welcome to module two of our course on financial accounting this module is the most important module of an accounting course if you want to survive your introduction to financial accounting course you need to understand journal entries the reason is you know in a couple chapters we're gonna learn about receivables well what do we do as receivables we do journal entries when we learn about inventory we do journal entries of inventory we learn about long-term assets journal entries journal entries we'll just come back again and again and again in any financial accounting course so you really need to understand them the good news is they're not too hard there's a lot of harder topics but the bad news is if you haven't understood it well it's just gonna haunt you for the rest of class so I'm glad you're here I'm glad you're watching this video this video assumes no prior knowledge of journal entries maybe you've been to a class or tried to do some readings and you're feeling very shaky you are in the right place so let's begin let's start talking journal entries and when I think about journal entries funny enough I don't think about accounting at all I think about physics now I didn't study a lot of physics in my life I think I took a grade 11 physics class that's it but I know enough to know that like if you took a grade 11 physics class in Canada where I'm from the star of the physics class if you could name a star is this guy Isaac Newton here's his Wikipedia page very important person in the world of physics apparently discovered a lot of important rules about how the world works I guess and so you know he's very famous for like sitting under an apple tree and an apple falls on his head and he apparently discovered gravity I don't exactly know how that works but obviously a lot of the math behind gravity he is thought of as one of the early people to understand that but have you taken again first-year physics class or in a really fazes excise you've learned about Newton's laws so there's one like force equals mass times acceleration or an object in motion wants to stay in motion an object at rest wants to stay at rest but it's his I think it's his third law that I want to talk about here and Newton's third law I think it's his third says for every action there is an equal and opposite reaction every time one things happens something equal and opposite is happening and that's what I want you to think about when we talk about journal entries there's not just one thing happening there's always kind of equal and opposite forces acting in a journal entry and this is core to the concept of journal entries and let me give you an example so let's say I go to the car dealership and I buy my dream car it's a Volkswagen Golf I think GTI I don't know I'm not a car guy but I really like the Volkswagen Golf it's my favorite car so I go and buy a Volkswagen and golf so my folks are going oh if I'm just gonna say car here for short my car the amount of cars I have actually let's call it cars goes up by let's say it cost me $30,000 so I now have $30,000 in car assets I didn't previously have write my cars have gone up by $30,000 well at the same time something else has to happen either have to take a loan or let's just make this as clean and simple as possible let's say I showed up with hundred dollar bills you know three hundred hundred dollar bills so it's $30,000 in cash and I hand the car dealer thirty thousand dollars in cash they hand me the keys to my nice shiny red Volkswagen Golf well something simultaneous has happened then from an accounting perspective right and accounting is all about tracking financial events and this is a financial event that has happened what has happened simultaneous to my car going up my cash has gone down I've lost thirty thousand dollars cash I no longer have that cash that cash belongs to the car dealer so my cash goes down by thirty thousand dollars okay well we have followed a transaction this is business being transacted and it happens hundreds and even thousands of times in a day for many businesses no not buying cars every day but certainly you know a Walmart will have hundreds and hundreds of sales transactions just one branch of Walmart let alone the whole corporate entity so there's lots of little transactions every day and it's you know an accountants role is to keep track of it all right we want to keep track of all of this in a logical way that's not gonna drive you crazy right cuz the company wants to keep track of its assets its liabilities that shareholders equity accounts it also wants to keep track of revenues and expenses to manage the business right just to understand what's happening with your own business let alone to prepare financial reports for you know investors and things like that which bigger companies absolutely want to do so starting with this micro level transaction we bought a car for cash cars went up cash went down this we've kind of recorded the transaction but this isn't how accountants record transactions maybe you were telling somebody we're going to take an accounting course and they said watch over those debits and credits well this is where debits and credits come in and again when I'm reviewing let's say a student has failed my class and they come into my office and they say you know I want to know why I failed and we're looking at their final exam nine times out of ten its journal entries it's this topic that sinks them so really you need to have your a-game here so anyway let's talk about how ternal entries work I'm gonna make a little table and I'm gonna make this table all the time and I hope it's gonna be helpful to you so I write the accounting equation here a equals L plus se then I write an up arrow down arrow down arrow up arrow down arrow up arrow then beneath I write D our CR dr c r dr CR okay so it's a little bit convoluted so far as looks like a hieroglyphic but believe me by the end of this video and certainly by the end of this module you'll know what this hieroglyphic means so a asset/liability SE shareholders equity we're getting pretty good at identifying accounts by now right it was all module 1 and if you didn't do module 1 go back and watch those videos I think they'll be useful to you but anyway we should be pretty comfortable with all that jargon dr c r is new dr well I mean CR it makes great sense CR stands for credit to CR credit and dr makes lots of sense dr stands for Dredd bit wait a minute debit with no there's no R in the word debit why do we put dr for debit i've done some research on this and it's unclear actually is conflicting reports the one I like the best is just that like look accounting has existed for thousands of years and this was Latin or some foreign language where the word for debit was add er what I don't want you to think is that debit and credit mean like debit card and credit card or you know you have a credit on your account maybe you've heard that phrase don't even worry about that what I want every student to do especially if you were in banking this is especially true for you forget what you know about the word debit and credit it's not gonna help you here accounting is very specific use for the term and if you sort of bring some previous baggage in ago I actually kind of know what this means forget it like it's gonna help you just to work from a clean slate here so let's look at this transaction my car for cash transaction