So let's discuss chapters 1 through 4. So
before we dive into the problems that we'll be working on let's first just talk about normal
balances. Right so normal balances are how in account increases. So we need to remember that
assets drawings and expenses all increase with a debit and liabilities owners capital and revenue
accounts all increase with a credit. And then to make it one of those accounts decrease we do the
opposite of its normal balance. So we need to know these normal balances for when we come up
with journal entries for when we prepare trial balances so that little piece is going to be
so important throughout all of accounting.
So we have our first question here. It says Emily
Valley is a licensed dentist. During the first month of operation of her business the following
events and transactions occurred. We will need to journalize each transaction then post all of
those entries into T-accounts and then prepare a trial balance. So let's take a look at this
first transaction. So our first transaction says that she invested $20,000 in her business. So we
think about what accounts are being affected here. Well the company is getting money right she's
investing cash into her business so we debit cash to make our cash increase.
And then what's
the other side of this transaction? Well if she's investing in the business her owners capital is
increasing as well and capital increases with a credit so we will credit our owners capital. And
for how much? That's where we get our 20,000. Now our second transaction hired a secretary
receptionist at a salary of 700 dollars per week payable monthly. So here all we did was
we hired someone so they haven't done any work for us yet we don't technically oh them any money
yet and we aren't paying them any money here.
So all you did was you called someone up and said
hey congratulations you're hired. That's not a business transaction and so we would not need an
entry for hiring an employee. When we eventually pay this employee at the end of the month
that's when we will record it in our journal. Now here on April 2nd paid office rent for the
month of $1,100. So you're paying this month's rent.
Since it's just for this month we will debit
rent expense and credit cash for $1,100. Now if we were paying office rent for 6 months or for a year
then we would deal with prepaid rent. But since we are just paying the office rent for the month
of April we just consider that an expense here. Now on April 3rd purchased dental supplies on
account from Dazzle Company for $4,000. So we think about what accounts are being affected.
Well we are buying dental supplies and we are making this purchase on account.
So our supplies
an asset account has to increase so we debit our supplies. And then how are we paying for
these? On account so we credit our accounts payable. And for how much? $4,000 because we
purchased supplies that were worth $4,000. Now on April 10th performed dental services
and build insurance companies $5,100. So here when we think about which accounts are being
affected whenever we perform services that's gonna be service revenue.
Right whenever you
see the phrase that you performed services we can be thinking service revenue. So we can be
thinking that we'll have to credit our service revenue to make our revenue increase.
And are we getting paid right now? No, right we're billing insurance companies. So
whenever you bill someone or send an invoice that's going to affect your accounts receivable.
Account receivable is an asset and it's increasing so we will debit our accounts receivable and we
will credit service revenue.
Because we need to show that these insurance companies us more
money right they owe us an additional $5,100 now and why do they owe us that money because we
performed services. So we credit service revenue. Now here on April 11th. Received $1,000 cash
from Lea Smith for an implant. So Lea Smith is a customer right and she's paying us $1,000
right now on April 11th for work that we will do in the future. So whenever you receive money
before you perform the work that's going to be considered an unearned revenue. Right so
this is an example of an unearned revenue a few other examples gift cards right a company
will receive money before actually performing the work. Or airline tickets right if you buy
an airline ticket you typically buy that well before the flight itself.
So those are unearned
revenues. So in this entry we are receiving cash so our cash has to increase and unearned
service revenue is credited. Now unearned service revenue is not a revenue account instead
it's a liability. But liabilities still increase with a credit so we're okay there and then how
much that's where our $1,000 comes into play. Now on April 20th he received $2,100 for
services performed and you received it from Michael Santos. So another one of our customers
paid us money for services. So what did we get? We got cash all right so our cash has to be
debited here to make it increase. And why did we get cash? We got cash because we performed
services right so our service revenue will be a credit. How much cash did we receive and
how much in revenue did we earn? $2,100.
So we will debit our cash twenty one hundred
and credit service revenue 2,100. Now we have a couple more entries here so on April 30th you
now finally paid that secretary receptionist that you hired back at the beginning of the month.
So we are paying them for their one month of work which came out to $2,800. So how are we
going to record this entry? Well whenever you pay an employee their salary we're dealing with a
salaries expense. Right so a salaries expense or salaries and wages expense has to be debited. So
we will debit that expense account. And then how are we paying them? Well we're gonna pay them
with cash. Right so we will credit our cash in this entry as well. And then our number in this
entry the amount that we need debit our expense and credit our cash for is $2,800. Now our final
entry. You paid two thousand four hundred dollars to Dazzle for accounts payable due. So way back
on April 3rd we purchased supplies on account from Dazzle and now we're gonna pay part of what we
owe them back.
