ACG 2021 Fianancial Accounting Chapter 2

Well. Hello, this is your financial accounting class and welcome to Chapter two.

Hopefully you're getting a little something out of the class.

So for chapter two we're going to go into our learning objectives for this chapter,

which we're going to describe an account and use the recording transactions.

We're gonna define debits and credits and

then explain the double entry accounting system.

They were going to analyze and record transactions and

see how they really impact the financial statements.

And then we're gonna look at a debt ratio

and described its use in financial accounting conditions.

And then we're going to prepare financial statements from a trial balance.

So hang tight.

Alright, here we go. Let's describe an account. All right.

So the basis of financial statements,

basically they're set up when business transactions occur.

So there's some source documents and things that happen and it's up to

the accountant to identify what the transaction

is and identify the source documents.

Then once they identify that they should analyze the transaction

and figure out where it belongs in the accounting equation.

Kind of like we did in the last lesson.

Then once we do that,

we're going to record the transactions in the

journal and then we'll post the journal information to

lead your accounts and from there we'll prepare

and analyze a trial balance and financial statements.

Okay,

so a source document are things that begin the transaction.

They identify and describe it.

And once we do that we enter that information into the accounting system.

So a source document is where the information originated.

For instance, a bill from a supplier or any type of sales receipts or checks,

purchase order payroll records of bank statements.

So know what these are because you'll be asked to identify

some of these in your assignments or even on tests.

So once you do that,

the account underlying the financial statements will then

the accounts actually make up the financial statements.

So the account records an increase or decrease in the account as to what's happening

kind of like yesterday we were looking and we paid cash out cash went down.

Or if we receive cash because of revenue, cash went up.

So that's an example of an account.

And then you also have liabilities and equities,

all those have accounts associated with them.

And then we record the activity into a general leisure.

So here's the account and its analysis.

So you have to remember the accounting equation where we have assets,

equals liabilities plus equity.

So here are typically the accounts that would make up assets,

you have all of those there and then you

have your liability accounts and then your equity.

So again, we're building on what we've already learned.

So just kind of keep all of that in mind.

So here are the asset accounts.

Again, just another illustration of what they are can be cash, land, buildings,

equipment, supplies, prepaid those receivables accounts receivables.

I basically say anything that you own that would be an asset to me.

That's a good way to kind of tell if it's an asset,

then you have liability accounts,

so it's accounts payable and accrued liabilities,

it's notes payables is unearned revenue.

And I look at liability is anything that you owe, you know, debt you owe somebody,

you gotta pay them.

So that's typically the liability accounts

and then Equity accounts, this is what you own after you've paid all your debts.

So after you've gotten your asset in, you paid off your debts,

this is kind of what's left over.

So it's your owner capital, it's your revenues, it's minus your expenses.

And unless your owner withdrawals.

So keep that in mind as you're analyzing the equations.

So let's go ahead and look at it expand that.

We kind of saw a little bit of

this yesterday where equity actually includes owners capital

minus your onus withdrawals, plus your revenues minus expenses.

So, remember yesterday was kind of, I was saying it could get a little bit confusing

because I would say if your expenses went up, your equity went down

and that's because the more expenses you have, the less equity you're gonna have.

So I guess maybe if I said that way, it might make a little bit more sense.

So when revenues go up, equity goes up, when expenses go up revenue,

equity goes down.

So just remember that in which side they show up

on the accounting equation because that will become very important.

Alright. So there's a leisure

and chart of accounts.

So the leisure is a collection of all accounts

and all of their balances in the accounting system.

Typically it's called a general ledger.

And so when you see that you'd see these right here you'd see in a chart of

accounts you're gonna have your assets and each

account typically has a number associated with it.

And this is a very simple numbering system.

Whereas some companies have very elaborate numbering

systems because they have so many accounts

that they have to identify all of them individually.

But just know that

in a chart of accounts typically assets starts with one

liabilities will start with the two and equity and we'll start with

the three revenues will start with the four and sometimes expensive.

Start with a five and in this case it starts with a six.

But typically this is what you would see and if you

look in an account and you get very familiar with it,

if someone gave you an account number you know right away

it was an asset because it started with the one.

