances are. That's the step we just went through. Question then is how do we go ahead and prepare our financial statements? Well the thing is we could do it directly from our T-accounts, but it's a lot of writing. It's a lot of... work, it's not a lot of work once you get used to it, but it's certainly a lot of writing, especially if you're doing it by hand, to write out all three financial statements. And it would really suck to write out all three financial statements and then find out your balance sheet doesn't balance. Because then you would have made a mistake somewhere and you don't know where your mistake is and you're going to have to erase everything and it's going to take a lot of effort and you've just wasted a lot of time writing out your financial statements only to find out that the balance sheet doesn't balance. So we do this intermediate step. It's not a formal financial statement. It's called the trial balance. And it's just a quick check to make sure that everything balances right now. So we're doing a trial, we're doing a test to make sure that everything balances. That's called the trial balance. Again, not a formal financial statement. If it balances, then we can go ahead and do our financial statements. And because then we know we're not wasting our time because we know where things should balance. And so then that's when we go ahead and we prepare our financial statements. And you have to prepare them in this order, your income statement first, your statement of owner's equity second, your balance sheet third. Okay, so let's talk about what a trial balance actually is. So let's go and look at this step here, figure out what a trial balance actually is. So as I mentioned before, a trial balance is not a financial statement. We are not sending this out to our users. You technically don't have to do one. Like no government body is going to come along and say, you didn't do a trial balance here. You're misleading your users, right? You don't send this out to the user so they don't know. It's just a calculation we do for ourselves, but every business I've ever seen in the history of accounting that I've ever looked at always has one. So it's something that everybody does because it's really very useful. What is it? It's simply a listing of all the final balances in our T accounts. So if you have 18 different T accounts, you will have 18 lines to your trial balance. It's one line per T account. and it only lists the final balance. So you don't get to see all the detail in between. It's just that final balance. And as it lists them, there's either a left-hand balance or there's a right-hand balance, right? It's either on the debit side or the credit side. That's all we're doing. We're listing them and then we're adding them up. And then the whole thing needs to balance. And if you've done everything right, it absolutely will 100% of the time. If it doesn't balance, you've made a mistake. And there's no sense going on and doing your financial statements if your trial balance doesn't balance because you already know you have a mistake. So you've got to go back and find it and make your trial balance balance. If, on the other hand, your trial balance does balance, it means your financial statements have to balance. So when you plug all the numbers into your financial statements, if your balance sheet doesn't balance at that point, well, you've made a mistake, but you know it wasn't in the numbers that you used. It was simply in your financial statements. So you don't have to go back and erase everything. You just need to focus on your financial statements and figure out where in the financial statements you made a mistake. Your journal entries were all fine because your trial balance balanced. So it kind of gives us a nice little checkpoint so we don't have to go all the way back to the beginning again. So let's go ahead and look at what our trial balance should look like in this particular example. I believe it's in this particular example. I apologize that these are not the right numbers. I have written account, debit, and credit up here. In real life, you do not need to do that. You don't need this line up here at all. I'm just doing it so you know what I'm doing. So if we go to our cash T account. It had a final balance of $18,000 on the left. So I'm just writing cash. And then I've got two columns here. I'm writing $18,000 on the left-hand side because that's where the balance was. Again, that's the debit side. But if you don't have these titles up here, it doesn't matter. As long as you have basically two different columns to write numbers in, and you put the final balance either on the left or the right, the exact same spot it actually was in your T-accounts. So this should be a very easy step. So we had cash. We had supplies, which was $630 on the left. We had equipment, which was $52,000 on the left. We had accounts payable, which was $630,000 on the right. We had notes payable, which was $20,000 on the right. And we had your name capital or J capital, $50,000 on the right. And those were the only accounts that we had. Again, if you split equipment up into two different things, you'd have an extra line here. You wouldn't have the equipment line. You'd have two other lines called whatever the assets were. But you'll notice the two of them, one was 10,000, one was 42,000. They essentially add up to 52,000 anyways. So it won't change your totals here. So you add up each side, and you'll notice they add up to 70,630 and 70,630. So this balances. That's all we want this to do. What is that number? What is 70,630? And the answer is it is absolutely nothing. It has no meaning whatsoever. It's simply the subtotal on your trial balance. just to make sure that your two sides balance. So don't take that to have any meaning whatsoever. It doesn't need to show up anywhere else on our financial statements. We don't look at it. That's not our total cash. That's not our total assets. That's not our total worth. It doesn't mean anything. Once your trial balance balance, again, if this doesn't balance, you've absolutely got to go back to your T-accounts and your journal entries and basically look at everything and try to find out where your mistake is. One hint, though, if you've made multiple mistakes, you've got to go back and look at everything. If you've only made one mistake, though, you really want to look at what the difference is between these two numbers. So let's suppose this was 69,630. Well, $69,630 is $1,000 off from $70,630. So I know that I'm off by $1,000. So what you need to do is you need to go back through your T-accounts and through your journal entries and look for $1,000. Maybe you had an entry of $1,000 and you just failed to post it to your T-accounts. Maybe you correctly posted it to your T-accounts, but when you're using your calculator, you forgot to type in that $1,000. So if you're just missing one number and it's $1,000, go look for $1,000. If you don't find $1,000, the other thing to look for is half of that number. So go back and look for $500. And what that would mean is you put the $500 on the wrong side. So maybe it was supposed to be a $500 debit. on the left hand side and in your t accounts you accidentally wrote it on the right hand side as a credit that'll make your right hand side too big by 500 and your left hand side too small by 500 therefore that's your thousand dollar difference But again, if you made more than one mistake, there's no simple rule. You've got to go back and look at every single thing. You've got to just double check to make sure the journal entry is balanced. You need to make sure you put in all the numbers correctly into their T accounts. And you need to get out your calculator and make sure you add up your T accounts again. It's a big pain in the butt if you made more than one mistake. One mistake is easy to find. More than one mistake, you've got to go back and do it in detail. From our trial balance, so you guys keep this open because this is going to be useful. From our trial balance, these are the numbers that go on to our financial statements with one exception. And all of these numbers go on the trial balance once and only once. So we have six numbers here. That means we're only going to have six numbers go on to our financial statements. We need to, and you should keep this, and every time you put one of these numbers on your financial statements, you should cross it off. And once you've finished your financial statements, or once you've crossed off all of these, you're done your financial statements. There's nothing more to do. The only slightly tricky one is our capital account. So going back to this, the only one that takes any real looking is the capital account. Because remember, the capital account that shows up in your financial records. is meant to be the opening balance. But you remember the opening balance account also has all the investments in here. So you're going to have to dig into this $50,000 and figure out how much of that was the opening balance versus how much of that were the investments during the year. So this is the only number that needs looking into. All the other ones, these are just the numbers. And again, once you've used each number once and only once, You've completed your financial statements and your balance sheet absolutely has to balance. Again, if it doesn't balance, it simply means you did something wrong with your financial statements because your trial balance already balanced. So we're going to start an example here. This is going to have us do everything of the entire accounting cycle. We're going to start with nothing and we're going to work up to preparing the financial statements. So we need two, at least two blank pieces of paper for now. Again, one page is your book called the journal. The other page is your book called the ledger. Later on, we're going to need another page probably for your trial balance and maybe another page for your financial statements. But for now, we definitely need two pages to act as two different books, your journal and your ledger. So let's get started here. It's August 1st. We decide to open a brand new business. We're going to open a driving range in Niagara-on-the-Lake. We start the business by putting $35,000, it's our entire life savings, into the business, and we also contribute land to the business worth $50,000. I guess we own some land already, maybe our grandparents passed away and left us some land, but we've decided to turn it into a driving range. So we're going to contribute land worth $50,000. Go ahead, journalize the transaction, make sure your equations are true, and then post it to your T-accounts. Pause the video, come back, and we'll take this one up. All right, you're back. So brand new business. First question is, is this a transaction? Again, using the separate entity assumption or the business entity assumption, we want to keep the owner completely separate from the business. So even though these are the owner's things and the owner owns the business, we're treating the business separate. So the business at the beginning of the day didn't have anything. By the end of the day, it now had $35,000 in cash and $50,000 worth of land. So it now has cash. Cash is an asset that's gone up. Land is an asset that's gone up. Assets that go up using our ale chart with the T accounts. We know that both of those are debits. Debits have to come first. What's the other side of the entry, though? Why did the business get this land and why did the business get this cash? It's not because they were owed it. They didn't borrow it from the owner, so they don't owe it back to the owner. These are investments by the owner. And investments get booked to the capital account. The capital account is an equity account. And as the business gets these things, the business is growing. It's getting bigger. So this is equity going up. Going back to our AL chart with the T accounts underneath, equity going up is a credit. So it needs to come after the debits and it needs to be indented. So your journal entry is going to look like this. Whatever your name is goes here, so I would be J, capital, equity going up, $85,000. You don't need accounts, debits, and credits up here. As long as you just write it here with the credit indented, and you write the numbers here with the credit numbers over in another column, that's all you need. It needs to have a date. I didn't, again, I've given you the date. I didn't write the date into my slides, but you absolutely should say August 1st here. Quickly check our equations. Our assets went up by 85. Our equity went up by 85. So yeah, that works. Our debits and credits, our debits are 85. Our credits are 85. So that works. Then we post these to our T accounts. Well, this is a brand new business. So a brand new business has no T accounts right now. It means it also doesn't have a chart of accounts. So we don't have to follow any set names that already exist. It's a brand new business. And when we set up the T accounts. The beginning balance is always just going to be zero because the business didn't exist before today. So the beginning balance is not what the balance is after the first transaction. The beginning balance is what the balance was from the end of last period. And there was no last period, so there is no opening balance other than zero. We have three account names up here, so we need three T accounts. One for cash, one for land, one for capital. So there's cash, it's 35 on the left. Land. 50 on the left and your name capital 85 on the right. So it's on the right in the journal entry, therefore it's on the right in the T account. And that's it for this one. Let's go to August 4th. It's three days later. This is a driving range. People are going to come to our place and hit golf balls. So we go out and we buy these very, very sturdy plastic and rubber mats that people hit their golf balls off of. Total cost of these was $12,240. These things are going to last for years and years and years, hopefully. We pay $2,000 in cash for them. We're going to pay the other $10,240 later. So same steps again, pause the video, go ahead and try this. Okay, you're back. So is this a transaction? Yes, we definitely paid cash. So cash is there. This is a transaction. Something's changed hands. The date is August 4th. We need to put the date in. What happened here? We paid cash. Again, find the easy one first. We paid cash. Cash is an asset. In this case, we paid it, so cash is an asset going down. An asset going down using our AL chart with the pluses and minus under it tells us that that is a credit. Credits come after the debits and get indented. So that's not the first line we need to write down, but if you want to, it's the second line you can write down. But you need to make sure you indent it. Cash is an asset going down by $2,000. We're going to pay the other $10,240 later. If we're paying them later. That means we owe it to them. If we owe it to them, that's a liability that's gotten bigger. Liability is getting bigger. That's a credit. How much do we owe them? $10,240. What are we going to call that? Again, it's not a loan payable. We didn't borrow the money from them. It's not a note payable. As far as we know, note payables tend to exist when you borrow money, but at the very least, you have to have signed something and say, yes, I owe you this much money. This is what I will pay you by. That's not what's happened here either, so it's not a note payable. This is money we owe them because we bought something, and we just said we'll pay you later. We bought it on account. So this is an account payable, something that we have to pay later. We owe them money and we gave them money. Why? Well, that's going to be the other side of the transaction. Well, why did we give them this money? Well, we gave them this money because we got golf mats, which is absolutely called equipment. I'm going to switch things up a little bit this time. I'm going to call these things golf mats. Absolutely right if you call it equipment. So equipment is absolutely correct. I'm just going to switch it up and call it golf mats this time. So I call it golf mats. That's an asset. It's gotten bigger. $12,240. Check our equations. It works. Make sure our debits equal our credits. They do. So we're all good. Post it to our T-accounts. We have three accounts here, so we need to have three T-accounts that we post to. But remember, we already have cash. So we don't need to make a new one for cash. We're going to make a new one for golf mats or equipment, depending on what you called it. A new one for accounts payable. Again, brand new business. They don't have opening balances. And so we just go ahead and post those like that. And then we're done. Let's move on to the next one here. These will start to get tougher. So I absolutely need