Hey there how are you guys doing seems like a.
while because we have actually taped. With any luck now everybody right here has taken the test I.
recognize for you individuals in your home have you taken test number one if you have not I wear'' t know. why you ' re seeing this lecture.
Because you should have taken test number one over. Ok everybody below did rather well on.
the test I was extremely happy of them I wish you succeeded at home ok. Were going to relocate.
on today and I'' ve stated this before and I ' ll state it again audit is a building.
block training course right are beginning to see that you understand all those inquiries that I'' ve asked. before what economic statements does the account take place exactly how do you cause the suggested.
change in the account remember all the inquiries that I asked around on the examination if you did.
badly on that section then you'' re foundation is collapsing it was in fact never there you.
have a structure of sand I'' m not attempting to frighten anyone right here, since you all did good.
We ' re going to build on chapters one as well as 2 at this point I ' m going to presume. I think if you do what I suggest doing and also make sure you ' re doing your research you will. Alright allow ' s chat concerning phase there changing accounts and preparing financial.
into accountancy periods in accountancy so we'can divide things up in a year in a quarter.
When we prepare our income declaration and also our statement of equity, or a month ok that ' s why. we stated for the month ending December thirty one two thousand as well as eleven or for the year.
ending December thirty one two thousand and eleven right? So we split time up in bookkeeping.
As an issue of truth there ' s one type of
companyBusiness The financial sector a whole lot of banks complete a pair economic statements at the end of.
truly utilized the term accrual basis of accounting yet we have actually spoken about its characteristics.
Firstly let ' s speak about the cash money basis of accounting the money basis of accountancy. we recognize revenue whenever the cash is gotten and also we identify costs and also document.
them whenever the money is paid is that exactly how we ' ve been doing points not and also. what we ' re going to locate the cash money basis of accountancy is not normally accepted bookkeeping. principles generally. We wear ' t were not so focused on when cash is coming in and also. when cash is going out what your going to locate if we use the cash basis of accountancy
. it will certainly offer us extremely erratic financial statements as well as it in fact is really simple to manipulate. If you make use of the cash money basis and also you don ' t want to have the
sort type business, financial declarations. that need to be doing that so back to the slide the money basis of bookkeeping is not usually.
approved accounting principles what we utilize is the accrual basis of audit and in.
that basis of accountancy we recognize that basis of audit we recognize incomes. when they are gained and also when are they gained when the service or product been given
. it doesn ' t necessarily hinge when the cash comes in.So with the amassing basis of accounting.'we identify income when they are gained as well as we
record expenses when they are incurred. the accrual basis of accountancy is what we use in our monetary statements and do example
. on why we do that here in a little bit are there any type of questions on that? I want to go.
through an instance her and also allow ' s just have a look right below change over to the
Elmo. I want to see to it you guys can see that on alright allows review that with each other December.
twenty ninth 2 thousand ten our business pays 6 thousand bucks money for six months.
of auto insurance coverage for our fleet of business lorries the coverage ' s through. is through of January initial, two thousand as well as eleven through June thirtieth, 2 thousand.
and also eleven.Companies pay auto insurance policy much like you pay auto insurance coverage you have to pay. prior to the protection in fact starts don ' t you? Or or else individuals will just wait an. work out I dint have a wreck this month so I ' m not going to spend for automobile insurance” no. you need to pay prior to your insurance coverage really begins. Ok so let ' s go back to this instance. ok now one more time on December twenty 9th our business pays six thousand bucks cash money. for 6 months of automobile insurance coverage for our fleet of company vehicles the coverage is for the
. duration of January first two thousand and also eleven through June thirtieth 2 thousand as well as eleven.
That is for 6 months? Allow me draw a little time line
here just simplyOffer Ok if we were taking legal action against the.
cash money basis of audit then we would identify six thousand bucks of cost in December. When the all the cash went out, boom all of it in December create that ' s. however so do you see. Truth since truly six thousand dollars that, that ' s not actually
the best ideal of reality. we ' ve paid it benefited six months didn ' t it?'Don ' t you assume it would certainly be much better if.
somehow if we can do this a various means and you possibly can recognize where I ' m going. with this? Allow me finish my timeline down here.Once once more that December, January, February,. march,'April, may, June wouldn ' t it be much better if in some way we can acknowledge a thousand dollars '. worth of expenditure'for every of six months do you see that truly more of a representation of.
fact. Doe that make sense? As well as this is in fact
what we ' re going to do with the accrual. basis of accounting is were mosting likely to do this were mosting likely to structure'things to make sure that we. identify one thousands of expense for each of those months think of it we paid six.
thousand bucks for six months of vehicle insurance policy so generally that ' s a thousand dollars ' well worth.
for insurance policy protection the expense per month does that make good sense? These are the durations.
that benefited okay now I desire you to discover something I want to point something out make.
sure it ' s clear in both of these situations we paid cash money on December twenty ninth please.
