Accounting 1: Program #3 – “Transaction Analysis”

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

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

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

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

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).

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