[MUSIC PLAYING]
Hi, Else here.
And this is part three of solving problems
using the accounting equation.
In our last video, we solved question three,
a complex question that involves three periods: beginning,
during, and end.
In this video, we'll solve two more complex problems
that students often struggle with.
By the end of this video, you should
have the necessary understanding of how
to manipulate the accounting equation so you
can attack any accounting equation question you see.
As I always point out, read the question once,
get the general idea, then read it again,
highlighting or underlining the important information.
Question four.
At the beginning of the year, ABC Company
has total assets of $905,000 and total liabilities of $452,000.
During the year, ABC's total assets increased by $143,000,
and their liabilities decreased by $143,000.
What is equity at the end of the year?
OK, read it again, underline what's critical.
Question four.
At the beginning of the year, ABC Company
has total assets of $905,000, total liabilities of $452,000.
During the year, ABC's total assets increased by $143,000,
and their liabilities decreased by $143,000.
What is total equity at the end of the year?
You'll notice that this question is
similar to question three, in that we have information
for three different periods: beginning, during, and ending.
However, we don't need information
about owner's capital, retained earnings, profit, dividends,
revenue, or expenses.
What we need is three basic accounting equations.
Notice that by reviewing the question,
we're able to figure out exactly what we need to solve it.
So here are the three equations representing
three different periods of time, and without the details,
exactly what we need.
We have the beginning, during, and the ending.
As in the last video, note that the equations are
mathematical equations, and as such,
they always have to balance.
Now, let's fill in what we know and then solve
for what we don't know.
I'll start at the top and move down.
Beginning assets, $905,000.
beginning liabilities, $452,000.
Moving to during the year, assets
increased during the year by $143,000.
Liabilities decreased during the year by $143,000.
OK, I filled in all my knowns, now
I have to solve for my unknowns.
Beginning.
Solving for equity, I know that it's equal to $453,000.
Let's look at during.
We need to calculate equity.
We have a positive number on one side of the equal sign,
and a negative number on the other.
Unfortunately, this causes students a lot of confusion,
and many students would answer that equity is equal to zero,
which is totally incorrect.
Instead, use math to solve for equity, which is $286,000.
Let's just be clear on how I got that.
When you look at this equation, the equal sign has to balance.
And we can see that $286,000 minus $143,000
is equal to $143,000.
So we know that this equation works.
Can we now calculate the ending balances?
Absolutely.
We now have an equation that moves down
from the top of the page to the bottom of the page.
Beginning assets plus increase in assets
is equal to ending assets.
Ending assets is equal to $1,048,000.
Beginning liabilities, less the decrease in the liabilities,
is equal to ending liabilities.
Ending liabilities is $309,000.
We now have two ways that we could calculate equity.
We could calculate equity by using the ending balances
and solving for the unknown, or using the beginning
and during balances to solve for the unknown.
If we've done it right, the two should end up
with the exact same answer.
I'm going to use the beginning and the during.
Beginning equity plus the increase in equity
is equal to ending equity.
Ending equity is $739,000.
Our question was what is ending equity?
And the answer is $739,000.
We have one more question to go through, again,
a totally different question.
Remember, that to become proficient at manipulating
the accounting equation, you want
to do as many different styles of questions as possible.
Question five.
The following information is provided for you:
total assets end of period $145,000, total liabilities end
of period $38,000.
Owner's capital end of period $63,000,
retained earnings beginning of the period $24,000.
Profit end of the period $29,000.
What are the dividends at the end of the period?
Read it again and underline the important parts.
Question five.
The following information is provided for you:
total assets end of the period $145,000, total liabilities end
of the period $38,000.
Owner's capital end of the period $63,000,
retained earnings beginning of the period $24,000.
Profit end of the period $29,000.
What are dividends at the end of the period?
Just so you know, profit, when they say the end of the period,
is really during the period, because profit
is over a period of time.
So we would put that in during, even though they
say the profit at the end of the period is equal to $29,000.
So we need our larger expanded format.
Let me just expand that on the page, so we can see it clearer.
So here again, we have one equation for the beginning,
we have one equation for during, and we
have one equation for the end.
Let's fill in our knowns.
Assets end of the period, $145,000.
Liabilities end of the period, $38,000.
Owner's capital end of the period, $63,000.
Retained earnings beginning of the period, $24,000.
Profit for the period is $29,000.
We have no information about revenues or expenses
during the period, so we can ignore these.
Wow.
This looks complicated.
Remember that what we're trying to figure out
is dividends for the period.
As always, let's solve for what we can solve first.
At the end of the year, we can solve for equity.
Total equity is $107,000, which is assets minus liabilities.
I know that equity is equal to owner's capital
and retained earnings, so I can now
solve for the retained earnings at the end of the year.
Retained earnings is $44,000.
OK, we need dividends for the year.
How can we get that?
Well, we know that the starting or beginning
numbers plus or minus the jury numbers are always
equal to the ending numbers.
That's true for assets, liabilities, and equity.
So it's bound to be the same for retained earnings.
Opening retained earnings plus or minus the during
is equal to the ending.
So $24,000 plus x is equal to $44,000.
So in that case, the during retained earnings,
the change in retained earnings during the year,
must be $20,000.
Well, can we now solve for dividends?
Profit minus dividends is equal to retained earnings.
That means that $29,000 minus some number for dividends
is equal to $20,000.
That means that dividends are equal to $9,000, the answer we
were looking for.
So what is the key to solving questions involving
the accounting equation?
Practice.
Make sure you get as much practice as
possible by completing all the questions in the textbook.
For our next video, we'll be analyzing
the impact of individual business transactions
on the accounting equation.
[MUSIC PLAYING]