Well it ' s because we had this big expenditure for car. Currently remember when we were going. Again it ' s not.
rested on when the cash money was paid we wish to match the same durations in which they aided. produce income the matching concept is an extremely vital principle do you see going. back to the Elmo that this is a better list below of the matching principle because that insurance policy. that we spent for six thousand dollars for six months that aid offer'profits for those. Six months? Especially a thousand dollars every month right? , if we wear ' t have.. firm automobiles we most likely can ' t run our organization so we can '
t develop profits so. we desire to match the expenditure to the durations in which they aided produce profits recognize? Alright any concerns on that? Please don ' t think twice to ask questions.What were going. to hence discuss is adjusting journal access just how are we mosting likely to do this exactly how are we going. to complete this abidance of the matching concept persei well we ' re mosting likely to utilize an. adjusting journal entry, as well as I will chat about these as well as I will abbreviate these AJE ' s an. AJE is a readjusting journal access what is a changing journal entry?
Well it is a type.
stuff. However in an adjusting journal entry is a type of journal entrance is recording to do. two things. To bring a property or responsibility account equilibrium to it'proper amount and to.
identify a revenues or expense.It does two points it brings an asset or obligation to. its appropriate quantity and also it recognizes an earnings or expense pair other features of changing. journal entries they are always made on the last day of the duration currently I don ' t say the. last day of the month or the last day of the year I ' m specifically
claiming AJEs are prepared.
on the last day of the period, since some firms simply prepare annual financial statements. and simply will certainly make AJEs on the last day of the year.There ' s other
companies who do monthly. financial declarations and they will certainly do AJEs monthly but they always do AJEs on
the. last day of the period'. We make them and they aid us prepare the financial declarations and. help guarantee their precision. An additional point and this is necessary the money account is. never component of a changing journal entry never will
you debit or attributed cash money in your AJE.
After that you have actually made a mistake, if you attributed or debited cash money in your AJE.
Ok allow me tell. In college as well as it helped me so I will certainly pass it along to you for no extra charge ok.So.
Profits expenses or expenditure possessions as well as liabilities ok you with me? Every AJE will certainly impact one.
it ' s constantly going to influence one from the left side and also one from the appropriate side.Does that. make good sense? Now I believe that ' s handy for a pair of reasons.
In some cases individuals can. obtain half the entry like is claimed I know we need to credit a liability here however what ' s. the opposite side of the access well you have to debit one of these it narrows down your. selections.
Currently let me to you another thing concerning AJEs every AJEs you make it will either.
debit a cost as well as of program it will credit some various other account or it will attribute an income. Okay every AJE you make
will certainly either debit an expense or it will certainly credit an income, so I ' ve
. currently told you this side so the other component of that is just one of these now this could not.
make a great deal of sense currently but I want you to assess it after we discussed these. a little more.Are you with me? Ok
any questions on that particular? What I intend to do now is remain with. the Elmo as well as I wish to go back to this instance ok now were mosting likely to make use of the accrual basis. of audit aren ' t we? So we can eliminate that
cash basis for currently do a little origami. below ok. So were mosting likely to use the accrual basis of bookkeeping let ' s speak about how this. would look in our journal access ok. Alright firstly I intend to make the journal
entry on. twelve twenty ten on twelve twenty 9 10 is when we paid the six thousand dollars for. the insurance coverage that will be January one through June thirtieth.
Our journal. Really excellent pre paid insurance policy I ' ll abbreviate it
.
of you might claim “hey wait Dave you have cash and that violates what you just told us” this.
is not a AJE that just a normal journal entry plus it wasn ' t made on the last day of the. period but this is the journal entry when we really spent for that car insurance coverage ok. now if we were to publish this journal access let me creep in a t account over below for.
pre-paid insurance then we would debit it right here for six thousand bucks are you. with me that ' s not extremely clear in fact let me do a far better t represent us. At twelve twenty nine we do a debit for six thousand dollars you with me? Ok alright January. thirty one comes just how much of that
insurance has been made use of up currently believe regarding it we paid. 6 thousand dollars for 6 months of protection so essentially a thousand dollars per month. it ' s from January initial to June thirtieth January thirty first is now below just how much. of that vehicle insurance have
we consumed? If someone, a thousand right it ' s kind of like. were Jessica were good of adequate to give you like a 6 thousand dollar best however gift card. wouldn ' t that be sweet as well as you made use of up a countless it just how much would you carry that card.