you to be trying these before you look at the answers because it's practice, practice, practice. And yes, you will not get some of these. That's kind of the point. I'm showing you some new things, but I need you to be thinking about it. And if you can actually think about it without seeing it and getting it right right away, you're really doing well already. So that's a good sign. And it's completely normal to not be getting these, but try them. You should always be able to probably get one line. You should get one side. Sometimes the second side of the transaction is difficult. But yeah, keep trying these. We're going to keep seeing some new ideas as we go here. All right, it's August 7th. We contribute our old computer to the business. So the business can basically use it to keep track of transactions and print off invoices. Five years ago when we bought the computer, it cost us $1,700. If we were to try to buy it today, it's probably only worth $150. So think about this one. Is this one even a transaction? If it's not, you don't have to do anything. If it is, then go ahead and do your steps. So pause the video and try this one. All right, you're back. Maybe you nailed it. Maybe you struggled with it. Maybe you did it quickly, but you're not sure if your answer is right or wrong. So let's go ahead and try this. First of all, did we go out and buy anything? The answer is absolutely, we did not go out and buy anything here. So is this even a transaction? Well, it was our computer to begin with. It's still our computer. So it's not a transaction, except the separate entity assumption or the business entity assumption, which says we treat the business separate from the owner. So if we were looking solely at the business, the business did not own a computer before today. By the end of today, they do own a computer. So something has absolutely changed for the business. Something has changed hands here. So this is a transaction. We do have to record this. So put in a date, August 7th. The account names, one of them should be easy. It's just called computer. Again, you technically could call this equipment if you wanted to. I'm going to call it computer. It's an asset. The business owns it. It's an asset that's gone up. So that's our debit. What's the other side of the entry? Well, this gets a little trickier. Hopefully you were able to figure it out though. And that is, well, why did, again, one side of the transaction always answers the other side. Why did the business get this computer? Is it because it bought it? No. Does it owe money for it? No. Was it just given to the business? Yes. That's the reason why the business got the computer. The owner just gave it to the business. And when the owner gives an asset to the business, that's exactly what an investment is. Now remember, there is no account for investment. Investment gets booked directly to the capital account. So this goes to the capital account. So again, whatever you called it in the previous example, I called it... In my slides, I called it Your Name Capital. In real life, I would just call it J Capital. And capital is always an equity account, and the business has just grown here, right? It didn't have a computer before, and now it suddenly has a computer. So the business has grown, so the equity has gotten bigger. So there's equity going up. Equity going up is a credit, which is why it needs to be written second, and it needs to be indented. Doesn't answer the question, though, is how much we need to record this for. So today it's worth 150. Five years ago, it cost us $1,700. We have gap principles to look at, though. Remember the gap principle, the historical cost principle. And that is we want to record our assets at what they originally cost us. So that principle would suggest that we need to record this at $1,700 because this computer costs us $1,700. However... We do have the separate entity of the business entity assumption, which says the owner is separate from the business. So when we look at the historical cost principle, and we want to record these assets and what they cost us, us, based on the separate entity assumption, the business entity assumption, us is the business. How much did this computer cost the business? Well, this computer didn't actually cost the business anything, right? It wasn't the business that bought this computer for $1,700. So the $1,700 is completely irrelevant to the business. The day the business got this computer, they got something worth $150. So what did the owner really give the business? The owner gave the business something worth $150. So the owner has invested essentially assets worth $150 on this day. So we are going to record this at $150. And so that's our entry. You can check your equations. You'll see that they both hold true. You want to post this to your T account. There's no T account for computer yet. There's already a T account for capital. So we go ahead and we just reuse that one. We post these two things to our T accounts. And that's what they should look like at this point. Again, if you call the golf mats equipment and you call the computer equipment, there's nothing wrong with that. You would only have one account for equipment. And now it's going to have two different numbers in it, right? That's totally fine. Continue on with that. There's nothing wrong with that. All right. It's now the next day. It's August 8th. We take out an advertisement in the newspaper and it runs immediately. The advertisement cost us $2,400 and we've got 60 days to pay. Again, walk through all the same steps. Is this a transaction? Is it not a transaction? And if it is, go ahead and do your other steps. Pause the video and come back and we'll take this up. Okay, you're back. Again, these are going to start to get a little bit tricky. That's kind of the point. We take out an ad in the newspaper and it runs immediately. Cost us $2,400, but we haven't paid them yet. So, first question, is this even a transaction? What have we given them? We've given them a promise that we're going to pay them. What have they given us? Well, they haven't really given us anything, have they? Do we own anything new? No, we definitely don't own anything. We don't own that. However, why are we paying them then? Or why are we going to pay them? We're going to pay them because we're going to give us an ad. They've already given us this ad. So they've definitely given us something now. So this is a transaction. We do have to record this. There are two sides to this transaction. The easier one is definitely the credit. We owe them $2,400. Owing somebody is a liability. It's gotten bigger. We didn't owe them anything before today. So it's a liability that's gone up. So that's our credit. What do we call it? Well, we essentially bought the ad and we haven't paid it yet. We bought the ad on account. So this is a accounts payable. So that's our credit. That's the second line. The question then is, well, why do we owe them money? Well, we owe them money because they gave us an ad. And so some of you probably called this advertisement asset going up. An asset going up is something that we own. Do we own more of it? Well, they gave us an ad. The question is, do we own it? Remember some of the characteristics of things you can do with things you own. If it's physical, you can put it on a shelf. Now, obviously, an ad is not physical, so we can't put it up on a shelf. But when you own something, you can sell it to somebody else. Can we sell this ad to somebody else? So this is our ad for our golf business. Could we sell it to Pepsi? Well, no, Pepsi wouldn't want to buy this because this is an ad of our company. You can change and alter things that you own, right? If I own a computer, I can spray paint it if I want. I can turn it upside down. I can do whatever I want with it. Can we change this ad in any way? And the answer is no, because it's already gone in the newspaper and it's already been shipped out into the world. We can never get this ad back again. We can never change this ad. We can never sell this ad to someone else. This ad is gone. We do not own it. If we don't own it then, where the heck is it? And the answer is, we've already used it. We buy an ad for the purposes of having it go in a newspaper. That's already happened. So we've already used it. And when you've used something, you've used it up. And using something up, again, five words. You've got to know these words. Hopefully this immediately springs into your brain and you know that this is an expense. And hopefully you're able to recognize that as you did this. We've used up this ad. What have we used? It's an ad. So it's called ad expense or advertising expense. What type of an account is it? Well, it's an expense that's gotten bigger, but that's not what type of account it is because asset liability equity. Well, expenses are, again, using the orange and blue slide. Those are things that go down and directly affect equity. So this is an equity account. And when we use something up, what's happening to the size of the business, it's shrinking. So this is an equity going down using our ALT charts, equity going down. is a debit. So this needs to come first and it does not get indented. So August 8th, that's the date. This is what your journal entry is going to look like that day. Again, whether or not it's advertising expense or ad expense, both of those are fine. Plug those into our T-accounts. Sorry, plug those into our equations just to make sure that they balance. They do. Then we need to post it to our T-accounts. Again, we have two account names, so we're going to have two accounts that these need to go to. We already have an accounts payable one, so you don't write a new one. You go ahead and use the one that already exists. We don't have one for advertising expense yet, so you need to go ahead and create it. Now again, just for clarity, I am writing these because I don't have access to two pages here. So I am just writing these at the bottom of each slide. You absolutely should not be writing these after each transaction. The transactions should all be in order in your journal. The T-accounts should all be on a separate page, and you should already have this accounts payable there. You should just be updating it. I am just writing it like this so I can fit it all into one slide and show you. You absolutely should be doing this on two separate pages. Just to keep it in your mind that these are actually two separate books. One is the journal you're writing in, and the other one you're posting into is called The Leisure. It's now five days later. People show up, or so people call us and say they want to make a reservation. There's going to be 60 of them show up, and to use our driving range, we're going to charge them $420 in total. We do not ask for a deposit. So go ahead and work through the steps here. Pause the video, work through the steps, and I will talk to you on the other side. Okay, you're back. This one here, they've called us. They're going to show up, and we are going to let them use our driving range. They are going to pay us. What exactly does that mean? That means we promise to let them use our driving range. They promise to pay us. So we're left with just a promise for a promise here. This is not a transaction. When something actually changes hands, either when they come to our driving range or they pay us, then it is a transaction. If they had paid us in advance, if they had paid us on this day, then it's definitely a transaction because something's changed hands. But as of this moment, we promise to let them use our range. They promise to pay us. That's just a promise for a promise. That's not a transaction. August 18th, we have some other customers show up today. They actually come to use the driving range. Now, if you don't know how a driving range works, They show up, they bring their own golf clubs, we give them a basket, a bucket of balls. So we have golf balls, we put them in a bucket, we give them the golf ball of buckets, the bucket of golf balls. They then take their clubs and they hit our golf balls out into our field, and then they leave. So they don't leave with our golf balls. These are still our golf balls. We just let them hit our golf balls. And then after they leave, we go and pick up the golf balls and then we put them in the bucket for the next person. So they drive $100 worth of balls. So that means when they hit these golf balls, we charge them $100. It doesn't mean the golf balls are worth $100. We charge them $100 to let them hit our golf balls. They pay us in cash. So try this one, pause the video, come back. Okay, you're back. Has anything changed hands here? Yeah, they gave us $100 in cash. So this definitely is a transaction. So we need to record it. Again, look for the easy one first. They gave us cash. That's an asset that's gone up. An asset going up is a debit. So you got your debit. You got your first line. That was easy. The second part is, well, why did they give us $100? They gave us $100 because we let them hit golf balls. Well, that's exactly what our business does, right? We've provided them with a service. The service is letting them hit our golf balls. So we have earned this, right? We've let them do something. We've provided them with the good or the service. So we have earned this. This is called revenue. Now, exactly what kind of revenue you call this is up to you. You cannot just call it revenue. So it could be driving range revenue. It could be range revenue. It could be service revenue. I personally, for this example, I like to call it range revenue. But any of those other ones that I mentioned are also fine. So cash is an asset going up. Revenue is an equity account. We've earned it, so our business is growing. Our business is getting bigger, so it's equity going up. Equity going up is a credit, which is why this one came second, and it's been indented. Check our equations. Make sure that they work. They do. If you ever check your equations and they don't work, you've absolutely done something wrong, so you've got to go back and fix it. Post these to our T-accounts in our ledger. We already have a T-account for cash. We don't have one for range revenue, so we need to go ahead and create it. So it's all going to look like that. Now, the group that said they were going to come back on the 20th, for some reason, came back on the 22nd instead. They've just shown up this day, and they've used our driving range. They pay us the $300 in cash, and they agree to send us a check next week for the other $120. So they leave without paying the full balance. Go ahead and try this one. Work through your steps. Pause the video, and I'll talk to you when you come back. Okay, you're back now. You've tried this one. They've paid us cash, so something's definitely changed hands. So this is a transaction. Again, they've given us cash. Do that one first. It's the easy one. Cash is an asset that's gone up, so it's a debit for $300. They tell us they're going to send us a check for next week. Well, that essentially is the same thing as saying they owe us. So this is something they've used our service. They didn't pay us. So they've essentially bought the other 120 on account or we've put the other 120 on account. This is an amount that we will get to not pay. We don't have to pay it. We get to receive this. This is an accounts receivable. It's an asset. We own the right now to collect this money from them. So it's an asset that's gone up. So it's also a debit for 120. The third line, though, is, well, why do why do they give us cash and why do they owe us? And the answer is because we let them hit golf balls. And again, that's exactly what our business does. We let people hit golf balls. And therefore, at this moment, we've just earned this today. So this is revenue today. And again, I called it range revenue. I will continue to call it range revenue. And I know they only gave us $300, but that's not the point. The point is we let them hit our golf balls $420 worth. So whether they paid us or not is absolutely irrelevant. In terms of whether or not this is revenue. The point is they hit $420 worth of golf balls today. So we've earned $420. So it's the full amount. Plug these into your accounts. Plug these into your equations. Make sure they work. They do. Post it to the T accounts. We already have range revenue. We already have cash. So just post those into the ones that already exist. Create a new one for accounts receivable. So that should look like that by the time you're done. I am putting the dates down here. I believe my accounting lab wants you to put the dates in. On a test, I do not need you to put the dates in. When you're doing it by hand, I don't need you to put the dates in. I've just left it there so you can easily see where each one is really from. But I don't need you to be