So if you are paying back someone that you owe that's going to affect your accounts
payable. And how's that going to be affected? Well we need our accounts payable to decrease because
we need to show that we don't owe them as much money anymore. So to decrease your accounts
payable you will debit that account. Because accounts payable is a liability and liabilities
account liability accounts decrease with a debit. Now our accounts payable is decreasing
but how did we get our accounts payable to decrease? By giving them cash. Right
so our cash has to be credited in this entry as well. And for how much? That's
the $2,400 that we paid to them right so our cash decreased by 2,400 and our accounts
payable decreased by 2,400. So those are all of our journal entries for this problem.
The next step is to post all of these entries into T-accounts. So we have our 9
t-accounts that we need for this problem. Right we had cash accounts receivable supplies,
accounts payable, unearned service revenue, owners capital, service revenue, rent expense and
salaries expense.
And you'll notice a few things here you'll notice the order that I put them in.
If we read across from top to bottom its assets, liabilities, capital, revenues and expenses.
That's the same order as your expanded accounting equation right so the reason I put them in
this order is because this is going to help us when we need to prepare a trial balance in
the final step of this problem. Now before we start posting our entries into T-accounts the
left side of a t account is for debits and the right side is for credits. So we're going to
reference all of our entries over on the left side of the screen and post those into these
t-accounts. So the first journal entry that we had was a debit to cash and a credit to
owners capital of 20,000. So we'll put that 20,000 over on the debit side of your cash
t-account and the 20,000 on the credit side of your owners capital T-account. So now
you've posted that entry into T-accounts. So now we can just keep moving down the list the
next one a debit to rent expense of 1,100 and a credit to cash of 1,100.
So we'll put those
into the rent expense and cash t-account. Our third entry a debit to supplies of 4,000
and a credit to accounts payable of 4,000 will look like that. We'll put the 4,000 on
the debit side of supplies and the 4,000 on the credit side of accounts payable. Our next
entry a debit to accounts receivable of 5,100 and a credit to service revenue of 5,100. So
we'll post those into our T-accounts. Again the left side of the t-account is for debits
and the right side is for credits.
Now we move on to our next entry we debited cash 1,000 and
we credited unearned service revenue 1,000. So we'll post that entry into our T-accounts. So
just a few more journal entries now to post we debited cash 2,100 and credited service revenue
2,100. So we post that into are T-accounts. Then we debited salaries expense 2,800 and
credited cash 2,800. And then our final entry was a debit to accounts payable of 2,400 and a
credit to cash of 2,400. So you've posted all of your entries into T-accounts. Alright so we have
all of our entries in here and what we need to do now is figure out the balance for each individual
account. So how do we do this? Well we can do it a few different ways right we can think back to
our normal balances and we can say well cash is an asset and assets increase with debits and decrease
with credits. So your twenty thousand, one thousand and twenty one hundred over on the debit
side for cash those are all increases and your three credits are all decreases. So you could add
up all of your debits and subtract your credits.
Another way to do it is add up your debits
and add up your credits subtract the two amounts and the balances on the side
where there's more. Right so if we add up our three debits for cash and add up
our three credits for cash subtract those two amounts we'll see that there's a debit
balance in cash of sixteen thousand eight hundred. So we put that clearly over
on the debit side of our t-account. Now the next couple accounts pretty easy to
figure out their balances right. Accounts receivable only had one entry in the t-account
so that's its balance supplies 4,000 is its balance.
Right if there's not multiple
entries into the t-account we can't do any math to figure out a new balance. Accounts
payable well accounts payable had 4,000 on the credit side and 2,400 over on the debit side.
Remember liabilities increase with credits so it's balance is 1,600 over on the credit side.
Got that by taking 4,000 – 2,400. Now unearned service revenue only that one entry so 1,000 as
a credit balance. Owners capital only one entry so it's balances 20,000. Now service revenue
service revenue had 2 credits. Right revenues increase with credits so we add up those two
credits and they add to 7,200. So the balance in service revenue is 7,200. And then our two
expense accounts just had one single entry so rent expense has a debit balance of 1,100
and salaries expense has a debit balance of 2,800. So now that we have all of these
balances now we can prepare a trial balance. So a trial balance it's gonna start off with
this. The company name then it's gonna say trial balance and then it's going to have
the date that you prepared it. Right so this was all for just the month of April
so April 30th 2020.