Create assume about it lets go back to that t account.Now allow ' s article this journal access. “Five thousand” As well as isn ' t that what you said is how a lot we have left. It ' s not part of this AJE.
we attribute pre-paid insurance policy which is a property you see how'it adheres to all those rules? Do. If
we did not do this AJE do you see where our asset would be overstated, you see individuals whereOveremphasized it would showing still that we had 6 thousand bucks of pre-paid insurance policy as well as we wear ' t. at one thirty one eleven, and do you see exactly how that expense
would not get on guides if'. we did not make that AJE you with me? So when we handle adjusting journal entries in. concerns to pre-paid possessions we are always worried exactly how
much of the possession was made use of up.How much. was consumed we consumed a thousand so we have to lower that property and also we have to book. that as cost to show it was consumed and it ' s expensed on the financials you with me? Concerns? Inquiries on that particular? Alright now I will certainly tell you this subjects this phase.
probably greater than any various other that you can not discover by simply me doing this. If you are simply. think I ' m simply mosting likely to enjoy Krug, and also I ' ll obtain it identified no you ' ve obtained to make AJEs,. you ' ve reached make AJEs, AJEs and also the very first time you do AJEs occasionally it ' s sort of clunky. as well as you get it wrong and also you ' re debiting the wrong thing or you ' re crediting the incorrect.
thing ok.You just obtained to keep doing it you ' ll obtain it if you overcome it, but if you ' re.
“Cassie? “For AJEs is it just for like pre-paid insurance or whatever?”.
That ' s a terrific question it ' s kind of going where were mosting likely to go now.
That ' s a wonderful. seg-way into where going to go in simply a minute, yet prior to'we do that recalling at this. Elmo is there in the AJE we made is there any inquiries? Now allow me ask'you this before.
we leave this February twenty 8th 2 thousand and also eleven rolls around just how much even more of that. pre-paid possession or pre-paid insurance policy have we consumed, just how much more? We used up an additional. thousand right? Appropriate looking back at this do you see where were mosting likely to make the very same. AJE on February twenty 8th 2 thousand and eleven, because we used “up another thousand. When we, were going to need lower our pre-paid insurance by an additional thousand as well as of course. blog post this the pre-paid insurance coverage will be appropriately shown at'its current equilibrium during that time. Of 4 thousand?Do you see exactly how we'' ll make this AJE at the end of January, February,
March, April, May, as well as June? Each time the AJE will certainly look like this each time were suing
up or expensing one hundreds of it and at the very end of June thirtieth what is that
asset worth? It'' s worth no and also it will be assessed our books as a property with no
amount balance or account equilibrium since we have used it all up similar to exactly how you might
consume your ideal however present card.Now allow ' s
go to that question that Cassie asked she
stated awesome Dave this is brilliant you kind of stated that didn'' t you? Yeah sort of what are the various other type of AJEs? We just spoke regarding pre-paid assets and there'' s another kind we ' re mosting likely to discuss here in a 2nd, however there'' s five groups of AJEs
there ' s. one chatting concerning pre-paid assets and expenditures, devaluation, unearned revenue, something. Currently I don'' t think I recognize. I'' m wishing to may be obtaining with.
the first 1 or 2 as well as I'' ll inform you we spend more time on initial group than any kind of.
of the various other categories so you'' re going “divine smokes this is mosting likely to take a while”” well.
it takes longer to explain the initial kind than it does on the third the 4th the fifth.
cool? Those are the 5 kinds of adjusting journal entries that kind of solutions your.
questions wear'' t it?'Alright let ' s take an appearance at tan instance in your slides this is similar.
than the one we simply did on December first of 2 thousand as well as eleven Scott company paid.
twelve thousand bucks for insurance policy for December two thousand and also eleven via May.
of 2 thousand twelve.They record the expense pre-paid insurance policy on December first 2 thousand. eleven ok. Now this is a little bit various since they paid on December one and that ' s. actually when the protection began right?
Two thousand its twelve thousand for 6 months. Is one more inquiry let me back up there ' s the t accounts for this? Allow me go to a different instance might be one that will certainly hit closer to home.Marlin you ' re.
place this in viewpoint'marlin allows ay at the beginning of the weekend break you bought twelve.