So kinda get familiar with this and you may see some of that

on some of your assignments and your your test perhaps.

Okay so now let's define debits and credits

and talk about this double entry accounting system.

So debit is on the left side.

Just remember that

and a credit is on the right side who came up with that.

I don't know that's just accounting.

And then you can see how this bar kind of goes across here

and then there's a line down the middle kind of making A.

T. This is called a. T. Account.

And a lot of times accountants analyze accounts based on the T. Account.

Like we know if we put something on the debit side and we put something

on the credit side and we let them together that will give us our balance.

So a T.

Account represents a ledger account and it's used

to show the effects of the transaction.

We'll see some of that coming up.

So here's a double entry accounting system.

So assets equal liabilities and equity kind of like yesterday when we looked

at yesterday last week when we looked at the systems

and we added cash and maybe it increased equity.

And we had something on both sides because both sides

have to equal remember assets equal liabilities and equity.

So if you make an entry to one side you have to

make an entry to the other side and they have to equal.

So if you look at this slide,

you'll see the word normal.

What that means is assets typically have a

normal debit balance because typically assets are positive

and when you look at liabilities they typically have a normal balance

on the credit side because assets increase on the credit side.

So anything on the right side of the equal will increase on the credit side.

So equity increases normally on the credit side.

So remember how we look at that example

where we said expenses expenses go up then your

equity decreases while expenses has a normal debit side,

it's equity, so it's not normal for equity but it's normal for the expense.

And because it is on the debit side it decreases equity

so that you have to think about maybe a little bit

longer as you are analyzing an equation when you're talking about

expenses and whether or not it decreases or increases equity.

But if you can remember this schedule or refer to it, it will help you out.

So just know that assets, the normal balances on the debit side,

liabilities and equity.

The normal balance is on the credit side.

Again, here's our double entry accounting system expanded for assets,

it's pretty much the same and liabilities is the same.

But for equity, because there's so many things involved in equity,

this is broken out a little more detail.

You can see the owner capital increases on the credit side,

you can see the withdrawals increase on the debit side,

you can see that revenues increase on the credit

side and expenses increase on the debit side.

And just because those pieces increase on the debit side is still decreases.

Equity because that's a minus.

So just keep that in mind.

And that's the expanded version of the accounting equation.

We went over a little bit last week but we were able to see more of it this week.

Alright, so here's an example of a double entry accounting system.

So account balance is the difference between the increases and decreases.

So let's look at cash.

Yesterday, we looked at several examples of the owner investing money.

They're receiving revenue and collecting on accounts receivables,

but at the same time he purchased equipment,

he purchased supplies and a lot of other stuff he did with cash.

So cash increased on the right side, which is the debit side.

But it increased.

I'm sorry, cash increased on the left side,

which is the debit side and then it decreased on the right side,

which is the credit side.

And if you were to add up all your debits, subtract your credits.

The balance is a debit of $4800. So overall cash increased on the debit side by $4800.

So now let's analyze them and look a little

bit of how they impact the financial statements.

All right.

If you were to look at this slide right here,

you can see how you have your source documents those ones we talked about earlier

and how they're either gonna be assets

liabilities equity depending on what's happening here.

And then from this information,

we do a journal entry into our General Journal which shows,

you know cash going up capital increasing it looks like this.

You typically would have your first line of your entry slightly to the

left and then the second line a little bit to the right.

And then all of those pieces of information run from the general

journal into their respective ledgers and

then eventually into the financial statements.

Alright here's another example.

So you see what this journal eyes,

this journal looks like a lot of times you

don't really see all those details on a piece of

paper because right now we are in an electronic age

and you may see it in an electronic leisure.

But this is what it looks like behind the scene. You're always gonna have a date,

you're always gonna have a description of what it is and then you're gonna

have your amount and then you're gonna have the other side of the entry.

Because remember there's two sides to the entry that

you need to make sure that you are providing.

And pretty much that's it. You need your titles.

You need to explain the transaction like what is happening here.

The explanation is

that the owner um

invested capital

and then over here he bought supplies.

So once you do your transactions you describe it

so that the person can know what that is.

Again in a system that's automated,

you would just type in the information so therefore when

you printed this out it would all be there.

