Hello we are back this is lecture number three I believe so we are moving right along.
So thank you for being here today for you folks watching at home, and for you folks
here face to face.
I was slowly getting over my cold so for the thank you for the flowers and the get will
cards that have been sent my way I will pull through this thing, and I do appreciate your
well wishes.
For you folks at home what we just did here for the face to facers was what we just took
a quiz, and obviously I can't give you the quiz at home.
The quiz that I gave why don't you show this on the screen, and if you're at home why don't
you just pause it , and see how well you would do on this quiz just pause it, and when you're
done taking that quiz so to speak just start it up again and you can go over the answers.
So we will go over the answers right now.
So let's switch it over and I'll just what is the accounting equation assets equals liabilities
plus owner's equity or equity right.
Assets equal liabilities plus owner's equity and that always has to remain in balanced
for a company at any given point in time the assets have to equal the liabilities plus
the owner's equity.
What makes equity increase?
Investments of assets by the owner into the business, and revenue right, investments of
assets by the owner into the business, and revenue are the two things that cause owner's
equity to increase.
The two things that cause it decrease are just the flip side of that.
Withdrawals of assets by the owners out of the business, and expenses so I want you to
have those facts real firmly cemented into your brains, because it's going to help us,
and especially today ok this is a really important lecture so I'm glad you're watching it.
One thing I wanted to remind you all of and especially for you folks at home but even
for you face to facers is you can always re-watch these I know you loved them the first time
the second time they're even better right.
So if you're ever struggling with a concept sometimes if you watch it a second time it's
going to become a lot more clear so don't hesitate to do that, that's one of the benefits
of teaching in this sort of manner.
Alright, before we go over the homework I'm going to clarify something real quick.
I'm going to try to change my verbage a little bit so that it's not as confusing.
The connect the connect assignments, how many people have signed up on connect?
Most of you there's a couple that still haven't we talked about that before class at home
I want you to sign up for connect and again go to the lessons tab go to the lessons tab
on angel and you should see something there that refers to the URL and the information
for homework connect.
But I want to start not calling it connect homework I'm going to try my best and you
can correct me I want to call it the connect assignments ok.
So when I talk about you need to do your connect assignment I'm not going to say connect homework
I'm really not going to try to do that I'm going to say connect assignments, because
the homework is like what I assign at the end of the hour or the end of the lecture
each time and then we go over it like what we're about to do.
So I don't want you to getting you confused you see what I'm saying?
So when I talk about doing your homework that's what I assign I usually put it up on the screen
right before you leave you do it pencil and paper, textbook, use your work papers perhaps
in the back of your book, and then we go over it that's the homework.
Connect assignments are something totally separate and we actually do not go over the
connect assignments in class.
They give you feedback on the computer make sense ok?
Let's go over the homework that I assigned I don't think it was real mind blowing homework
was it?
So let's go over quick study one-eight boy that was a toughie wasn't it?
Did you pull an all nighter on that one?
Ok we know that assets have to equal liability plus equity so for company one on quick study
one-eight on page thirty-one what do liabilities equal ten-thousand dollars.
On company two what do assets equal eighty thousand dollars?
Company three what does equity equal?
Also eighty-thousand dollars correct ok good.
Quick study one-seven total assets of Caldwell Company equals forty thousand, and its equity
is ten thousand so what its liabilities thirty thousand again assets have to equal liabilities
plus owner's equity.
B total assets of water world equal fifty five thousand and its liability and its equity
amounts are equal to each other.
So how much are its liabilities so how much are its liabilities twenty seven five how
much is its equity twenty seven five same.
Alright so any questions on those two?
Ok I think the other one I gave you is exercise one-seven is that correct?
And this is in regards of to the different types of ways you can organize your business.
So they want us to determine from the description if it's a sole-proprietorship, a partnership,
or a corporation.
And when I read these I'll emphasize in the phrasing what the giveaway was in for what
type of what organization it is.
A-one pays its own income taxes and has two owners it's a corporation a corporation pays
its own income taxes.
B ownership of Zeller Company is divided into a thousand shares of stock it is a corporation,
corporations have stock we didn't talk about that, but it was in your book so I want you
to be reading your book as well.