writing the dates in. All right, August 22nd, that night. So they came and used our range that day. We're now at that night. We're cleaning up. And we noticed that they've destroyed one of our mats. So there was some thug out there with his golf club. Or maybe the guy had his kid with him and the kid had a lighter with him and was just lighting it on fire. I don't know. So somehow one of our mats got destroyed. These things were supposed to last us for years. But they've destroyed one of our mats. So we just throw it in the garbage. Think about your accounting steps, what you need to do here, if anything at all. So pause the video, try this one, come back, and we'll talk about it after. Okay, you're back. So what's happened here? Has anything changed hands? Well, no, we're not even dealing with anyone else. So I can see how this might not be a transaction. But remember the actual definition of a transaction. The actual definition of a transaction is if there's any change in your assets, your liabilities, or your equity. Well, with our assets, has anything changed? And the answer is yeah. At the beginning of today, we owned a mat. At the end of the day, we threw in the garbage, so we don't own the mat anymore. So actually, something has happened to our assets here. So this is a transaction. What's actually happened to our mats? Well, the easiest one is, like I said, at the beginning of the day we own something, which is an asset. At the end of the day, we don't own it. So our asset has gone down. So whatever we call that asset, again, you might have called it equipment. I know I called it a golf mat. So for me, a golf mat is an asset that on this day has now gone down. This particular mat, so I know we had lots of mats and there was like 12,000 worth of mats, but we didn't lose 12,000. We only lost this one mat. So this one mat used to be recorded at $50 and now it's gone. So we've essentially lost a $50 mat here. So that's going to be asset going down using my little chart is my credit. So that's going to be my second line and that's going to be indented. Golf mat's an asset going down for 50 bucks. Again, remembering that one side of the transaction always explains the other side. We lost a golf mat. Therefore, what? Well, do we owe somebody now? No. Do we own something more now? No. If you're struggling with this, here's another way to think of this. If you look at your, again, your basic thing that I want you to write down all the time, your assets equal liabilities plus equity with a little T chart under each one and the pluses and the minuses and the debits and credits. If you look at that, we know that we need a debit. There are only three kinds of debits on there, right? There's only three T accounts. So there's only three places where you have debit written down. The first one is asset going up is a debit. So because we threw out this golf mat, do we now own more of something else? Well, no, clearly we didn't get in. We just threw something else. We definitely don't own more of something else. Go to the next one, a liability. A liability going up is a credit, but we want a debit here, so it's a liability going down. So the debit is a liability going down. So because we threw out this golf mat, do we now owe somebody less money? And the answer is no, we didn't owe anybody any money here. I guess we owed a little bit of money from buying the golf mat, but because one of our customers destroyed a golf mat, it doesn't mean that we owe the person we bought it from less money. So a liability hasn't gone down here, which only leaves us with equity. And the debit in equity is equity going down, our business shrinking. Because we had a golf mat and we threw it out today, did our business shrink? The answer is yes. That's exactly what happened, right? At the beginning of the day, we owned a golf mat. At the end of the day, we didn't. So our business has actually shrunk. So it's definitely an equity going down. Now, the question is, which equity account is it? If you go back to the blue and orange slide, all of the accounts above equity are all equity accounts. So it's just one of those accounts. So it's got to be one of those. So if you're trying to just narrow things down, that should help you narrow things down. If you couldn't just actually think of this right off the bat anyway. So for me, we threw out a golf mat. What happened essentially is another way of saying on that day, we just used up a golf mat. We had one and then it's gone. We must have just used it up. And that's exactly what happened. One of our customers came and used it up for us. When you use something up, it's called an expense. What did you use up? You used up a mat. So I just went ahead and call this a mat expense. Now, for absolute clarity, if you've taken accounting before, this is not the correct transaction. I am assuming that at this point you have not taken accounting. We are only answering this question based on everything we know at this very moment. And at this very moment, golf mats would be recorded at what it costs us. And we used it up, so I'm going to call it an expense. So based on everything we know at this moment, this is the right entry. In real life, that's actually not the right entry. If you haven't taken accounting before, just ignore this little 10 seconds I'm about to say here. If you have taken accounting before and you're confused by this, I will just tell you what the answer probably should have been. Right. Golf mats would depreciate. So maybe this would have been depreciated. accumulated depreciation account and then we sell it and we would need to check or we throw it out we would probably have a loss on disposal and the loss on the disposal would be the difference between what we got for zero and the net book value of the golf mats which again we don't necessarily know what that is but it's probably 50 so it's probably a loss on disposal of 50 bucks But that we're not doing that yet in this course. So completely ignore all that. Back to everybody talking here. So for the purposes of this course at this very moment, this is our entry. We will see more after test two how this actually would get recorded. But again, that's not until after test two. Plug these into your equations. It works. It works. Post it to the T accounts. Again, we already have golf mats. So we're just posting the 50 on the right hand side here for golf mats. We don't have mat expense yet. So we're setting a new one up. Okay, it's now August 27th. We agree with a local golf course to pay them a fee of 10% of any of the rates we get to charge our customers that they have booked with us. So if they send us customers, we're going to give them 10% of whatever the range rates were. So pause the video, try this one, come back. Okay, you're back. Clearly, can't do much here. There's no numbers and nothing's happened yet, right? We promised to pay them 10% and they promised to send us customers. So at this point, it's just a promise for a promise. Nothing has actually happened yet. So this is not a transaction. We are now done. This is the entire month. Those were all the transactions for the whole month. Go ahead and do the next step in the accounting cycle. Pause the video and try that. Okay, now you're back. You've done that. Hopefully, you know the next step is to foot your T-accounts. If you didn't know that was the next step, pause the video now and go ahead and do that. Okay, now you're back. So everybody should have done this by now. So we have our T-accounts. This is what all our T-accounts should look like. This is what all the final balances should look like. Again, if you called computer and golf mats both equipment, you would only have one account for the two of them, and it would be all these numbers added together. So the total for that should be $12,340 would be the final balance in that account if you put them all together. Again, go ahead and do the next step. Pause the video. Go ahead and do the next step in the accounting cycle. Okay, you're back. So hopefully you know what the next step is. The next step is to then after you footed this, then we're going to do this new thing that we just discovered, which is called the trial balance. If you didn't know what's the trial balance, pause the video and go ahead and do the trial balance for now. Okay, everybody's back. Everyone should have done the trial balance now. In my accounting lab, I believe they want you to probably put the company name, trial balance, and the date here. Do that in My Accounting Lab. For me, this is not a formal document. You don't need all that stuff at the top, so it's not a requirement. So when you're doing it by hand on a test, you don't need that stuff for me, but My Accounting Lab, you probably do. Again, you don't need the words debits and credits here. What you do need is all your different accounts listed here. So here's all my different accounts. In my accounting lab, it may be picky about the order you put things in. So please, please, please look up examples in your textbook and try to follow the order that they use. They will generally put the assets first, and they're probably going to put assets like, and even the assets, try to put them in the same order they put the assets in. Then they're going to put the liabilities and try to use the same order of the liabilities that they use. Then they're going to have capital, and then withdrawals, and then they're going to have their... Usually their revenue, revenue would normally be up here, and then their expenses. Again, please follow the examples in the book because my accounting lab might be picky. When you're doing it by hand, for me, order does not matter. Again, this is not a formal financial statement, so there's no technically wrong way to do it. So I would never ding you marks for the order. But please be careful in my accounting lab because they may care about the order. So you put all your accounts in here. Your debit should add like the left-hand column should look like this. The right-hand column should look like this. The point is they both need to add up to 98,310. That balances, so we're good. Go ahead and do the next step of the accounting step, the accounting. I guess before, if yours didn't balance, you should know that you need to go back and you need to find out where the mistake is because this absolutely needs to balance. If it did balance, go ahead and do the next step now and pause the video. Okay, you guys should have gone ahead and done your financial statements. If you didn't, pause the video now and go ahead and do your financial statements. Okay, now everybody's back. Everybody should have done their financial statements. First financial statement you always have to do is the income statement. So remember, you need to put the company name, which statement it is, and what the period of time was. In this case, it's a month. It was only August, right? It wasn't the whole year. It was only a month. And it ended August 31st. That needs to be at the top. We need our headings, heading for revenue, heading for expenses. Put in all our revenue here, but we only had one revenue account. Put in all our expenses, we had two. So we need a subtotal, total expenses. Revenue minus expenses gives us our net income. This is, I want to be very clear about when you see this written, because you might see this written in multiple places. Accountants like to write net income and then in brackets put loss. And what that means is, is if this number is not in brackets, it's called your net income. If this number is in brackets, it's called your net. loss. So it's no longer called your net income. It's now called your net loss. It's the same thing. It's just that rather than make a positive income, you now have a negative income, which is known as a loss. So 520 minus 2450 is 1930. Brackets for accountants are the same thing as a minus sign. So this means we have a net loss of 1930. If it said net income bracket loss, and this was a positive number, it didn't have brackets. It would just mean that's our net income. It doesn't mean it's our net loss. So this is, if you wanted to write this as a positive number, like actually do the math and write it as a positive, you wouldn't have the word income here at all, and you wouldn't have the brackets. You would just write net loss, and then you would just write 1930. But because we've written it this way, it's the brackets that tell you that this is actually not net income. It's actually a net loss. On to our next statement, which is the statement of owner's equity. You need the same three things at the top. Oh, I see I haven't changed the title. Just for clarity, this is the statement of owner's equity, not retained earnings. Retained earnings is a corporate concept. So this is the statement of owner's equity. Just for clarity. Statement of owner's equity. J capital at the beginning. J capital at the end. All of the numbers. Oh, sorry. I should have said this also as well. All the numbers on here came from our trial balance. So once you use range revenue 520, cross it off on your trial balance. 2400, cross it off on our trial balance. 50, cross it off on our trial balance. This is just a subtotal. This is just a total. These numbers all come from our trial balance as well. But remember the capital account contains two numbers. It contains our opening balance and it contains all of our investments for the year. So this is the one account you actually need to go back to the T account for and see whether or not those numbers that make up the total, the total was $85,150, whether or not those numbers make up the opening balance, investments, or a mixture of the two. and you need to figure out what the mixture is. And so in this case, we know that the opening balance was zero. Everything else was an investment. So the entire balance was an investment here. So once you've added those two together, they add up to 85, 150. That's exactly what was on the trial balance. Cross it off in the trial balance because now we've used the total that was on the trial balance. We then add the net income, which is the same thing as minusing the net loss. And again, because we're putting it in brackets, we're actually lessing the loss is what we're doing here. So we're minusing the loss. We then minus out the withdrawals. So the net loss comes from our previous financial statement. The withdrawals comes from an account. So we need to go back to our trial balance, look for withdrawals. There is no withdrawals account, which just means withdrawals were zero, which is why we're putting zero here. Add those together, you end up with a capital balance at the end of the year of 83,220. Again, that is not in your capital account. That is simply the number that you calculated on this piece of paper, which is then the number that you carry forward to your next financial statement, which is your balance sheet. So now we do our balance sheet. Same things at the top. Driving range. Balance sheet. Remember, the balance sheet is not a period of time, so it's not a month. It's just the very moment at the end of August 31st, 2020. So we don't put month here. This is just August 31st, 2020. Asset heading, liability and owner's equity heading. Although I'm fine with you just having a liabilities heading. Put your assets down, add them up, gives you total assets. You've got one liability, so you don't need a subtotal here because there's only one. In our equity section, you need a heading. The account is called J Capital or whatever your name is, Capital. It was 83,220. Again, that does not come from the trial balance. That comes from our previous financial statement. All of these other numbers come from our trial balance. Once you put them in, cross them off on your trial balance. You'll notice that once you do that, you've crossed off every single number in your trial balance, and you've used each number exactly once. So don't use them a second time, and don't miss any numbers. If you use it more than once or you miss a number, your whole thing's not going to balance. You have to use each number exactly once. you add up this side you have total assets 95 000 you add up this side you end up with 95 000. remember to label this this is total liabilities plus owner's equity so i don't technically need you to have this this heading up here something wrong with having it i like to do it but technically as long as you have a heading for liabilities and a lot heading for equity and if there's more than one of either of these you've got to add them up and get a subtotal But at the end, when you add up the total liabilities and the total equity, you need to have a line called total liabilities plus owner's equity. The whole thing balances, so that works. So that's good. I'm going to show you the homework. Go ahead and do it, and then I'll see you next class.