Okay So let's look at the T. Account for this one here.

If you look at the general ledger

for cash you would see that we debited $30,000 when the owner put it in.

And so the balance is 30,000.

And then when he purchased something and used up $2500 of it and $26,000 of it.

Um This ledger where this T. Account just gives a running balance.

So 30 the balance is 30 25 went out. Now the balance is 27 500

26,000 went out. Now the balance is 1500. But oh

now he collects $42,000 in revenue and it goes back up.

So basically it's just a check and balance system

making sure everything balances and you know exactly

what your balance is in each account.

In this case we know exactly what our balance is in the cash account. Okay?

Right once you get that then you have to post your entries to the general ledger.

So here's the general journal where you did your entries and you take

each one of these and you post them into your general leisure.

Now this is just a manual illustration of how this happens, luckily for us.

Nowadays all this happens behind the scenes in our

automated general ledger system but you need to understand

how it works just in case there's an issue

and you then have to figure out what happened.

So here's the key, you identify the debit into the general journal.

You come up with your amount and your description

that's a and then b you enter the debit amount here.

You enter the credit amount there and then see once you identify all of that,

you move over over to the general ledger here

and on the general ledger each account has its own section.

Cash has its section,

and capital has its section and any other account

would have its own section in the general leisure.

So if you ran a general ledger you would be able to see a cash balance,

capital balance of receivables balance.

Any of those types of balances you will be able to see in a general ledger.

So once that's called posting the transaction to the general ledger

so that double entry accounting system helps us to do that.

We identify the transactions,

we analyze them in the accounting equation to figure out where they belong.

We recorded the drone entry and then we posted them into the general ledger.

So there are your processing transaction steps,

make sure you understand those and know what those are.

Again, this is just another illustration of the of the processing steps.

We identified them. We analyzed them in that accounting equation.

We recorded them into our general journal and

then we posted them into the general ledger.

Again here are the steps, identify, analyze, record and post.

Next you want to process some more transactions.

So that was the cash that he initially put in.

So this is just going to show us what happens when he purchases cash for supplies.

Again, he used cash

to purchase the supplies. The asset now is cash and supplies.

So here's the entry where he debited supplies and he credited cash because remember

on an asset of cash um the credit shows the decrease in an asset.

So that's why cash is on the credit side, supplies on the debit side.

And then on the general ledger he posts the increase in

supplies here and you post a decrease in cash there.

And also if you notice on this cash, general ledger,

you can see everything that's happened so far.

The $30,000 that first affected cash and then the 2500 that's affecting cash. Now

You cannot see how this is going.

Every transaction has a place and you just have to

know where to put those transactions in its place.

So here we are purchasing equipment. Same thing is happening.

We identified it fast forward paid $26,000. Cash for the equipment.

We'll cash was an asset but so was equipment cash went down.

But the equipment went up. Here's our entry. Similar to the one we just did

here is equipment section of the general ledger.

And then this is now what cash looks like.

So cash is getting a lot of activity but we're able

to keep track of it right there in our general ledger,

The next transaction, we posted supplies on credit.

So this is similar to what we looked at last week,

the same type of transactions only before we were

just looking at it on the accounting equation here

we're looking at it as to how it affects um your general ledger and how we recorded.

So anyway we purchased supplies.

So cash, no supplies went up in, cash actually was on credit. So there is no cash here.

We bought it on credit. So we have like an accounts payable which is a liability.

So liabilities went up.

So here's that entry

debit supplies, credit accounts payable.

And then in our supplies account we show what we once purchased by cash.

We also show what we purchased by accounts payable

but it doesn't matter because supplies and supplies.

It just shows us what our balances.

And then now we can show what our accounts payable looks like on the general ledger.

So keeping track of this manually, it can be kind of tedious.

Which is why I'm thankful that we have automated systems now.

Alright so now let's look at when the owner provided services for cash,

he got the cash and now he recognized revenue.

Here's the entry

David cash, credit revenue.

Here's the there's the effect on cash and the general ledger and

then here is consultant revenue in its own general ledger account.

Hopefully you're starting to get the hang of what's happening here because you will

be asked to do similar transactions on your assignments and on your test.