C Waldren is owned by Mary Malone and she is personally liable for the company's debts,
sole-proprietorships one owner she's personally liable sole-proprietorships.
D Mike Douglas and Nathan Logan own financial services a financial services provider neither
Douglas nor Logan have personal responsibility for the debts of financial services it's a
corporation there not personally liable.
E Baily and Kay own squeaky clean a cleaning service both are personally liable to the
business so there's two owners they're personally liable partnership.
Well LLC wasn't really an option so it was just sole-proprietorship, partnership, and
corporation if you had to choose one of those three there was only one right answer, but
you are correct for D LLC would satisfy that as well if that as well if that were an option
ok good.
Are we on F?
Plasto products does not pay income tax and has one owner, sole-proprietorship, and G
I'm not sure why they call it E and LLC but this company does not have separate legal
existence apart from the one person who owns it it's a sole-proprietorship it's kind of
a little misleading with the name of the company, but it is a sole-proprietorship.
Alright any questions on that, any questions on that?
ok great.
What I want to do now I'm going to give you a little preview of things to come on today's
lecture.
But once again I want to emphasize the accounting equation let me write it here up on the screen
for you.
And if I'm ever writing and you can't see it please let me know.
Ok assets equal's liabilities plus owner's equity I will abbreviate here ok and that
always, always, always has to stay in balance ok what we're going to do today and you'll
see this is we're going to start analyzing business transactions and seeing how it affects
that accounting equation.
Let me give you an example start looking back at this let's say that a company got a loan
from a bank for five thousand well how will this be affected well cash which is an asset
will go up by five thousand, and what else will go up by five thousand your liabilities
correct.
You went into to the bank they loaned when you are done with them you're going to have
five thousand dollars more of cash which is an asset, but you're also going to have a
liability of five thousand dollars right.
Ok does that accounting equation stay in balance?
It does right if it was balanced before it is still balanced ok now let's say with that
new money let's say we purchased a one thousand dollar photo copy machine a piece of equipment
well how will that effect this accounting equation?
Well our cash which is an asset would go down by one thousand what else would change?
Not an expense, because it's a fixed asset it's a piece of equipment and our equipment
would actually go up by one thousand dollars.
So one asset our cash goes down by a thousand think about that you gave them a thousand
so you have a thousand dollars less cash than when you entered the store, but you also have
this new big piece of equipment cash goes down equipment goes up looking back at that
does everything stay in balance is the accounting equation still in balance.
We didn't do anything on this side but then that effect was zero over here right everything
stays in balance that's a little preview of what we're going to talk about today, but
before we do.
I want to go to a slide here and the slide is right here there are certain principles
and assumptions of accounting and all the rules of accounting are kind of based on these
principles and assumptions ok now we're not going to go through those all today, but we
are going to go through the revenue recognition principle.
The revenue recognition principle ok, what is the revenue recognition principle?
Well that states that we're going to recognize revenue when it is earned.
When is it earned when the product or service has been delivered to the customer.
Now I have a little cash sign with a cross through it, because it is not necessitated
by when the cash changes hands.
We recognize revenue when it is earned when is it earned when we have provided the product
or service.
let me go through a little demonstration on this this is such an important principle that
I want to make sure that I want to get it in your brains ok.
Jessica let's say you're my customer and lets say I want to sell you one of these nifty
red calculators, and the price for one of these is five dollars ok.
So let's just make the transaction yes five dollars right there let's just make the transaction.
Let's get a good side shot from the camera.
I want to get a good side shot ok I've given you the product I can recognize five dollars
of the revenue, but now we're going to change it up a little bit alright.
We're going to change it up a little bit let's keep with that side shot.
Let's say Jessica says "hey I really need a calculator I heard you sell these really
great five dollar calculators", and I say "oh there are wonderful" and she says I want
to buy one, doggonit I didn't bring them today, and she says well I tell you what I'm going
to give you the five dollars right and I go yes she goes I'm going to give you the five
dollars today, and can you just bring it to me on Monday.
I say no problem and she gives me the five dollars now can I recognize this as revenue?