That's how you're going to learn this stuff. Today's class we're going to do a quick review of the basic stuff we're supposed to know already. I'm going to keep hammering this stuff home because it is so incredibly critical that you understand this stuff.

and you just know it, you're going to find the rest of the course a lot easier if that's the case. So I'm going to continue to hammer that home. So we'll start with a quick review.

Then I'm going to look at what posting to T-accounts means, talk about what the accounting cycle actually is, then talk about what a trial balance is, and then we're going to start a practice example, which we won't finish today, but we'll get on and finish it next class. Five basic words you need to know. Got to know these by now. When you own something, that's an asset. When you owe something, that's a liability.

The difference between these two is called your equity. That's essentially, again, there's no great definition. That's just kind of the size of the business or how much of the business the owner, essentially from an accounting standpoint anyways, has a claim to. And the two more difficult words, which you really do need to know, revenue is when we've provided the good or the service.

We've earned it by providing the good or the service. And expense is when we've used something up. And again.

Both of those have nothing to do with actual cash. We've looked at the basic accounting equation. That's our AL, our assets equal our liabilities. I can't talk today for some reason.

Assets equal our liabilities plus our equity. Doing our different financial statements, we have to do our income statement first. Our income statement is our revenue minus our expenses. Again, revenue, our different accounts.

Not named revenue, but sales revenue, service revenue, licensing revenue, interest revenue, lesson revenue, different types of revenue, but there's no account called just revenue. You add those all up, that gives you your total revenue minus all your different expense accounts. Same idea there.

No account called just expense. That gives you your total expenses. One minus the other one. All of these numbers come from your financial records.

You do one minus the other one on this piece of paper. You do it on the income statement. That gives you your net income, hence the reason it's called the income statement. And that is not an account. This does not show up in your accounting records.

It only shows up as a number we've calculated on this piece of paper called the income statement. Once you've calculated it on the income statement, you then take the net income number and you use it on your second financial statement, which is your statement of owner's equity. This is the one that starts with your opening balance of capital. which is just called whatever the owner's name is capital so j capital it'll have a balance in it that balance is actually made up of two different numbers or two different totals the opening number that's in there is the opening balance anything else that's gone in there during the year is actually an investment so when the owner puts money or assets into the business it counts as an investment but it gets recorded into this account so there is no account called investments but these two numbers come from the one account called J Capital, which is an account.

You then take your net income from your income statement, and then you minus your J Withdrawals number, which is an account. So that's coming from your financial records. And from there, you're going to calculate a number called J Capital or Owner Capital Closing Balance.

It does not come from the account because the account has this number in it. You're just calculating what that number needs to be at the end of the year. And you're doing that on this piece of paper called the Statement of Owner's Equity.

Once you've calculated J capital ending balance, you then take that number and put it on your third financial, your final financial statement, which is your balance sheet. And that is the only account that shows up under the equity section. And that plus your liabilities, which there are different liabilities account. Those two things need to add up to whatever your total assets add up to.

And those come from accounts as well. I've talked previously about why these are blue and orange. And generally the blue ones up here all move in the same direction as equity. The two orange ones up here move in the opposite direction of equity.

We haven't talked about why these are orange and blue. However, now that we finished last class, I can tell you why they're all orange or blue. And while everything I said about the equity accounts up here all moving in a certain direction compared to equity, the overall equity, that still holds true. The real reason why I sell these are all orange and blue.

Is that the blue ones all get bigger with a credit So credits make these ones bigger The orange ones get bigger with a debit So this is actually a debit and credit idea here. So there's only three types of accounts. You actually make them bigger with a debit.

And if you go back to your asset, liabilities, equity T-charts, where I had you put in the pluses and the minuses on either side, you will see that the only one that gets bigger with pluses are the assets. So then why are these two orange? Well, the answer is equity gets bigger with a credit. But these two move in the opposite direction of equity.

So they don't get bigger with a credit. These two actually get bigger with a debit. Even though as they get bigger with a debit, you're actually making your equity smaller. All right, let's move on to some new stuff here. And that is last class, we were going through an example.

And I had you keeping things in T accounts in the last example we did at the end of class. Let's talk about how to go ahead and add up our T accounts. When you are done a period, so this is, I believe, what our cash T account should look like. When you are done a period, draw a line underneath the last number. So whatever the lowest number is.