So now we're gonna pay expenses in cash. So we pay rent,

Same thing cash goes out the door. So we debit and expense now.

So debit expense for an expense. Credit cash.

You can see on the general ledger that the rent expense goes up.

And then here's our trusty dusty effect on cash.

All right, there's that one.

And the next thing we're gonna do is we're gonna pay employee salaries in cash.

So you can see how now this salaries expense that goes up. Cash goes out the door.

So here is a new item in our general ledger for salaries expense.

But then here's the running effect on cash. That credit of $700.

All right.

Now you wanna look at how this owner is

providing consulting and rental services on cash on credit.

Sorry, remember prior to these services, he did get cash,

but now he's getting them on credit.

So instead of debit in cash and he was still looking at an asset.

But the asset this time as accounts receivables.

And then our revenue is in equity in equity.

Um one is consulting revenue and one is rental revenue.

So our transaction looks like this as follows accounts receivables for $1900,

consulting revenue for 1600 and rental revenue for 300.

You could have done those severally just recorded accounts receivables for 1600.

Just had those two lines and then recorded accounts receivables for 300.

And had those two lines.

But it's so much easier to record them all in one transaction.

And then look at number four posting.

You see what the effects are on the general ledger.

Similar to what we've been looking at

this whole recording.

Okay now we're gonna receive cash on accounts receivables.

Again you just received cash as an as an asset.

The accounts receivable went down and in this case

nothing happened to liabilities and equity only effect assets.

So you again you recorded debit cash, credit accounts receivables.

You now put the effect of the cash in your general ledger.

And now you can look at the effect of the accounts receivables on the

general ledger as well because you started out with a receivable of $1900.

Now it's gone down by $1900. So the net effect of your receivables is zero.

And that makes sense because your client just paid it all to you.

All right next we're gonna look at

posting transactions which is partial payment of accounts payable.

Alright.

So remember we bought something on credit, so now we're going to pay $900 on it.

So cash goes down accounts payable goes down. So here's the entry

debit accounts payable credit cash and if you look at the ledger now

you can see where we started out with accounts payable of $7100.

We've reduced it by 900. So now a net effect is less than the 7100 that we have.

And then in cash you can see that now we have less cash because we had to pay it out.

Okay.

And then one of the things an owner can do once he's you know,

provided capital for the business and he's made some sales and did some things.

You may need to withdraw some money to take care of something else.

So in this case, see Taylor withdraws $200 from the business for personal use.

So cash goes down.

But also equity goes down because this was the money that he put into it himself.

This was not from revenue or anything like that. It was not an expense.

A lot of my students get confused when an owner withdraws money from the business,

they'll say it's an expense.

No expense is something that you had incurred.

When you're trying to maintain the business.

You're paying paying for stuff in the business,

you're buying things from the business.

Those expenses when you just go in yourself and take

your own money out or money that you've earned out.

That's a withdrawal. And that's equity. So here's the entry

Withitionsals as a debit

similar to an expense, but it's called a withdrawal.

It's a debit of 200 and then cash goes down for 200.

Here is the account for the tailor withdrawals and then here's your effect on cash.

Okay? Receipt of cash for future services.

All right,

so fast forward now is gonna receive $3,000

of cash in advance of providing consulting services.

So he's getting this money before he even provides this service to the customer.

So he's getting money for something he has not even done.

That is called unearned revenue.

And when you get money for something that you haven't done,

but you're gonna do later,

that means you owe that to somebody.

That means it's a liability because now you owe something.

So in this particular case it is called unearned

consulting revenue.

So, we're gonna recognize the cash that we got.

But also we're gonna recognize an increase in the liability.

So here's the debit cash to the 3000 and credit to the

consulting revenue liability as we don't get confused with this one.

This is not revenue yet.

This is a liability when it is earned, then it becomes revenue.

But right now it's a liability even though revenues in the name.

The fact that it says unearned makes it a liability.

So here's your posting, here's your effect on cash. You got cash in the door.

But then this unearned consulting revenue goes up, which is a liability for 3000.

So you just have to know where to put this and again,

um my students would have gotten confused with

the unearned revenue because they would have put

it over here as revenue in equity section instead of over here as a liability.

Again, eventually when it's earned, then it becomes revenue.