No I cannot, now this strikes some people as odd now she's a customer I'm a business
she just gave me five dollars, and I cannot recognize that as revenue, because it is not
yet earned I haven't given her the calculator.
So she gives me five dollars and the way I actually record this on my books is as unearned
revenue which is a liability, because what do I owe her?
I either owe her money back or a calculator right.
So going back to that example she give me five dollars ok the weekend comes and goes
I say hey its Monday I have I got that calculator for you Jessica she goes great I can't wait
to get it ok.
So hold your hands out like this I still have not earned the revenue, I have not earned
the revenue, I have now earned the revenue it does not necessitate cash is not the impetuous
for when we recognize the revenue it's all when I give you that calculator cool.
Let's do one more of these I put the five dollars in my pocket, and I lost it in there
one more of this let's rewind, and start this whole thing over she says hey I want to buy
one of those calculator from you and I say oh they're great you're going to really like
them they're five dollars, and she says I tell you what I don't have the money right
now for it and she goes can I just pay you the money for it on Monday and I say that's
no problem she goes I really need it today for the rest of my classes so I go ahead and
give you the calculator I have earned the revenue now has she paid me for it no doesn't
matter I can recognize the revenue, because it is earned I have given her the product
or service I now have on my books what is called an accounts receivable I have a receivable
from Jessica, because I'm going to receive cash in the future but I can and will recognize
that as revenue ok very important.
The weekend comes and goes its Monday and say hey how's that calculator going and she
says it may be the best calculator I've ever had in my whole life and I say do you have
the five dollars you owe me?
And she says yes and she give me the five dollar now do I recognize this as revenue
no I already recognized it as revenue you see what I'm saying I don't recognize revenue
again I recognized it when I gave her the product or service so all I do at this point
is my receivable goes down and my cash goes up.
There's no revenue recognize when she pays me the revenue is all predicated on when I
give the product or service and this can happen the same way if I were a landscaper and I
was mowing your lawn for fifty dollars I would recognize the revenue as soon I was done mowing
your lawn regardless of when you paid me for it.
There are certain companies and businesses that are known for you pay cash before you
receive the service for instance how many of you drive a car most of you I hope you
all have car insurance right you have to prepay your car insurance right well the insurance
company gets all this money in, but they have not provided the service of insurance coverage
yet have they?
So let's say you pay twelve hundred dollars Jessica for six months of auto insurance ok
well they get that twelve hundred dollars that's unearned revenue correct every month
that they provide you with coverage they can recognize two hundred dollars of that right,
because they provided that service right, does that make sense?
Other companies that usually have money before they provide product or service a magazine
subscription let's say you have paid twenty four dollars for twelve issues for reader's
digest magazine well they have the money, but they haven't provided the product yet
have they?
Every month when they send out that wonderful magazine they can recognize some of that as
revenue.
The last example would be like a rock concert ok.
A few years ago I paid money for a Bruce Springsteen concert here in town did you pay for that
too?
You know where this sad story going don't you?
I was so excited to see Bruce Springsteen, and if you're watching Bruce you really let
me down ok.
But any way I showed up to the concert and it was cancelled now I got my money back,
because Bruce and the E-Street band had not provided me a product or service right.
Think of all that money that Bruce got in was it earned no when is it earned as soon
as he's done with the concert does that make sense?
So one last time we recognize revenue when it is earned when is it earned?
When the product or service has been provided ok cool.
Alright, so now what I want to do is go back to this accounting equation now there is the
basic accounting equation correct assets equals liabilities plus equity now from our quiz
the two things that caused equity to decrease were what?
Withdraws of assets by the owner out of the business, and expenses right.
I want to expand this accounting equation, and I want you to understand what we're doing
here.
Equity is decreased by expenses and owner withdrawals right.
Let me get my pointer going here so as these things increase as these things increase equity
actually decreases, because they're subtracted does that make sense?
As withdrawals increase owner's equity decrease because it's subtracted, as expenses increase
owner's equity decreases, because expenses are subtracted.
Revenues and investments by the owner into the business which we keep track in the capital
account as those increase owner's equity increases, but I want you to be aware of these minus
signs here because for those items when they increase owners' equity decreases, does that
make sense?