Beers and also you placed them in your fridge your refrigerator was vacant prior to then.
In your refrigerator? Someone has drunk just how numerous beers? “Too many” too many yet specifically.
It” ' s not the very same person and ideally they ' re not driving? Does this make this is.
Evident? You placed twelve beers in the refrigerator there ' s 3 left at the end
of the. weekend 9 of them were used up or intoxicated think of that'idea when we consider office.
supplies let ' s take an appearance at an instance consider your screen.During 2 thousand and also eleven,.
Scott Firm'bought fifteen thousand five hundred of supplies.
As well as they recorded the.
expenditure as products which is a possession. Now on December thirty one of two thousand.
and also eleven they did a rely on the materials and also there was twenty six fifty five accessible.
you with me? So how much of the materials were therefore made use of up well it ' s not as clean a number. is it? Yet there was twelve 8 four 5 that were consumed of workplace supplies do you.
see that? , if you want to assume of it this means in your refrigerator you bought fifteen.
.
thousand five hundred containers of beer on the end of the year you did a count and you found. twenty 6 fifty five of beer accessible well somebody intoxicated twelve thousand eight forty. five containers of beer that was fairly a party wasn ' t it? Do you recognize so we have to. make this AJE we make it on the last day of the period cash is not part of this AJE we. need to reduce our supplies account by crediting it as well as we have to book twelve 8 four 5. of expense so our economic statement will certainly be taped precisely you see just how that it ' s. sort of similar to pre-paid I wear ' t understand if they give us a t account right here good.If we. did a AJE we upload that and also it'post right here and also it upload right below do you
see if we did. not post the AJE our products asset would be considerably overstated on our monetary declarations. and also we would certainly have never booked our expenditure so our net income would be greatly over specified. also. By making this AJEs right here we have identified an
expense cost as well as have. lowered a property it follows our REAL doesn ' t it? As well as it mosting likely to the Elmo is it among. these tis one these isn ' t it every AJE is just one of these we debited an expense right here supplies. expenditure ok does that make good sense? A question on that products any concerns? “I have a. concern is it essential to indicate on the journal access the it is a modification journal.
entrance?” Young boy that ' s an excellent concern the question is do you require to suggest on
your journal. entrance that it is an AJE cause your right it ' s a journal access it ' s going to be taped.
with the other journal entries now there is certainly going to be some tips that its. mosting likely to be an adjusting journal entrance create it ' s mosting likely to be on the last day of the period. however normally in the summary they ' ll say readjusting journal access to tape supplies.
utilized up, as well as when I enter and audit business or seek advice from them I typically see a great deal of.
journal entrances made on the last day of the period because they are adjusting their books.
that ' s appear like its fishy yet they are readjusting their accounts so their financials statements. would be shown accurately.You ever before hear anybody claim oh it ' s actually busy at the office we ' re. shutting out the year well a
great deal of that is making these modifications so these economic. declarations are precise. So you probably would in your little description state something however. it appears like it ' s a routine journal entrance doesn ' t it? Debit have to equal the credit ratings. as well as all of that ok.
As well as for your purposes all your AJEs will just have two accounts'. one account being debited one account being credited.Ok so may be that assists to. Ok any kind of. various other concerns? Ok I desire to at least discuss the next classification which needs to with. depreciation, devaluation is an unique sort of an AJE for a consuming of an asset specifically. it ' s for a set property such as a car or a piece of tools or a structure or a. conveyor belt or a vehicle. Those are all dealt with'properties ok now there is only one kind of repaired. property that we do not drop well discuss this later yet land is a set possession. and it ' s not depreciate it everything else is depreciated now I wish to caution you here. allow come off this for a 2nd you ' ve heard the term depreciation prior to right? And I. wish to caution you because the way you listened to
it utilized or heard it make use of is'in some cases not what. we ' re carrying out in accounting what were possibly listened to in situations like this well Jake just. got a new vehicle and also he paid twenty thousand for it as quickly as he drives it off the whole lot. it ' s not worth twenty thousand it ' s an utilized vehicle currently right you ' ve listened to people state that. that may or may not be true.However, what we ' re performing in dropping things in'accounting. is spreading out the cost out over an affordable amount of time for example lets claim you paid. twenty thousand dollars for that truck and allow ' s claim it was for your business ok do you. see where you if you expenditure that whole truck in the month that you got it that would. type of not truly be complying with the matching principle, since that vehicle is possibly.
going to last you what? Five years or so may be? You with me? If it complied with that matching concept if you believe that truck is going, wouldn ' t it be better wouldn ' t. it be better. to last you five years if somehow you can diminish what I'claimed five years if you can.
depreciate 4 thousand dollars for every of those five years doesn ' t that make more.
sense? And also appear to follow the matching concept matching the expenditure to the periods in which.