I purchased a car for cash what is a car in you know this chart here is it an asset liability of shares equity cars in asset ok we have a car increasing by $30,000 therefore an asset is increasing by $30,000 therefore I should I'm just trying to highlight but work very well I should debit that a thing because it's going up right I should debit that asset so let's debit our car now how am I going to debit my car well if I were if this were my like piece of paper right if I were a student and I had like a spiral notebook and you know here's some hole punches on the side well this isn't to scale but you're getting the idea here's like the margin read this is like the margin etc okay I don't need to do this at the top of the page I would write D R with an underline and then see R with an underline then below I would write the date so today's date is July 17th so I'd write July 17 17th okay what happened on July 17th I bought a car and I said I've just said I want to debit that car so on the left side sort of close to the margin here I'm gonna write the word car and under the DR I'm gonna write 30,000 that's saying I'm debiting my car by $30,000 I don't need a dollar sign now what's happening with cats well what is cash cash is going down but what is cash cash is also an asset to make an asset go down we credit it so let's credit cash so when I write the word cash I want to encourage you to write the word cash kind of over almost like we've hit enter on a computer and hit the spacebar five times like write it over here ish so okay I've written it over there now the number 30,000 goes on the credit side finally I have to describe what's happened and to describe what's happened I write purchased a car for cash and I might write some more details I might write like you know Volkswagen Golf you know these are the features or whatever you know you might write more details here but that's the gist of it right you're just trying to describe what has happened okay so we've done it we've done our first journal entry I'm looking for a few things one I'm looking for an account to be debited an account to be credited I'm looking for the value of the debits and credits to match so $30,000 worth of debits $30,000 worth of credits I'm looking for a date and I'm looking for a description I'm also looking for there not to be dollar signs so at this point I've got myself a very good journal entry and we are on our way to understanding journal entries I want to do a second version of this transaction so yeah I'm just gonna what am I gonna do I'm just gonna redo things okay so transaction two I buy the car so my car goes up by 30 okay and rather than cash I just get a loan so I get a car loan to pay for it now when I get that financing and let's just say no money down right let's make this really simple it's purely a car loan 100% financed with a car loan what's happening with my car loan is it going up or down well yesterday I didn't have a car loan today I do so my car loan is going up by 30k now I know what you're thinking you're skeptical right now you're saying Tony didn't you just say Isaac Newton and they're every action there's an equal and opposite reaction we got two things going up well this is absolutely a possible thing in accounting but I'll explain what I mean by equal and opposite in a sec let me just copy down my little table move it down the page here so what's happening I got a car going up by 30,000 so this is an asset increasing by 30,000 I'm going to debit that asset so I'm gonna put a car and again debit credit car going up by 30,000 car debit 30,000 car loan what is a car loan to me well car loan is a debt right it's something I have to pay back it's a liability we said the car loan is going up I've got a credit my car loan so I credit car loan maybe I'll even write the word payable in there because I like to write the word payables after liabilities and again it's a liability going up so we credit it 30,000 so when I talked about Isaac Newton saying for every action there's an equal and opposite reaction what I meant was every transaction will have a debit and a credit at least one debit at least one credit and the values of those will be equal right the debits will equal our credits at the end of the day we need to date this thing so again July 17th and we need to describe it purchased a car financed with a loan okay so we've done our second journal entry time to move on to the third and final journal entry of this intro and then we're just gonna do lots and lots of practice journal entries so let's do the third journal entry the third scenario scenario 3 I buy a car my car goes up 30,000 but I put 10,000 down and finance the rest with a car loan so my cash goes down 10,000 and my car loan goes up 20,000 okay we should be able to do this so again let me bring this little thing down I like to have this close at hand okay there we go I've left the D in debit there we are so what's happening here well my car's going up thirty thousand it's an asset going up let's debit car car again debit credit now if I were doing all of my journal entries at once I wouldn't write D'Arc's ER every time I would write it at the top of the page and that kind of holds for the column so any debit car 30,000 now what happened to cash cash went down cash is an asset going down it's an asset decreasing so credit cash 10,000 and car loan isn't a liability increase into increase of liability we credit it so we credit car loan payable or dis car loan 20,000 so again we need to date this July 17th and we also need to describe it purchased a car put 10k down financed the rest with a car loan alright so we've got our third entry one final note regarding these entries because we haven't done any equity transactions most companies there's not a lot of equity transactions but there are transactions that affect equity and those transactions involve revenues expenses and dividends so let's think about how revenues affect equity revenues if you earn a revenue means you're more profitable you have higher retained earnings if you're any more revenue so it makes equity go up revenues help shareholders equity so revenues because they always make equity go up they're always a credit expenses because they always make equity go down they're always a debit and dividends the same because they always make equity go down they are always a debit this little table is the key to the whole thing this is the key to your week this is a key to well however long it's but this is the key to your understanding of journal entries this is the most important topic of the semester period Bar None I don't think it's the hardest although I do think it's hard but that would be harder things yet to come but if you struggle here you're gonna struggle with everything in the course so it's worth taking your time worth practicing I've got I think it's eight really long problems lots of chances to practice practice practice your journal entries it's like I said the most important thing okay that's all for this video if you stay tuned this long I hope you've liked it and if you know again if you're watching this on youtube I totally appreciate it if you can share it with your friends you can give me a thumbs up and just comment let me know what I can do to improve so anyway I appreciate that you're here I appreciate that you hung in there to the bitter end that's all for this video see you next time bye for now