Now what I want to do is something really important and it is going to be you can come
of that for a second we are going to analyze some transactions here and this one of those
first skills that I want you to master you need to master this before we go on to the
next skill which we'll learn in chapter two.
So this real important so if you have to rewatch this section a time or two that's fine but
I want you to have this down we're going to analyze transactions.
Going to the screen we know that the accounting equation must, must, must remain in balance
after every transaction that we analyze so let's walk through a few of these where does
this start it starts right here so let's say Jay Scott invests twenty thousand dollars
cash to start the business maybe it was a inheritance from his grandpa or something,
but he has twenty thousand dollars and he is going to start a business.
Well form your quiz you know that this is one of those thing that increases owner's
equity right.
And owner's equity and capital we kind of you those as interchangeably at this point,
but the two accounts that are going to be affected are cash is going to go up and owner's
capital or owner's equity is goes up you with me?
The capital account is where we keep track of that investment ok you with me.
So cash goes up by twenty thousand and owners capitol goes up by twenty thousand.
Now how does that look if you look at it like this?
Well you have cash over here to your left going up by twenty thousand and you have owners'
capital which is part of equity going up by twenty thousand does the accounting equation
stay in balance?
Yes it does, yes it does.
And this is a brand new business so this is the very first transaction of the business.
Let's look at another transaction let's say they purchased office supplies and they paid
a thousand dollars cash well what would be the accounts that are affected?
Well cash would go down right, and supplies would go up now supplies are things like they're
shown binders, post it pads, staples, pencils stuff like that.
Think about it you go to office depot with a thousand dollars cash when you leave your
cash is decreased, but your office supplies have increased both by a thousand dollars
correct?
How does that look in this analysis?
Well cash goes down and those parenthesis means negative mean going down cash goes down
by a thousand and supply goes up by a thousand are you with me?
Now sometimes people think something has to happen on each side of the equal sign ok the
left side and the right side no nothing happened over on the right side of this equation nothing
happened over here did it?
It is all over here it is all over here it is all on the left side but that has a zero
net effect so the accounting equation stays in balance doesn't it?
Understand what we're doing?
Does the accounting equation remain in balance?
Yes.
Let's look at another transaction this time we purchased equipment, equipment is just
not post it notes, and pencils but it's something big like this big expensive photo copier.
We purchased equipment for fifteen thousand dollars cash the first question you ask are
what are the accounts effected.
Well cash goes down by fifteen thousand and your account called equipment has just gone
up by fifteen thousand right.
Those are both assets once again now supplies aren't the same thing as equipment ok so when
we look at it in the analysis this is how it's going to look your cash has decreased
by fifteen thousand dollars, and your equipment has increased by fifteen thousand dollars
ok Marlen.
Since the owner owns the business when he puts that coipy machine into the business
why wouldhnt owners equity go up as well since.
That's a great question let me reiterate that question what he's saying is since the owner
owns the business and this asset is going into the business why doesn't that increase
his equity that's a great question,because it seems to contradict the quiz I'll tell
you why.
Look back at the screen it's the business the businesses cash that purchased the equipment
think about when he put this cash in his owner capital increased he can't just use that cash
to keep buying assets and keep running up his equity you see what I'm saying?
So In a way the owner did not buy personally that photocopy machine it was the business
that bought it, does that make sense excellent question excellent question.
Alright number four let's look at another transaction this time the owner purchased
supplies of two hundred dollars and equipment of a thousand dollars on account, and I said
the owner but I really meant the business the business purchased supplies of two hundred
dollars and equipment of a thousand dollars on account.
What does it mean on account?
Sometimes that called on credit that means we're just going to pay you later we're going
to take the assets and we're going to pay you later ok they trust us.
So what accounts are affected?
Well think about it supplies are going to go up by two hundred dollars equipment is
going to go up by a thousand dollars and our liability which is called accounts payable
accounts payable is going to up by how much?
Twelve hundred correct how does that look?
Well let's take a look supplies goes up by two hundred equipment goes up by one thousand
and accounts payable goes up by twelve hundred.
Sometimes people make the mistake they think accounts payable goes down or the negative
no accounts payable goes up right.