So if this was D and this was E, even though this was the last number we put in, this is the lowest. number here because in terms of vertical so draw a line on whatever the lowest vertical number is it's got to go all the way across so don't just put it on one side even if there are only numbers on one side the line needs to go all the way across and you need to have this middle part continue on down right so it can't end right here it needs to continue on down It's then kind of like a game. Like if you were playing a card game or darts with a friend and you were keeping a running score for both of you, you would have your score on one side and their score on the other side.

That's exactly what this is. It's the two sides of the accounting books competing against each other. You need to figure out which side won.

And so in this example, the left-hand side, the debit side, scored $70,000 in total. The credit side scored $52,000 in total. So which side won? Well, the debit side won. 70,000 beats 52. It's bigger.

The real question then is how much did it win by? And the answer is this side won by 70 minus 52. It won by 18,000. And that's the final balance in your T-account.

It's how much the bigger side won by. So in this case, the left-hand side won by 18,000. So I'm just going to write 18,000 down here. It needs to be below the line that you just drew across, and it needs to be on the correct side of the line in the middle. Again, the left-hand side won, so I'm putting it on the left-hand side.

You'll notice in accounts payable, which you also have, that when you draw the line across, you've got 2,000 on the left-hand side and 2,630 on the right-hand side. So in this case, the right-hand side won. So your final answer needs to go on the right-hand side. And the right-hand side won by 630. So go ahead and do that for all of your different T accounts.

Pause the video and do that for all your different T accounts and come up with what the final balance needs to be in each one. And make sure you do the correct form. I don't need you to do this double underline. Technically, double underline kind of means that's the final number and we're done. I don't need you to do that.

So go ahead and pause the video and try this out and then come back. Okay, you're back. Let's see what you got for all your T-accounts. At least in the example I did, this is what it all looks like. You've got cash, $18,000 on the left.

Accounts payable, $630,000 on the right. Notes payable, $20,000 on the right. Notice that even one with only one number in it, we're still drawing the line across.

We're still putting what the ending balance is. So $20,000 on the right. Supplies, $630,000 on the left. Equipment, $52,000 on the left. And your name capital, or J capital, $50,000 on the right.

Now again, if you called equipment two different things, you would have two different numbers and two different balances. I don't remember what these were in this example, but if these were two different types of assets and you didn't call them equipment, you give them more individual names, you would have one account with a $42,000 balance and another account with a $10,000 balance. It doesn't affect our overall balancing, it just changes the names of things. So now that we have this, We are now going to take these numbers.

We don't need to really, we don't need to go back to our journal entries anymore. Once you have your T-account balances done, we're done with our journal entries. But how do we get from these T-account balances to our financial statements?

Let's go and look at the accounting process. We've looked at it briefly, but we're going to make it a little more expanded this time. So we're going to start with transactions. Things happen in the business. As we've seen, we go ahead and we record those.

We write them down into our general journal. That's known as journalizing the transactions. Remember, the journal is done all by day, which is great for entering them. It's not great for summarizing things.

So we took the same information that we put into the journal, and we rewrote it into a separate book, so no longer in the journal, but in a separate book called the general ledger, and that's called posting those numbers to our general ledger. In this case, we were being lazy because we were doing it by hand, so rather than using a full ledger, we were just using things called T-accounts. T-accounts are just a summary of what's in the ledger.

It's just a simplified version of the ledger. So we were posting things to our T-accounts. Then the step we just did is we footed our T-accounts. Footing your T-accounts means you're just adding up your T-accounts and coming up with what the final balances are.

That's the step we just went through. Question then is how do we go ahead and prepare our financial statements? Well the thing is we could do it directly from our T-accounts, but it's a lot of writing. It's a lot of...

work, it's not a lot of work once you get used to it, but it's certainly a lot of writing, especially if you're doing it by hand, to write out all three financial statements. And it would really suck to write out all three financial statements and then find out your balance sheet doesn't balance. Because then you would have made a mistake somewhere and you don't know where your mistake is and you're going to have to erase everything and it's going to take a lot of effort and you've just wasted a lot of time writing out your financial statements only to find out that the balance sheet doesn't balance. So we do this intermediate step.

It's not a formal financial statement. It's called the trial balance. And it's just a quick check to make sure that everything balances right now. So we're doing a trial, we're doing a test to make sure that everything balances. That's called the trial balance.

Again, not a formal financial statement. If it balances, then we can go ahead and do our financial statements. And because then we know we're not wasting our time because we know where things should balance.

And so then that's when we go ahead and we prepare our financial statements. And you have to prepare them in this order, your income statement first, your statement of owner's equity second, your balance sheet third. Okay, so let's talk about what a trial balance actually is. So let's go and look at this step here, figure out what a trial balance actually is.

So as I mentioned before, a trial balance is not a financial statement. We are not sending this out to our users. You technically don't have to do one.

Like no government body is going to come along and say, you didn't do a trial balance here. You're misleading your users, right? You don't send this out to the user so they don't know. It's just a calculation we do for ourselves, but every business I've ever seen in the history of accounting that I've ever looked at always has one. So it's something that everybody does because it's really very useful.

What is it? It's simply a listing of all the final balances in our T accounts. So if you have 18 different T accounts, you will have 18 lines to your trial balance. It's one line per T account.

and it only lists the final balance. So you don't get to see all the detail in between. It's just that final balance.

And as it lists them, there's either a left-hand balance or there's a right-hand balance, right? It's either on the debit side or the credit side. That's all we're doing. We're listing them and then we're adding them up.

And then the whole thing needs to balance. And if you've done everything right, it absolutely will 100% of the time. If it doesn't balance, you've made a mistake. And there's no sense going on and doing your financial statements if your trial balance doesn't balance because you already know you have a mistake.

So you've got to go back and find it and make your trial balance balance. If, on the other hand, your trial balance does balance, it means your financial statements have to balance. So when you plug all the numbers into your financial statements, if your balance sheet doesn't balance at that point, well, you've made a mistake, but you know it wasn't in the numbers that you used.

It was simply in your financial statements. So you don't have to go back and erase everything. You just need to focus on your financial statements and figure out where in the financial statements you made a mistake. Your journal entries were all fine because your trial balance balanced.

So it kind of gives us a nice little checkpoint so we don't have to go all the way back to the beginning again. So let's go ahead and look at what our trial balance should look like in this particular example. I believe it's in this particular example. I apologize that these are not the right numbers.

I have written account, debit, and credit up here. In real life, you do not need to do that. You don't need this line up here at all. I'm just doing it so you know what I'm doing.

So if we go to our cash T account. It had a final balance of $18,000 on the left. So I'm just writing cash. And then I've got two columns here.

I'm writing $18,000 on the left-hand side because that's where the balance was. Again, that's the debit side. But if you don't have these titles up here, it doesn't matter. As long as you have basically two different columns to write numbers in, and you put the final balance either on the left or the right, the exact same spot it actually was in your T-accounts.

So this should be a very easy step. So we had cash. We had supplies, which was $630 on the left.

We had equipment, which was $52,000 on the left. We had accounts payable, which was $630,000 on the right. We had notes payable, which was $20,000 on the right.

And we had your name capital or J capital, $50,000 on the right. And those were the only accounts that we had. Again, if you split equipment up into two different things, you'd have an extra line here.

You wouldn't have the equipment line. You'd have two other lines called whatever the assets were. But you'll notice the two of them, one was 10,000, one was 42,000. They essentially add up to 52,000 anyways. So it won't change your totals here.

So you add up each side, and you'll notice they add up to 70,630 and 70,630. So this balances. That's all we want this to do. What is that number? What is 70,630?

And the answer is it is absolutely nothing. It has no meaning whatsoever. It's simply the subtotal on your trial balance.

just to make sure that your two sides balance. So don't take that to have any meaning whatsoever. It doesn't need to show up anywhere else on our financial statements.

We don't look at it. That's not our total cash. That's not our total assets.

That's not our total worth. It doesn't mean anything. Once your trial balance balance, again, if this doesn't balance, you've absolutely got to go back to your T-accounts and your journal entries and basically look at everything and try to find out where your mistake is. One hint, though, if you've made multiple mistakes, you've got to go back and look at everything.

If you've only made one mistake, though, you really want to look at what the difference is between these two numbers. So let's suppose this was 69,630. Well, $69,630 is $1,000 off from $70,630.

So I know that I'm off by $1,000. So what you need to do is you need to go back through your T-accounts and through your journal entries and look for $1,000. Maybe you had an entry of $1,000 and you just failed to post it to your T-accounts. Maybe you correctly posted it to your T-accounts, but when you're using your calculator, you forgot to type in that $1,000.

So if you're just missing one number and it's $1,000, go look for $1,000. If you don't find $1,000, the other thing to look for is half of that number. So go back and look for $500.

And what that would mean is you put the $500 on the wrong side. So maybe it was supposed to be a $500 debit. on the left hand side and in your t accounts you accidentally wrote it on the right hand side as a credit that'll make your right hand side too big by 500 and your left hand side too small by 500 therefore that's your thousand dollar difference But again, if you made more than one mistake, there's no simple rule. You've got to go back and look at every single thing.

You've got to just double check to make sure the journal entry is balanced. You need to make sure you put in all the numbers correctly into their T accounts. And you need to get out your calculator and make sure you add up your T accounts again.

It's a big pain in the butt if you made more than one mistake. One mistake is easy to find. More than one mistake, you've got to go back and do it in detail. From our trial balance, so you guys keep this open because this is going to be useful. From our trial balance, these are the numbers that go on to our financial statements with one exception.

And all of these numbers go on the trial balance once and only once. So we have six numbers here. That means we're only going to have six numbers go on to our financial statements.

We need to, and you should keep this, and every time you put one of these numbers on your financial statements, you should cross it off. And once you've finished your financial statements, or once you've crossed off all of these, you're done your financial statements. There's nothing more to do.

The only slightly tricky one is our capital account. So going back to this, the only one that takes any real looking is the capital account. Because remember, the capital account that shows up in your financial records.

is meant to be the opening balance. But you remember the opening balance account also has all the investments in here. So you're going to have to dig into this $50,000 and figure out how much of that was the opening balance versus how much of that were the investments during the year.

So this is the only number that needs looking into. All the other ones, these are just the numbers. And again, once you've used each number once and only once, You've completed your financial statements and your balance sheet absolutely has to balance. Again, if it doesn't balance, it simply means you did something wrong with your financial statements because your trial balance already balanced.