But as long as it's unearned and the owner still owes that service, it's a liability.

Hopefully that's

a little bit clear

to you.

Okay. So the owner is still

doing stuff with this business here is going to

um processing transactions.

Alright.

So what he's doing is he is paying cash for

insurance and he's paying it for a 24-month insurance policy.

But coverage begins on December. one

notice these dates they're giving you and they're

telling you how long this policy is.

That is because he is paying for something that he is going to use up over time.

So therefore it's not really an expense yet because he has not really used it up.

It's a prepaid insurance. And as the months move along, you'll see this later.

As each month moves along, he will then expense each month as it comes.

But in the beginning it's an asset to him because he has not used any of it up.

So cash goes out the door and then he has prepaid it.

The entry is to debit to the prepaid insurance of $2400 and to credit the cash.

And then you can see over here on your trial balance,

you have um the prepaid insurance.

I'm sorry that john letter.

Excuse me,

You have your prepaid insurance of 2400 and then here's the effect of cash.

So lots of stuff happening with cash there,

same thing we're getting ready to purchase some supplies

and what we're doing is we're going over.

Each transaction that we looked at last week on um for this owner.

But again,

it's just repetitive showing you how it works

in the identify analyze record and post.

We want this to become second nature to you.

So we're just going over and over and over again

so that you understand how these transactions

work and eventually how they're going to run

into the financial statements.

Alright, so now we're gonna pay some more expenses in cash before we pay what

we pay it on rent, expense and cash and we paid salaries in cash.

Now we're paying utilities expense and cash. Same thing.

We've got utilities expense for debuting crediting cash,

utilities expense shows up in the general ledger

as a debit because

as expenses go up, that's a debit.

Even though again it decreases equity and then here is our effect on cash.

Um We're paying salaries again for work done. So salaries expense goes up.

There's a debit even though it decreases equity.

Here are our regular journal entries. And then here is our effect on cash.

Alright, let's look at this summary

of the items in the ledger.

So this is what happened to catch all those ones that we saw individually.

They are now shown here in our ledger.

Everything that we did. This is just a summary of all of that.

And this is just a visualization of what a

general ledger looks like It is all of your accounts

and all of your activities that happens there and

then their balances at the end of the period,

you can see the balance of cash and at the end of 40 to

75 the balance of accounts receivable is now zero because we've collected it,

the balancing supplies is 97 20.

So it shows you what the balances are. And it also shows you

in this accounting equation that everything still adds up,

your assets still equals your liabilities plus your equity.

So no matter what you're doing, putting all of this together, make sure

that everything

still balances.

All right. Now we're going to prepare financial statements from a trial balance.

Alright.

So all the stuff that we've been working and putting together,

you're going to kind of see how it comes together in financial statements.

Alright.

So preparing trial balances three steps first,

you're gonna list each account title and its amount from the

ledger which we've just shown that gave us that ledger,

they ain't going to compute the total of the debit balances and credit balances

and that's basically adding them up and they're going to prove that they match.

So simple. Right,

Okay. So let's look at this trial balance.

All of these balances came directly from the ledger.

Remember the 40 to 75 0 for the accounts receivable, The 97 20 for supplies,

so on and so forth.

You put them in the right columns and then they add up at the end.

Love it when that works out.

Alright.

So if it doesn't work out, you need to search for the air to find out what's happening.

So first of all you verify that you added things correctly,

then you look to make sure they're in the right column.

Then you make sure that you,

you know did a debit or credit and it was put on the statement correctly.

Then go ahead and re compute each account in the ledger to make sure that's right,

Make sure everything was posted correctly and make sure that um

each original journal entry has an equal debit and credit.

You know sometimes it's very simple to find what

the issue is and sometimes it may not,

but you may have to keep going back and forth until you

actually find it because the bottom line is they must equal.

Alright,

so this is what happens when you have

a financial statements prepared from the trial balance.

So you're gonna have the trial balance which

then you're gonna turn it into your beginning balance

sheet than anything that has happened during the period

from the income statement and the owner's equity,

you're gonna roll that into that and then you'll get your balance sheet,

Your ending balance sheet because the balance sheets are at a

point in time like at the end of the month,

at the end of the quarter, at the end of the year,

whereas income statements are for the period ending is for a certain period of time,

like maybe for six months, one month, 12 months.