We owed them zero now we owe them twelve hundred how are you going to make that accounts payable
go down in the future well how do you make your loans go down you pay them off right.
So take a look at that supplies goes up by two hundred equipment goes up by one thousand
accounts payable goes up by twelve hundred dollars, you with me?
Is accounts payable considered the liability or equity?
Good question accounts payable is a liability ok accounts payable is a liability as a matter
of fact going back to the screen here if I have my pointer here the liabilities are over
here the equity is over here ok.
Now take a look at that again I want to introduce a concept to you called what is known as dual
entry accounting what that means is that every transaction has to affect at least two accounts
otherwise you can't stay in balance so every one of these transactions these first four
that we've analyzed at least two accounts affected.
Now in transaction four there were three accounts that were affected that's fine.
Dual entry accounting just states that at least two accounts are affected I've done
transactions where it's affected fifty or sixty accounts.
But in order for the accounting equation to remain in balance at least two accounts have
to be affected now let me ask you this is the accounting equation still equal?
It is isn't it?
And at any given point you can figure up and I'll circle this you can figure up what the
ending balances are just by adding what's above and you can figure this all out and
verify that assets truly does equal liabilities plus equity you with me cool.
We're going to analyze four more transactions.
Let's say we borrowed four thousand dollars from bank of America what would be affected
here well cash would go up by four thousand dollars and a certain liability would go up
by four thousand dollars but it would be accounts payable this would be note payable.
Now what's the difference between notes payable and accounts payable?
Notes payable are more formal they're written down on a note and there's usually interest
involved.
Accounts payable is just like when you buy some office supplies and you say I'll pay
you at the end of the month and they say ok you've shopped here for fifteen years we know
you're good for it ok.
But a note payable how many here have a student anybody here have student loans?
Anybody here have a car loan?
Anybody here have a mortgage well if you have any of those you have to sign stuff and they
gave you an interest rate those were notes ok.
So going back to this example we got a four thousand dollar loan from bank of America
cash goes up by four thousand, and our notes payable liability goes up by four thousand.
How is that reflected in this analysis?
Just as it's shown.
Notes payable goes up by four thousand and cash goes up by four thousand does the accounting
equation hold?
Do assets still equal liability plus owner's equity?
Yes.
Next one and it reiterates that in this slide right here.
Now let's look at some transactions involving revenues, expenses, and withdrawals and I
want really want you to recall the quiz that you took what are the two things that make
owners' equity increase, what are the two things that make owner's equity decrease.
So remember that ok we provide consulting services and we receive three thousand dollars
in cash.
So we have a customer we provide consulting services to him or her and they pay us immediately
three thousand dollars cash.
What is affected?
Cash is affected and yes this will increase equity but it increases equity because revenue
is increased.
Does that make sense?
So the way that this looks is like this revenue here where's my pointer whoops up here.
Revenue is an equity account when revenue goes up from your quiz that's one of the things
that increases equity and that's why these are added ok.
So revenue goes up by three thousand and also our cash goes up by three thousand you with
me?
Accounting equation still holds doesn't it assets equal liabilities plus owner's equity
ok.
Somebody is working on something here in the building.
Alright let's take a look at the next transaction we paid salaries of eight hundred dollars
to employees now what is this this is an expense now I want you to remember expense are one
of the things that as they increase owner's equity decreases right.
Ok so how does this look whoops cash goes down because we paid out eight hundred dollars
to our employees and our salaries expense went up salaries expense went up.
Now remember that as salary expense account increases equity account decreases, because
expenses reduce equity.
How does this look?
It looks like this?
And I want to make sure you understand this.
Expenses go up expenses are not decreased here expenses goes up but eventually when
we're figuring out total equity we add revenue but we're going to subtract our expenses.
Does that make sense guys?
So when you have a expense yes your expense goes up which causes your total equity to
go down I want you to understand that.
Understand?
Does the accounting equation hold stay put?
Good.
Let's do one more a withdrawal of five hundred dollars is made by the owner this is the similar
situation cash goes down by five hundred dollars withdrawals goes up, but as withdrawal account
which is where we keep track of these things when the owner takes out assets when the withdrawal
account goes up equity decreases, because from your quiz withdrawals is one of the things
that causes equity to go down.