For our functions in audit. Am I. stating the market worth is sixteen
thousand and as well as had to depreciate decrease write it down. When we diminish we are not doing it to try to.
discount our possession to market price, due to the fact that admit it after a year what you assume that'vehicle.
deserves versus what you believe it ' s worth versus what I believe it ' s worth versus what. Anna thinks it ' s worth is possibly four different amounts.For our purposes in accountancy we. decrease to spread out the expenditure out over a reasonable duration of time we are not attempting. to create it'down to market worth ok cool you with me? Ill possibly
repeat that because. it ' s essential and also it ' s a common error people make. When we readjust for devaluation going.
to the slides what we do depreciation is the procedure of calculating with expenditure from assigning.
the price of plant as well as tools over their anticipated useful lives. That ' s an elegant language. from what I simply claimed just how do we calculate devaluation well we take the expense minus what we call the. salvage worth or the residual value those coincide terms different terms for the.
exact same thing that ' s wherefore we assume we can offer it at the end of that amount of time.
In the example we did I utilized the salvage value of no for Jake
' s twenty thousand dollarBuck January one 2 thousand and eleven Barton, bought equipment for sixty two thousand.
dollars pay the'tools has an approximated beneficial life of five years and the business.
anticipates to sell the devices at the end of its lie for 2 thousand bucks cash money. What ' s. depreciation expenditure for the year finished December thirty one two thousand and also eleven well we
. take the price of the property sixty 2 thousand minus our approximated residual
worth of 2. thousand dollars split by our approximated life of 5 year and also this ways were going.
to decrease twelve thousand dollars annually now just how does that journal entry look.
We debited an account called devaluation expenditure and you could assume we attribute the
. property itself however we do not below ' s exactly how the journal entry looks we debit devaluation. cost for twelve thousand and also this company just makes AJEs at the end of annually and also. we do not attribute the equipment we do not credit equipment we do not attribute the asset like. we made with products and pre-paid insurance we make use of an account called accumulated devaluation. currently whenever I present an account please know me well I want you to understand the type of. the account the equilibrium of the account as well as what financial statement it is on favored. examination question.Accumulated devaluation is a contra asset account what the heck is a. contra asset account? Come off
there momentarily the word opposite what does the word. converse indicate? Lie negate or contrast it suggests contrary so if you claim I believe the principals. are good this year and I say Jessica I ' m going to contradict you I assume they are horrible. I ' m going to take the contrary view the word contra indicates opposite so let ' s return to. this slide a possession is a regular debit or debt balance account? An asset is a normal debit. equilibrium account.
So currently back to the slide what equilibrium do you believe an opposite possession has? A credit history since converse means opposite a possession is a debit equilibrium account a contra. possession is a credit rating equilibrium account.So we do not credit score in depreciation we do not credit. the possession itself we attribute an account called an accumulation depreciation which is a converse.
possession currently why we do that and also currently the possession
itself I will certainly discuss following time ok but I do.
wish to demonstrate how this views your financial statements on your annual report and will.
probably go a min or 2 mins over our time dang. We show the possession itself and after that.
I want you to read your publication I am going to give three handouts.
lets go to the Elmo as well as just have a look and what they are mosting likely to resemble and the first.
one is a handout on pre-paid asset AJEs as well as in each circumstances I want you to initial response.
an essential concern and after that I want you to make your AJE each of these is different do not.
analyze this one and also consider this they ' re all different from each various other so I desire you.
to do your give out on pre-paid assets AJEs.I likewise have a give out on workplace products.
AJEs you with me? And I desire you to do that whole thing once more there ' s a key concern. to respond to each time and a AJE independent of each various other. Due to the fact that I love, as well as then lastly.
I ask you an essential concern and I ask you to make the AJE each firm individually considered. For you individuals at house as constantly I have these handout under the lessons.
tab cool yet that ' s all I want you to do for homework it looks like a lot but you ' re not. doing that much it ' s not mosting likely to take you all think so quit your whining I ' m just kidding. you ' re not whimpering ok you guys did terrific on your test so for you folks in the house obtain these. off of angel for you people here let me hand them out prior to'you leave well see
later au revoir.