Accounting – Chapter 1-4 Review (Final Review)

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 

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.

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 

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.

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