So we're going to start an example here. This is going to have us do everything of the entire accounting cycle. We're going to start with nothing and we're going to work up to preparing the financial statements.

So we need two, at least two blank pieces of paper for now. Again, one page is your book called the journal. The other page is your book called the ledger. Later on, we're going to need another page probably for your trial balance and maybe another page for your financial statements. But for now, we definitely need two pages to act as two different books, your journal and your ledger.

So let's get started here. It's August 1st. We decide to open a brand new business.

We're going to open a driving range in Niagara-on-the-Lake. We start the business by putting $35,000, it's our entire life savings, into the business, and we also contribute land to the business worth $50,000. I guess we own some land already, maybe our grandparents passed away and left us some land, but we've decided to turn it into a driving range. So we're going to contribute land worth $50,000. Go ahead, journalize the transaction, make sure your equations are true, and then post it to your T-accounts.

Pause the video, come back, and we'll take this one up. All right, you're back. So brand new business.

First question is, is this a transaction? Again, using the separate entity assumption or the business entity assumption, we want to keep the owner completely separate from the business. So even though these are the owner's things and the owner owns the business, we're treating the business separate. So the business at the beginning of the day didn't have anything. By the end of the day, it now had $35,000 in cash and $50,000 worth of land.

So it now has cash. Cash is an asset that's gone up. Land is an asset that's gone up. Assets that go up using our ale chart with the T accounts. We know that both of those are debits.

Debits have to come first. What's the other side of the entry, though? Why did the business get this land and why did the business get this cash?

It's not because they were owed it. They didn't borrow it from the owner, so they don't owe it back to the owner. These are investments by the owner.

And investments get booked to the capital account. The capital account is an equity account. And as the business gets these things, the business is growing. It's getting bigger. So this is equity going up.

Going back to our AL chart with the T accounts underneath, equity going up is a credit. So it needs to come after the debits and it needs to be indented. So your journal entry is going to look like this.

Whatever your name is goes here, so I would be J, capital, equity going up, $85,000. You don't need accounts, debits, and credits up here. As long as you just write it here with the credit indented, and you write the numbers here with the credit numbers over in another column, that's all you need. It needs to have a date. I didn't, again, I've given you the date.

I didn't write the date into my slides, but you absolutely should say August 1st here. Quickly check our equations. Our assets went up by 85. Our equity went up by 85. So yeah, that works. Our debits and credits, our debits are 85. Our credits are 85. So that works. Then we post these to our T accounts.

Well, this is a brand new business. So a brand new business has no T accounts right now. It means it also doesn't have a chart of accounts. So we don't have to follow any set names that already exist. It's a brand new business.

And when we set up the T accounts. The beginning balance is always just going to be zero because the business didn't exist before today. So the beginning balance is not what the balance is after the first transaction.

The beginning balance is what the balance was from the end of last period. And there was no last period, so there is no opening balance other than zero. We have three account names up here, so we need three T accounts. One for cash, one for land, one for capital.

So there's cash, it's 35 on the left. Land. 50 on the left and your name capital 85 on the right.

So it's on the right in the journal entry, therefore it's on the right in the T account. And that's it for this one. Let's go to August 4th. It's three days later.

This is a driving range. People are going to come to our place and hit golf balls. So we go out and we buy these very, very sturdy plastic and rubber mats that people hit their golf balls off of. Total cost of these was $12,240. These things are going to last for years and years and years, hopefully.

We pay $2,000 in cash for them. We're going to pay the other $10,240 later. So same steps again, pause the video, go ahead and try this.

Okay, you're back. So is this a transaction? Yes, we definitely paid cash. So cash is there.

This is a transaction. Something's changed hands. The date is August 4th.

We need to put the date in. What happened here? We paid cash.

Again, find the easy one first. We paid cash. Cash is an asset.

In this case, we paid it, so cash is an asset going down. An asset going down using our AL chart with the pluses and minus under it tells us that that is a credit. Credits come after the debits and get indented. So that's not the first line we need to write down, but if you want to, it's the second line you can write down.

But you need to make sure you indent it. Cash is an asset going down by $2,000. We're going to pay the other $10,240 later. If we're paying them later.

That means we owe it to them. If we owe it to them, that's a liability that's gotten bigger. Liability is getting bigger.

That's a credit. How much do we owe them? $10,240.

What are we going to call that? Again, it's not a loan payable. We didn't borrow the money from them. It's not a note payable.

As far as we know, note payables tend to exist when you borrow money, but at the very least, you have to have signed something and say, yes, I owe you this much money. This is what I will pay you by. That's not what's happened here either, so it's not a note payable.

This is money we owe them because we bought something, and we just said we'll pay you later. We bought it on account. So this is an account payable, something that we have to pay later.

We owe them money and we gave them money. Why? Well, that's going to be the other side of the transaction.

Well, why did we give them this money? Well, we gave them this money because we got golf mats, which is absolutely called equipment. I'm going to switch things up a little bit this time. I'm going to call these things golf mats.

Absolutely right if you call it equipment. So equipment is absolutely correct. I'm just going to switch it up and call it golf mats this time.

So I call it golf mats. That's an asset. It's gotten bigger. $12,240. Check our equations.

It works. Make sure our debits equal our credits. They do.

So we're all good. Post it to our T-accounts. We have three accounts here, so we need to have three T-accounts that we post to. But remember, we already have cash. So we don't need to make a new one for cash.

We're going to make a new one for golf mats or equipment, depending on what you called it. A new one for accounts payable. Again, brand new business.

They don't have opening balances. And so we just go ahead and post those like that. And then we're done. Let's move on to the next one here. These will start to get tougher.

So I absolutely need you to be trying these before you look at the answers because it's practice, practice, practice. And yes, you will not get some of these. That's kind of the point. I'm showing you some new things, but I need you to be thinking about it.

And if you can actually think about it without seeing it and getting it right right away, you're really doing well already. So that's a good sign. And it's completely normal to not be getting these, but try them.

You should always be able to probably get one line. You should get one side. Sometimes the second side of the transaction is difficult. But yeah, keep trying these. We're going to keep seeing some new ideas as we go here.

All right, it's August 7th. We contribute our old computer to the business. So the business can basically use it to keep track of transactions and print off invoices.

Five years ago when we bought the computer, it cost us $1,700. If we were to try to buy it today, it's probably only worth $150. So think about this one.

Is this one even a transaction? If it's not, you don't have to do anything. If it is, then go ahead and do your steps. So pause the video and try this one.

All right, you're back. Maybe you nailed it. Maybe you struggled with it. Maybe you did it quickly, but you're not sure if your answer is right or wrong. So let's go ahead and try this.

First of all, did we go out and buy anything? The answer is absolutely, we did not go out and buy anything here. So is this even a transaction? Well, it was our computer to begin with.

It's still our computer. So it's not a transaction, except the separate entity assumption or the business entity assumption, which says we treat the business separate from the owner. So if we were looking solely at the business, the business did not own a computer before today. By the end of today, they do own a computer.

So something has absolutely changed for the business. Something has changed hands here. So this is a transaction.

We do have to record this. So put in a date, August 7th. The account names, one of them should be easy. It's just called computer.

Again, you technically could call this equipment if you wanted to. I'm going to call it computer. It's an asset.

The business owns it. It's an asset that's gone up. So that's our debit. What's the other side of the entry? Well, this gets a little trickier.

Hopefully you were able to figure it out though. And that is, well, why did, again, one side of the transaction always answers the other side. Why did the business get this computer?

Is it because it bought it? No. Does it owe money for it?

No. Was it just given to the business? Yes.

That's the reason why the business got the computer. The owner just gave it to the business. And when the owner gives an asset to the business, that's exactly what an investment is.

Now remember, there is no account for investment. Investment gets booked directly to the capital account. So this goes to the capital account.

So again, whatever you called it in the previous example, I called it... In my slides, I called it Your Name Capital. In real life, I would just call it J Capital.

And capital is always an equity account, and the business has just grown here, right? It didn't have a computer before, and now it suddenly has a computer. So the business has grown, so the equity has gotten bigger. So there's equity going up. Equity going up is a credit, which is why it needs to be written second, and it needs to be indented.

Doesn't answer the question, though, is how much we need to record this for. So today it's worth 150. Five years ago, it cost us $1,700. We have gap principles to look at, though.

Remember the gap principle, the historical cost principle. And that is we want to record our assets at what they originally cost us. So that principle would suggest that we need to record this at $1,700 because this computer costs us $1,700. However... We do have the separate entity of the business entity assumption, which says the owner is separate from the business.

So when we look at the historical cost principle, and we want to record these assets and what they cost us, us, based on the separate entity assumption, the business entity assumption, us is the business. How much did this computer cost the business? Well, this computer didn't actually cost the business anything, right?

It wasn't the business that bought this computer for $1,700. So the $1,700 is completely irrelevant to the business. The day the business got this computer, they got something worth $150.

So what did the owner really give the business? The owner gave the business something worth $150. So the owner has invested essentially assets worth $150 on this day.

So we are going to record this at $150. And so that's our entry. You can check your equations.

You'll see that they both hold true. You want to post this to your T account. There's no T account for computer yet.

There's already a T account for capital. So we go ahead and we just reuse that one. We post these two things to our T accounts. And that's what they should look like at this point. Again, if you call the golf mats equipment and you call the computer equipment, there's nothing wrong with that.

You would only have one account for equipment. And now it's going to have two different numbers in it, right? That's totally fine.

Continue on with that. There's nothing wrong with that. All right. It's now the next day. It's August 8th.

We take out an advertisement in the newspaper and it runs immediately. The advertisement cost us $2,400 and we've got 60 days to pay. Again, walk through all the same steps.

Is this a transaction? Is it not a transaction? And if it is, go ahead and do your other steps. Pause the video and come back and we'll take this up. Okay, you're back.

Again, these are going to start to get a little bit tricky. That's kind of the point. We take out an ad in the newspaper and it runs immediately.

Cost us $2,400, but we haven't paid them yet. So, first question, is this even a transaction? What have we given them? We've given them a promise that we're going to pay them.

What have they given us? Well, they haven't really given us anything, have they? Do we own anything new? No, we definitely don't own anything.

We don't own that. However, why are we paying them then? Or why are we going to pay them? We're going to pay them because we're going to give us an ad.