So how does this look?
Well it looks like this your withdrawals actually go up however when you figure total equity
you're going to subtract owner's withdrawals you're going to subtract expenses you're going
to add revenues and of course capital is going to be added.
So if you take that twenty thousand plus three thousand that's twenty three minus five hundred
minus eight hundred oh, and then you have to add your liabilities that's where they
get that so this number is all of these together ok.
But if want to figure out my total equity I add owner's capital, I subtract owner's
withdrawal; I add revenue I subtract expenses do you understand that?
Because withdrawals decrease equity, any questions on that, any questions on that?
Ok what I want to do now real quick is I want to work on a homework example in class I want
you to do exercise one-thirteen exercise, not quick study!
Always listen if I'm saying quick study, or exercise, or problem, but I want you to do
exercise one-thirteen on the top of page thirty five ok.
For you folks at home whenever we do this they're going to play this snazzy jazzy JCCC
music I want you do this at home just like if you were here in class.
If you need more time just pause it and we'll go over the answer in a little bit, but this
is a very valuable time for you so let's take a few minute and we'll do exercise one-thirteen.
(music 37:30-43:44).
Ok once again for you folks at home if you're not done just pause it and start when you
are done, but I want to make sure we get through the answers before class is over.
Ok exercise one-thirteen they want us to describe what was the probable nature of each transaction.
In transaction A cash went down by two-thousand and land went up by two thousand so what happened
there?
They took two-thousand dollars cash and purchased some land correct so cash went down the land
asset went up everything remains in balance correct.
Transaction B office supplies went up by five hundred, accounts payable went up by five
hundred what happened there?
We purchased five hundred dollars of office supplies on credit or on account sometimes
we say.
Transaction C accounts receivable went by nine hundred and fifty dollars and revenues
went up by nine hundred and fifty dollars.
Well we provided nine hundred and fifty dollars' worth of services to our customers, but they're
going to pay us later.
We provided it on credit or on account it's a account receivable because we're going to
receive cash in the future, and we can recognize that revenue because of the revenue recognition
principle even though we haven't received the cash, because we provided the service.
Transaction D cash goes down by five hundred and accounts payable does down by five hundred
what happened there?
We paid off that liability right our cash is decreased and our accounts payable liability
has also decreased right cool.
Lastly transaction E remember how we had a accounts receivable for nine hundred and fifty
here the customer paid us they paid us cash of nine hundred and fifty dollars to settle
that accounts receivable.
We don't recognize revenue nothing happens in the revenue column right, because we already
recognize the revenue.
But cash goes up which is an asset, accounts receivable which is also an asset goes down,
make sense?
I want you to get very adept at analyzing these and most of your homework will have
to do with this sort of analysis, are there any questions?
It can't go out of balance if you try to make a journal entry or you try to analyze a transaction
it has to balance if it doesn't balance you goofed up that's the beauty of it.
you goofed up in your math is that what you are saying?
You goofed up in your math or you didn't analyze the transaction correctly the beautiful thing
about accounting is that it's precise it has to be in balance.
If you do something and it's not in balance then somewhere you went wrong maybe you effected
the wrong account or maybe the wrong direction ok.
Alright let me give you your homework not talking connect assignments let me give you
your homework.
Your homework is right here on the screen, and I want you to do exercises one-twelve,
one-ten, one-eleven, and one-eight now when I have them out of order like that is what
I usually mean I want you to do them in the order I wrote them I think it would be easier
to do them in that order.
Of course you can do them in whatever order you want.
Now I have a note down here that says use your work papers if you have them.
See that exercise one-eleven that I have as homework up there guys look in your work papers
and you're going to find something that looks like this exercise one-eleven and we're going
to do just like the transaction analysis we did in class we're going to do it here ok.
Make sense?
So don't forget about those work papers if you purchased them that's why you purchased
them so just look in the back look for the right reference and use that as kind of a
template to do your homework, but have this homework done next time.
Get signed up for your connect assignment if you haven't call the eight hundred number
if you're having trouble.
We'll see you next time bye.
(music outro)