Mark Farber: Hi, I'm Mark Farber.
This is another accounting fundamentals video.
Today what we're going to do is we're going to talk about journalizing.
So how do we record transactions in accounting, as opposed to the way we did it before, the
sort of the back of the envelope method.
We call it journalizing because all transactions in accounting are recorded in a book called
the journal.
The journal is sometimes referred to as the book of original entry, meaning that before
we do anything with the data we first have to record it in this journal.
And it's essentially one big continuous book.
In the old days it was a book.
Now, of course, it's done on computer, but it's one big continuous list of every single
transaction that a company goes through.
So the first thing that a company has to do is decide, "Do we have a transaction?"
Once they've decided if they have a transaction, and they've analyzed the transaction, the
next step is to record it in the journal.
Over here we have five transactions, and these are the same five that we looked at before:
investing some money in the business, purchasing the computer, paying rent, completing a job
and invoicing a client, and then finally withdrawing some cash from the business.
We can go through these very quickly.
We can see that this one involves receiving cash, so an asset's going to change.
Therefore it's a transaction.
Payment of cash, payment of cash.
Completing a job is revenue, and that's going to change equity.
And finally withdrawals, that involves both cash and equity.
So all of these we can determine are transactions, and they need to be recorded.
Before we recorded them in our accounts simply by increasing and decreasing various accounts.
Now what we want to do is we want to record them using debits and credits.
I've got a neat little tool over here, in which I just wrote out essentially the accounting
equation: assets, liabilities, and equities, and I've added revenue and expenses.
I use this as a handy little trick.
What I do for my trick, and I'll explain in a second, is I put a plus and a minus, and
minus, plus, minus, plus, minus, plus, plus, minus.
So in other words, plus, minus on the outside ones, and then minus, plus on the inside ones.
This helps me to recall whether I need to use a debit or a credit for various accounts.
For instance, for assets, the left side, remember, is the debit side.
The right side is the credit side.
So a debit to an asset will increase the account, and a credit will decrease the account.
Similarly for liabilities, the debit will decrease the liability amount, and a credit
will increase the liability amount.
So it's a good little tool to us.
So let's go through these and see how we would record them.
This is essentially what a journal would look like.
Normally it will have the number of the transactions, then the date that the transactions were placed
on.
That's very important, as we'll see later.
We didn't put in dates here, so we'll ignore it for now.
The accounts that we're going to be using, and then whether we're debiting or crediting
the account.
Let's start with the first one.
We have transaction number one.
I'm just going to ignore the date for the moment, and we're investing cash.
Cash is the first account that we're going to use.
I like to, over here, write DR.
You don't have to.
Just by way of sort of tradition, if you will, and organizing our journal, we tend to write
the debits first and then the credits.
So I'm going to debit cash.
My cash is increased.
Cash is an asset.
It's increased, so it's a debit.
So I'm going to debit cash, and I'm going to record that under the debit column, $5,000.
And then the second half of the transaction ... because remember, it's double-entry accounting,
so we need a debit equal to a credit.
The second half is, I'm going to credit, and notice that when I write my credits, I indent
them a little bit.
That's just to make it more visually appealing and easier to keep track of.
I'm going to credit capital.
That was the account that we used last time, and that goes in the credit column.
So my debits equal my credits.
I don't have to check back with my accounting equation.
I know that everything's in balance.
Let's go on to the second one.
By the way, I would normally write in a little description of what that transaction was,
just so if I go back and look at the journal later, I can see what I did.
But we're not going to do that, just because I'm constricted some of my space here.
But we'll put in our second transaction, number two, and that was purchasing the computer.
Again, I don't have a date.
If I purchased a computer, I've acquired an asset, so my assets will have increased.
So I'm going to debit, and again I used equipment last time, in this case $2,000.
And I paid cash, so my cash is decreased, so I'm going to credit cash.
Again, cash is an asset.
I want it to go down, so that's the right side, so it's credit, $2,000.
Debits equal credits, and I'm okay.
Let's go through the last three fairly quickly.
We might only get to do two more because I'm running out of space.
But pay rent.
Again, no date.
Rent is an expense, we've said.
Well, when I have an expense and I'm increasing the amount of expense that I've incurred,
it's on the left side, so it's a debit.
I'm going to debit rent expense.
I'll just abbreviate that.
We said the rent expense is $2,000 in.
I put it in the debit column.
And I paid cash, so credit cash $2,000.
And we've got room.
Let's do one more.
Complete the job and invoice $3,000.
So we've completed the job.
We've earned revenue, and we'll talk more about how we earn revenue later.
I've earned revenue.
My revenue's increased.
That's on the right-hand side, so it's a credit.
And because we have to write the debit first, in addition to earning revenue, I also have
an asset.
I have an account receivable.
I'm owed $3,000.
Assets have increased, so it's a plus on that side, so it's a debit.
So we'll put the debit first.
Again, I don't have a date.
Debit accounts receivable, and that was $3,000.
Whoops.
Goes over here.
And I'm going to credit revenue.
That goes over here.
So notice that for each of these transactions ... We won't do the last one.
For each of these transactions, my debits always equaled my credits, and therefore I
know, from what we learnt in the last video, that my accounting equation is in balance.
I don't have to worry about it beyond checking this very simple thing.
And I've got all of the amounts recorded in these accounts.
Now, the one thing you can see when you look at this is, if you wanted to figure out how
much cash the company has, you would have to go through each transaction looking for
cash, cash, cash, figure it out and that would be very difficult.
So in our next video, we're going to look at how we take the information out of the
journal and put it into another set of books called the ledgers, where we keep track of
how much is actually in each account.