Now you'll notice it says accounts debit and credit. What we
do in a trial balance is we list out all of our accounts and then their balances in
either the debit or the credit column. So that's why we first figured out all of these
balances here in our t-accounts. Right so if you don't have these t-accounts written down I
would recommend taking a picture of the screen right now and then that's gonna help you
as you prepare all of your trial balance. All right so let's start creating our trial
balance. Now now we need to list out these accounts in a specific order and that order
is the order that I talked about a little bit earlier with the order that I listed out
those T-accounts right it's gonna go assets, liabilities, owners capital, owners drawings,
revenues and expenses. So that's the amount of your or that's the order of your accounting
equation. So we're gonna start off with assets. Now assets need to be listed in a specific
order themselves. And that order is called your order of liquidity.
So your order of
liquidity is how quickly can you turn it into cash or how quickly you're going to use
up that asset. So your most liquid asset will be cash and we put the balance that we had for
cash in the debit column because it was a debit balance. After cash we have accounts receivable.
Again accounts receivables balance was in the debit column because it's an asset right.
After accounts receivable we had supplies. So those were our three different assets.
We had
cash, accounts receivable and supplies. And their three balances go in the debit column. After
assets we start listing out our liabilities. First one was accounts payable its balance
of sixteen hundred you'll notice is now over on the credit side. Because a balance for a
liability is a credit balance. After accounts payable is unearned service revenue. And that
$1,000 balance is also on the credit side. So those were our two liabilities. After
your liabilities comes owners capital. Owners capital had a credit balance of
20,000. Now after your owners capital would be your owners drawings. But in
this example you didn't have any owner's drawings so we don't need to include
owner's drawings on this trial balance. So after your capital here we're
gonna list out our revenue account. So service revenue had a credit balance of 7,200.
After your revenue accounts come
your expense accounts. Right we had two different expense accounts we had
salaries expense of 2,800 and we had rent expense of 1,100. And you'll notice I
listed out the expenses in order from greatest to least. So you've listed out
all of your accounts and their balances. That's step one of a trial balance. The next step
is to add up all of your debits and add up all of your credits, because we want to be able to show
that your total debits equal your total credits. Right because we had a few different rules early
on here in accounting your debits have to equal your credits and your assets have to equal
your liabilities plus owner's equity.
Right we had those two different rules that we had to
follow here. So if we add up all of our debits and all of our credits we will get twenty nine
thousand eight hundred as your total debits and twenty nine thousand eight hundred as your total
credits. So if you prepare a trial balance and your total debits equal your total credits
you probably did everything right. You may have still messed up somewhere but there's no
point in going back and just double-checking, right. However if your debits don't equal
your credits something's wrong. I would first double-check your math to just make sure that you
didn't just add things up incorrectly. But after, after that if that's all right you then have
to work your way backwards and figure out where that mistake might have been. So maybe it's
in your T-accounts or maybe it's all the way back at your journal entries. So we prepared
trial balance like this to help us prepare financial statements.
Right so you have those
four financial statements. The first one that you prepare is your income statement and on the
income statement are your revenues and expenses, to help you find your net income or net loss.
So the income statements number one. After you prepare the income statement then you can prepare
your owners equity statement. And we prepare that one second because we need the net income or the
net loss from the income statement to help us prepare our owner's equity statement. So your
owner's equity statement helps you figure out your ending owners capital. And then you use that
ending owners capital amount on your balance sheet the third financial statement that you'll prepare.
And that balance sheet proves that your total assets equals your total liabilities plus owner's
equity.
And then after you prepare a balance sheet then you prepare a statement of cash flows. So
those are your four financial statements that you prepare. So question number two. We need to use a
trial balance to help us calculate net income or net loss, our total assets, are total liabilities
and our ending owners capital. All right so we have this trial balance for us. We have a bunch
of different accounts here. The first step is to figure out our net income or net loss. Well
we were just talking about that with the income statement right you find that by taking your total
revenues and subtracting out your total expenses. So revenues minus expenses get you your net
income or net loss. So we need to go through this trial balance to figure out our total
revenues. Well on this trial balance we had a service revenue of 64,000 and a rent revenue
of 6,500. So we had those two revenue accounts, 64,000 and service revenue 6,500 and rent
revenue. So our total revenues will be sixty nine thousand five hundred. We'll keep that
in mind for when we figure out our net income or loss.