They've already given us this ad. So they've definitely given us something now. So this is a transaction. We do have to record this. There are two sides to this transaction.

The easier one is definitely the credit. We owe them $2,400. Owing somebody is a liability.

It's gotten bigger. We didn't owe them anything before today. So it's a liability that's gone up.

So that's our credit. What do we call it? Well, we essentially bought the ad and we haven't paid it yet.

We bought the ad on account. So this is a accounts payable. So that's our credit.

That's the second line. The question then is, well, why do we owe them money? Well, we owe them money because they gave us an ad.

And so some of you probably called this advertisement asset going up. An asset going up is something that we own. Do we own more of it?

Well, they gave us an ad. The question is, do we own it? Remember some of the characteristics of things you can do with things you own. If it's physical, you can put it on a shelf.

Now, obviously, an ad is not physical, so we can't put it up on a shelf. But when you own something, you can sell it to somebody else. Can we sell this ad to somebody else?

So this is our ad for our golf business. Could we sell it to Pepsi? Well, no, Pepsi wouldn't want to buy this because this is an ad of our company.

You can change and alter things that you own, right? If I own a computer, I can spray paint it if I want. I can turn it upside down.

I can do whatever I want with it. Can we change this ad in any way? And the answer is no, because it's already gone in the newspaper and it's already been shipped out into the world. We can never get this ad back again. We can never change this ad.

We can never sell this ad to someone else. This ad is gone. We do not own it.

If we don't own it then, where the heck is it? And the answer is, we've already used it. We buy an ad for the purposes of having it go in a newspaper. That's already happened. So we've already used it.

And when you've used something, you've used it up. And using something up, again, five words. You've got to know these words.

Hopefully this immediately springs into your brain and you know that this is an expense. And hopefully you're able to recognize that as you did this. We've used up this ad.

What have we used? It's an ad. So it's called ad expense or advertising expense. What type of an account is it?

Well, it's an expense that's gotten bigger, but that's not what type of account it is because asset liability equity. Well, expenses are, again, using the orange and blue slide. Those are things that go down and directly affect equity.

So this is an equity account. And when we use something up, what's happening to the size of the business, it's shrinking. So this is an equity going down using our ALT charts, equity going down. is a debit. So this needs to come first and it does not get indented.

So August 8th, that's the date. This is what your journal entry is going to look like that day. Again, whether or not it's advertising expense or ad expense, both of those are fine.

Plug those into our T-accounts. Sorry, plug those into our equations just to make sure that they balance. They do. Then we need to post it to our T-accounts.

Again, we have two account names, so we're going to have two accounts that these need to go to. We already have an accounts payable one, so you don't write a new one. You go ahead and use the one that already exists.

We don't have one for advertising expense yet, so you need to go ahead and create it. Now again, just for clarity, I am writing these because I don't have access to two pages here. So I am just writing these at the bottom of each slide. You absolutely should not be writing these after each transaction.

The transactions should all be in order in your journal. The T-accounts should all be on a separate page, and you should already have this accounts payable there. You should just be updating it.

I am just writing it like this so I can fit it all into one slide and show you. You absolutely should be doing this on two separate pages. Just to keep it in your mind that these are actually two separate books.

One is the journal you're writing in, and the other one you're posting into is called The Leisure. It's now five days later. People show up, or so people call us and say they want to make a reservation.

There's going to be 60 of them show up, and to use our driving range, we're going to charge them $420 in total. We do not ask for a deposit. So go ahead and work through the steps here.

Pause the video, work through the steps, and I will talk to you on the other side. Okay, you're back. This one here, they've called us. They're going to show up, and we are going to let them use our driving range.

They are going to pay us. What exactly does that mean? That means we promise to let them use our driving range. They promise to pay us. So we're left with just a promise for a promise here.

This is not a transaction. When something actually changes hands, either when they come to our driving range or they pay us, then it is a transaction. If they had paid us in advance, if they had paid us on this day, then it's definitely a transaction because something's changed hands.

But as of this moment, we promise to let them use our range. They promise to pay us. That's just a promise for a promise. That's not a transaction. August 18th, we have some other customers show up today.

They actually come to use the driving range. Now, if you don't know how a driving range works, They show up, they bring their own golf clubs, we give them a basket, a bucket of balls. So we have golf balls, we put them in a bucket, we give them the golf ball of buckets, the bucket of golf balls. They then take their clubs and they hit our golf balls out into our field, and then they leave. So they don't leave with our golf balls.

These are still our golf balls. We just let them hit our golf balls. And then after they leave, we go and pick up the golf balls and then we put them in the bucket for the next person.

So they drive $100 worth of balls. So that means when they hit these golf balls, we charge them $100. It doesn't mean the golf balls are worth $100. We charge them $100 to let them hit our golf balls.

They pay us in cash. So try this one, pause the video, come back. Okay, you're back. Has anything changed hands here? Yeah, they gave us $100 in cash.

So this definitely is a transaction. So we need to record it. Again, look for the easy one first.

They gave us cash. That's an asset that's gone up. An asset going up is a debit. So you got your debit.

You got your first line. That was easy. The second part is, well, why did they give us $100?

They gave us $100 because we let them hit golf balls. Well, that's exactly what our business does, right? We've provided them with a service.

The service is letting them hit our golf balls. So we have earned this, right? We've let them do something. We've provided them with the good or the service.

So we have earned this. This is called revenue. Now, exactly what kind of revenue you call this is up to you.

You cannot just call it revenue. So it could be driving range revenue. It could be range revenue.

It could be service revenue. I personally, for this example, I like to call it range revenue. But any of those other ones that I mentioned are also fine. So cash is an asset going up. Revenue is an equity account.

We've earned it, so our business is growing. Our business is getting bigger, so it's equity going up. Equity going up is a credit, which is why this one came second, and it's been indented. Check our equations.

Make sure that they work. They do. If you ever check your equations and they don't work, you've absolutely done something wrong, so you've got to go back and fix it. Post these to our T-accounts in our ledger. We already have a T-account for cash.

We don't have one for range revenue, so we need to go ahead and create it. So it's all going to look like that. Now, the group that said they were going to come back on the 20th, for some reason, came back on the 22nd instead. They've just shown up this day, and they've used our driving range. They pay us the $300 in cash, and they agree to send us a check next week for the other $120.

So they leave without paying the full balance. Go ahead and try this one. Work through your steps. Pause the video, and I'll talk to you when you come back.

Okay, you're back now. You've tried this one. They've paid us cash, so something's definitely changed hands.

So this is a transaction. Again, they've given us cash. Do that one first. It's the easy one.

Cash is an asset that's gone up, so it's a debit for $300. They tell us they're going to send us a check for next week. Well, that essentially is the same thing as saying they owe us. So this is something they've used our service.

They didn't pay us. So they've essentially bought the other 120 on account or we've put the other 120 on account. This is an amount that we will get to not pay. We don't have to pay it. We get to receive this.

This is an accounts receivable. It's an asset. We own the right now to collect this money from them.

So it's an asset that's gone up. So it's also a debit for 120. The third line, though, is, well, why do why do they give us cash and why do they owe us? And the answer is because we let them hit golf balls. And again, that's exactly what our business does. We let people hit golf balls.

And therefore, at this moment, we've just earned this today. So this is revenue today. And again, I called it range revenue. I will continue to call it range revenue. And I know they only gave us $300, but that's not the point.

The point is we let them hit our golf balls $420 worth. So whether they paid us or not is absolutely irrelevant. In terms of whether or not this is revenue. The point is they hit $420 worth of golf balls today. So we've earned $420.

So it's the full amount. Plug these into your accounts. Plug these into your equations. Make sure they work. They do.

Post it to the T accounts. We already have range revenue. We already have cash. So just post those into the ones that already exist.

Create a new one for accounts receivable. So that should look like that by the time you're done. I am putting the dates down here.

I believe my accounting lab wants you to put the dates in. On a test, I do not need you to put the dates in. When you're doing it by hand, I don't need you to put the dates in. I've just left it there so you can easily see where each one is really from.

But I don't need you to be writing the dates in. All right, August 22nd, that night. So they came and used our range that day. We're now at that night. We're cleaning up.

And we noticed that they've destroyed one of our mats. So there was some thug out there with his golf club. Or maybe the guy had his kid with him and the kid had a lighter with him and was just lighting it on fire. I don't know.

So somehow one of our mats got destroyed. These things were supposed to last us for years. But they've destroyed one of our mats. So we just throw it in the garbage. Think about your accounting steps, what you need to do here, if anything at all.

So pause the video, try this one, come back, and we'll talk about it after. Okay, you're back. So what's happened here?

Has anything changed hands? Well, no, we're not even dealing with anyone else. So I can see how this might not be a transaction.

But remember the actual definition of a transaction. The actual definition of a transaction is if there's any change in your assets, your liabilities, or your equity. Well, with our assets, has anything changed? And the answer is yeah.

At the beginning of today, we owned a mat. At the end of the day, we threw in the garbage, so we don't own the mat anymore. So actually, something has happened to our assets here.

So this is a transaction. What's actually happened to our mats? Well, the easiest one is, like I said, at the beginning of the day we own something, which is an asset.

At the end of the day, we don't own it. So our asset has gone down. So whatever we call that asset, again, you might have called it equipment. I know I called it a golf mat.

So for me, a golf mat is an asset that on this day has now gone down. This particular mat, so I know we had lots of mats and there was like 12,000 worth of mats, but we didn't lose 12,000. We only lost this one mat.

So this one mat used to be recorded at $50 and now it's gone. So we've essentially lost a $50 mat here. So that's going to be asset going down using my little chart is my credit. So that's going to be my second line and that's going to be indented. Golf mat's an asset going down for 50 bucks.

Again, remembering that one side of the transaction always explains the other side. We lost a golf mat. Therefore, what?

Well, do we owe somebody now? No. Do we own something more now?

No. If you're struggling with this, here's another way to think of this. If you look at your, again, your basic thing that I want you to write down all the time, your assets equal liabilities plus equity with a little T chart under each one and the pluses and the minuses and the debits and credits.

If you look at that, we know that we need a debit. There are only three kinds of debits on there, right? There's only three T accounts. So there's only three places where you have debit written down.

The first one is asset going up is a debit. So because we threw out this golf mat, do we now own more of something else? Well, no, clearly we didn't get in.

We just threw something else. We definitely don't own more of something else. Go to the next one, a liability.