But a balance sheet is at that point in time.

Okay, so again,

I mentioned last week that there were four basic financial statements,

there's an income statement, there's a statement of owner's equity,

there's a balance sheet and then there's a statement of cash flows,

so know what each one of those does income statement reports,

revenues and expenses incurred by the business over a period of time.

The balance sheet reports the financial position at a

point in time has those assets liabilities and equity.

The statement of owner's equity reports,

the changes in the equity and want to put something in, he takes something out,

he makes money, loses money, it shows all of that.

And then the statement of cash flows list,

the cash inflows and the cash outflows for the period.

But again, in this class,

we're not really gonna go too much into the statement of cash flows,

but just know what it is and that it is one of the four basic statements.

Alright, so look at the income statement for fast forward,

you can see that

revenues are up on the top and then expenses are on the bottom for a net income of 33

95.

Then, based on that if you look at the,

how it flows into the statement of owner's equity,

here's the income statement again and that 33-95

flows right over here to the owner's equity.

So the owner started out with 30,000 and then he

had good business and added 33-95 in his net income.

And now his total um owners capital is 33-95.

But then he did that $200 withdrawal and now his owner's capital is 33-195.

But wait, let's show how that rolls into the balance sheet.

So here's his net income,

here's his owner's capital and lo and behold on the balance sheet.

The residual of the owner's equity that 33-1-95 flows

into the balance sheet onto the equity section.

So all of your revenues rolls into owner's equity and then all

of that rolls into the equity section of the balance sheet.

All right, So study this as you can make sure that you understand that.

But it's pretty simple, kind of like the accounting equation,

we said that income expenses, owner's equity and all of that rolls in.

The equity was just netted right here. My abilities are here and assets are there.

So not too difficult once you get used to

looking at them and understanding how it all works.

Okay, so let's just go back and look.

Um So what they're saying is that usually you

don't use dollar signs and journals or letters.

And if you look um if you have one, it's the first one,

but not everyone is the first and the last,

It just makes it neater because if you have dollar signs

in all of these that could get kind of unwieldy looking.

So usually dollar signs are not using journals and ledgers and

dollar signs appear in the financial statements and other reports,

but usually again only the first and the last numbers in the column.

So just some housekeeping items.

So if you're asked to prepare a journal, I'm sorry,

a balance sheet income statement drone injuries,

you know what they look like and then you won't have any questions if you

don't see them because this is kind of the presentation format that we go by,

not major, but that's what happens.

So having learned all of that usually go into a ratio

that we look at for companies to kind of analyze them.

And today we're gonna look at a debt ratio.

We're going to compute it and describe how we

look at it and analyzing a company's financial condition.

So debt ratio level

looks at the level of debt that a company has so higher the debt ratio.

That just means the more debt a company has.

And when a company has a lot of debt,

that means they're abusing the bulk of their money to pay on that debt.

And so they don't have a lot to pay shareholders. They don't have a lot to pay bills.

Sometimes that's not a good thing. So you have to evaluate the level of debt.

The calculation is total liabilities divided by total assets.

So just make sure you have access to the ratio or you memorize that so that when

you're asked to compute a debt ratio or

to even compare debt ratios between two companies,

you'll be able to do that.

So let's look at this.

Um these companies right here,

this is Costco and walmart and you can see

that based on total liabilities and assets for Costco.

Um This is the debt ratio.

Now it doesn't give us the assets and liabilities for walmart,

but it's already given us the debt ratios.

You can look and see that Costco has more debt than walmart

again, Is that does that necessarily mean Costco is in trouble?

Not necessarily,

that's just one indicator or one thing that you

will look at when you're analyzing a company,

you have to look at everything in Totality

high school may have um you know, just tons more assets than walmart as well.

You know, we don't know because we can't see it.

They didn't do it here, but just know that.

Again,

a debt ratio just tells you perspectively what is going on

with the company as far as their debt is concerned.

Alright, that class is the end of Chapter two.

Again, if you have any questions, please feel free to text me or email me.

All right, enjoy

ACG 2021 Fianancial Accounting Chapter 2

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