Now we can figure out our expenses.
So we take a look over at our adjusted trial balance and we see we had depreciation expense
of 8,000. We had salaries and wages expense of fifty-five thousand seven hundred. And we had
utilities expense of fourteen thousand nine hundred. So we have those three expenses eight
thousand fifty-five thousand seven hundred and fourteen thousand nine hundred. So your total
expenses if you add up those three amounts are seventy eight thousand six hundred.
Red flag should be going off right now. Right our total revenues, sixty-nine
thousand five hundred. Total expenses 78,600. Well since our total revenues are
less then our total expenses we’re not going to have a net income.
Right
we're gonna have a net loss. so if we take our total revenues of 69,500 and
we subtract out our total expenses of seventy eight thousand six hundred.
We end up with a net loss of 9,100. So we've lost money in this
in this month in this year. Now we need to figure out our total assets. So
we take a look over at our adjusted trial balance and we know that assets are listed first. Right
so we had cash is an asset, nine thousand eight hundred and forty. Accounts receivable that's
an asset of 8,780. Equipment that's a long-term asset right that falls under property plant and
equipment that's fifteen thousand nine hundred. We have one more we have accumulated depreciation
on that equipment. But that's not just a normal asset that's a contra asset. So we're going to
subtract out that 7,400 when we calculate our total assets. Here so we will add together our
nine thousand eight hundred and forty from cash. Our 8,780 from accounts receivable. Are fifteen
thousand nine hundred from the equipment. But then subtract out the 7,400 for your accumulated
depreciation equipment, because that accumulated depreciation decreases the book value of that
equipment.
So if you do that math you'll end up with total assets of twenty-seven thousand
one hundred and twenty. Right your cash plus accounts receivable plus equipment minus your
accumulated depreciation on that equipment. Now we can move on to total liabilities.
So once again we're taking a look over at our adjusted trial balance and we need to
figure out what are our liability accounts. Well liabilities come after your assets. Right
so we're looking at accounts payable that's a liability right because that's money that we
are liable to pay for someone. You have one other liability unearned rent revenue. Again
remember these unearned revenue accounts are liabilities they are not revenue accounts.
So those are our only two liabilities.
So your total liabilities will just be your accounts
payable of four thousand two hundred and twenty plus your unearned rent revenue of 1,800. Which
gives you a total liability amount of 6,020. So once we find our total liabilities we can then
figure out our ending owners capital. So a few different ways that we can go about this here.
Let's, let's make something that resembles a owner's equity statement right where we start
off with our beginning owners capital. That's the 45,200 you on your adjusted trial balance. Then we subtract out this net loss of nine
thousand one hundred that we've found earlier in this problem and we subtract out the sixteen
thousand dollars in drawings that the adjusted trial balance shows us so.
That's a total of
25,100 that we need to subtract out. Right we need to subtract out 16,000 in drawings and 9,100
in a net loss. So if we take our beginning owners capital of 45,200 and we subtract out 25,100 we
end up with an ending owners capital of 20,100. So that's one way that you could have found
this. The other way is using your accounting equation. Right your total assets were 27,120
and your total liabilities were 6,020. So if you take your assets minus your liabilities
you would have ended up with 20 thousand one hundred. So those are the problems that we're
gonna be completing here during this review. I also just want to touch on a few things from
chapters 3 and 4.
Right so chapter 3 discussed adjusting entries. Now these adjusting entries
will always have either a debit to an expense or a credit to a revenue. Right so you need
either a debit to an expense or a credit to a revenue. And the other account in that adjusting
entry would be a balance sheet account. But make sure that that balance sheet account is not cash
because adjusting entries will never include cash. So that was really the big takeaway from Chapter
three right learning you're adjusting entries. Chapter four focused on closing entries. So we
had those four closing entries right first you would close your revenues to income summary.
Then your second one would be closing expenses to income summary.
So you've closed revenues
and expenses to income summary in your first two closing entries. And remember when we are
closing these accounts we are zeroing out the balance right we want the ending balance to
be zero. So step one we close our revenues to income summary step two close expenses to
income summary. Step three is you close your income summary to owners capital. So you zero out
your income summary account. And then step four you close owner's drawings to owners capital.
So owners capital is involved in these closing entries but it is never closed itself. Owners
capital is a permanent account. So it's affected by your closing entries but it is never closed.
Your revenue accounts, your expense accounts, income summary and owner's drawings those
are the four accounts that are closed they're called temporary accounts. So after you close
those accounts their balances would be zero.