A liability going up is a credit, but we want a debit here, so it's a liability going down. So the debit is a liability going down. So because we threw out this golf mat, do we now owe somebody less money?

And the answer is no, we didn't owe anybody any money here. I guess we owed a little bit of money from buying the golf mat, but because one of our customers destroyed a golf mat, it doesn't mean that we owe the person we bought it from less money. So a liability hasn't gone down here, which only leaves us with equity.

And the debit in equity is equity going down, our business shrinking. Because we had a golf mat and we threw it out today, did our business shrink? The answer is yes.

That's exactly what happened, right? At the beginning of the day, we owned a golf mat. At the end of the day, we didn't.

So our business has actually shrunk. So it's definitely an equity going down. Now, the question is, which equity account is it? If you go back to the blue and orange slide, all of the accounts above equity are all equity accounts.

So it's just one of those accounts. So it's got to be one of those. So if you're trying to just narrow things down, that should help you narrow things down. If you couldn't just actually think of this right off the bat anyway. So for me, we threw out a golf mat.

What happened essentially is another way of saying on that day, we just used up a golf mat. We had one and then it's gone. We must have just used it up. And that's exactly what happened.

One of our customers came and used it up for us. When you use something up, it's called an expense. What did you use up? You used up a mat.

So I just went ahead and call this a mat expense. Now, for absolute clarity, if you've taken accounting before, this is not the correct transaction. I am assuming that at this point you have not taken accounting.

We are only answering this question based on everything we know at this very moment. And at this very moment, golf mats would be recorded at what it costs us. And we used it up, so I'm going to call it an expense. So based on everything we know at this moment, this is the right entry.

In real life, that's actually not the right entry. If you haven't taken accounting before, just ignore this little 10 seconds I'm about to say here. If you have taken accounting before and you're confused by this, I will just tell you what the answer probably should have been. Right.

Golf mats would depreciate. So maybe this would have been depreciated. accumulated depreciation account and then we sell it and we would need to check or we throw it out we would probably have a loss on disposal and the loss on the disposal would be the difference between what we got for zero and the net book value of the golf mats which again we don't necessarily know what that is but it's probably 50 so it's probably a loss on disposal of 50 bucks But that we're not doing that yet in this course. So completely ignore all that. Back to everybody talking here.

So for the purposes of this course at this very moment, this is our entry. We will see more after test two how this actually would get recorded. But again, that's not until after test two. Plug these into your equations. It works.

It works. Post it to the T accounts. Again, we already have golf mats.

So we're just posting the 50 on the right hand side here for golf mats. We don't have mat expense yet. So we're setting a new one up.

Okay, it's now August 27th. We agree with a local golf course to pay them a fee of 10% of any of the rates we get to charge our customers that they have booked with us. So if they send us customers, we're going to give them 10% of whatever the range rates were. So pause the video, try this one, come back. Okay, you're back.

Clearly, can't do much here. There's no numbers and nothing's happened yet, right? We promised to pay them 10% and they promised to send us customers.

So at this point, it's just a promise for a promise. Nothing has actually happened yet. So this is not a transaction. We are now done. This is the entire month.

Those were all the transactions for the whole month. Go ahead and do the next step in the accounting cycle. Pause the video and try that.

Okay, now you're back. You've done that. Hopefully, you know the next step is to foot your T-accounts.

If you didn't know that was the next step, pause the video now and go ahead and do that. Okay, now you're back. So everybody should have done this by now. So we have our T-accounts. This is what all our T-accounts should look like.

This is what all the final balances should look like. Again, if you called computer and golf mats both equipment, you would only have one account for the two of them, and it would be all these numbers added together. So the total for that should be $12,340 would be the final balance in that account if you put them all together. Again, go ahead and do the next step. Pause the video.

Go ahead and do the next step in the accounting cycle. Okay, you're back. So hopefully you know what the next step is. The next step is to then after you footed this, then we're going to do this new thing that we just discovered, which is called the trial balance. If you didn't know what's the trial balance, pause the video and go ahead and do the trial balance for now.

Okay, everybody's back. Everyone should have done the trial balance now. In my accounting lab, I believe they want you to probably put the company name, trial balance, and the date here.

Do that in My Accounting Lab. For me, this is not a formal document. You don't need all that stuff at the top, so it's not a requirement.

So when you're doing it by hand on a test, you don't need that stuff for me, but My Accounting Lab, you probably do. Again, you don't need the words debits and credits here. What you do need is all your different accounts listed here.

So here's all my different accounts. In my accounting lab, it may be picky about the order you put things in. So please, please, please look up examples in your textbook and try to follow the order that they use.

They will generally put the assets first, and they're probably going to put assets like, and even the assets, try to put them in the same order they put the assets in. Then they're going to put the liabilities and try to use the same order of the liabilities that they use. Then they're going to have capital, and then withdrawals, and then they're going to have their... Usually their revenue, revenue would normally be up here, and then their expenses.

Again, please follow the examples in the book because my accounting lab might be picky. When you're doing it by hand, for me, order does not matter. Again, this is not a formal financial statement, so there's no technically wrong way to do it.

So I would never ding you marks for the order. But please be careful in my accounting lab because they may care about the order. So you put all your accounts in here. Your debit should add like the left-hand column should look like this. The right-hand column should look like this.

The point is they both need to add up to 98,310. That balances, so we're good. Go ahead and do the next step of the accounting step, the accounting. I guess before, if yours didn't balance, you should know that you need to go back and you need to find out where the mistake is because this absolutely needs to balance. If it did balance, go ahead and do the next step now and pause the video.

Okay, you guys should have gone ahead and done your financial statements. If you didn't, pause the video now and go ahead and do your financial statements. Okay, now everybody's back. Everybody should have done their financial statements. First financial statement you always have to do is the income statement.

So remember, you need to put the company name, which statement it is, and what the period of time was. In this case, it's a month. It was only August, right? It wasn't the whole year. It was only a month.

And it ended August 31st. That needs to be at the top. We need our headings, heading for revenue, heading for expenses.

Put in all our revenue here, but we only had one revenue account. Put in all our expenses, we had two. So we need a subtotal, total expenses. Revenue minus expenses gives us our net income.

This is, I want to be very clear about when you see this written, because you might see this written in multiple places. Accountants like to write net income and then in brackets put loss. And what that means is, is if this number is not in brackets, it's called your net income. If this number is in brackets, it's called your net. loss.

So it's no longer called your net income. It's now called your net loss. It's the same thing.

It's just that rather than make a positive income, you now have a negative income, which is known as a loss. So 520 minus 2450 is 1930. Brackets for accountants are the same thing as a minus sign. So this means we have a net loss of 1930. If it said net income bracket loss, and this was a positive number, it didn't have brackets.

It would just mean that's our net income. It doesn't mean it's our net loss. So this is, if you wanted to write this as a positive number, like actually do the math and write it as a positive, you wouldn't have the word income here at all, and you wouldn't have the brackets. You would just write net loss, and then you would just write 1930. But because we've written it this way, it's the brackets that tell you that this is actually not net income.

It's actually a net loss. On to our next statement, which is the statement of owner's equity. You need the same three things at the top.

Oh, I see I haven't changed the title. Just for clarity, this is the statement of owner's equity, not retained earnings. Retained earnings is a corporate concept.

So this is the statement of owner's equity. Just for clarity. Statement of owner's equity.

J capital at the beginning. J capital at the end. All of the numbers.

Oh, sorry. I should have said this also as well. All the numbers on here came from our trial balance. So once you use range revenue 520, cross it off on your trial balance. 2400, cross it off on our trial balance.

50, cross it off on our trial balance. This is just a subtotal. This is just a total. These numbers all come from our trial balance as well. But remember the capital account contains two numbers.

It contains our opening balance and it contains all of our investments for the year. So this is the one account you actually need to go back to the T account for and see whether or not those numbers that make up the total, the total was $85,150, whether or not those numbers make up the opening balance, investments, or a mixture of the two. and you need to figure out what the mixture is.

And so in this case, we know that the opening balance was zero. Everything else was an investment. So the entire balance was an investment here. So once you've added those two together, they add up to 85, 150. That's exactly what was on the trial balance. Cross it off in the trial balance because now we've used the total that was on the trial balance.

We then add the net income, which is the same thing as minusing the net loss. And again, because we're putting it in brackets, we're actually lessing the loss is what we're doing here. So we're minusing the loss. We then minus out the withdrawals.

So the net loss comes from our previous financial statement. The withdrawals comes from an account. So we need to go back to our trial balance, look for withdrawals. There is no withdrawals account, which just means withdrawals were zero, which is why we're putting zero here.

Add those together, you end up with a capital balance at the end of the year of 83,220. Again, that is not in your capital account. That is simply the number that you calculated on this piece of paper, which is then the number that you carry forward to your next financial statement, which is your balance sheet.

So now we do our balance sheet. Same things at the top. Driving range.

Balance sheet. Remember, the balance sheet is not a period of time, so it's not a month. It's just the very moment at the end of August 31st, 2020. So we don't put month here. This is just August 31st, 2020. Asset heading, liability and owner's equity heading. Although I'm fine with you just having a liabilities heading.

Put your assets down, add them up, gives you total assets. You've got one liability, so you don't need a subtotal here because there's only one. In our equity section, you need a heading. The account is called J Capital or whatever your name is, Capital.

It was 83,220. Again, that does not come from the trial balance. That comes from our previous financial statement.

All of these other numbers come from our trial balance. Once you put them in, cross them off on your trial balance. You'll notice that once you do that, you've crossed off every single number in your trial balance, and you've used each number exactly once. So don't use them a second time, and don't miss any numbers.

If you use it more than once or you miss a number, your whole thing's not going to balance. You have to use each number exactly once. you add up this side you have total assets 95 000 you add up this side you end up with 95 000. remember to label this this is total liabilities plus owner's equity so i don't technically need you to have this this heading up here something wrong with having it i like to do it but technically as long as you have a heading for liabilities and a lot heading for equity and if there's more than one of either of these you've got to add them up and get a subtotal But at the end, when you add up the total liabilities and the total equity, you need to have a line called total liabilities plus owner's equity. The whole thing balances, so that works.

So that's good. I'm going to show you the homework. Go ahead and do it, and then I'll see you next class.

Transcript for:Understanding the Accounting Cycle Process

Transcript for:
Understanding the Accounting Cycle Process