Accounting For Slow Learners

would you like to be an expert in 
Accounting in less than five hours   well if that's the case then just watch this video 
a little bit every day and you will be an expert   in accounting by the time you finish just sit back 
and relax and enjoy learning like you're watching   your favorite education Channel and by the time 
you finish you will have everything you need   my name is Mark smolen I'm the founder and CEO 
of worldwide QuickBooks I personally guarantee   you the clearest possible explanation for every 
important accounting idea that a small business   owner could need or an accounting student could 
want to learn I answer all questions immediately   if you leave them in the comments section below 
and I promise to get back to you quickly and give   you the best answer I can I love hearing from all 
of you and I know you'll enjoy this video [Music]   let's start off by saying that everybody learns 
differently and everybody listens differently too   that's why YouTube gives you the ability to 
change the volume right here in front of the   video and you should also know you can click on 
the Cog wheel and adjust the playback speed to   your listening pleasure this way you can make it 
faster if you think I'm speaking too slowly or you   could slow it down if you think I'm speaking 
too quickly and most importantly you need to   know how to navigate this video the description 
field has the table of contents and you can get   to the table of contents by clicking the show more 
button that's right under the video at the end of   the description field if you click show more the 
rest of the description field will open up and it   will reveal the table of contents that'll give 
you the ability to click on the time index of   the chapter you want and this way the video will 
jump right to the place that you want to watch   so I thank you very much for watching and I hope 
you will click like And subscribe and without   further delay I now present an introduction 
to accounting part one has only one chapter   introduction to accounting chapter one what 
is accounting what is accounting if you can   answer that question right at the beginning then 
everything we do here will make perfect sense   accounting is the way that companies record 
summarize organize and present financial   information let's look at that again it's the way 
companies record summarize organize and present   financial information now to explain this 
clearly let's first focus on the recording part   we record transactions right now into the 
computer the same way that we recorded them   on paper spreadsheets in the days before the 
computer and then once all of the transactions   are properly recorded we would simply Summarize 
each area of accounting and financial data   obviously the summary numbers were very important 
we would then have to organize these totals onto   meaningful documents that would reveal how well 
the company is operating this is an example of   a profit and loss it shows how well the business 
is operating during a particular period of time   of course we would have to organize all the 
financial information and this is an example   of another financial statement called the 
balance sheet it shows what a company has   compared to what a company owes this is a 
very abbreviated version of a balance sheet   but it does give you an example of the financial 
position of a company at a specific Moment In Time   so then the question is why do we do 
accounting that's where the presenting comes in   we do accounting so that we can present our 
financial statements to people or organizations   who need to know what's going on with this 
business and you may well ask who needs to   see that information well obviously the owners 
and the managers of the company need to see how   well the company is doing and need to see the 
financial position at different periods of time   and of course everybody in this country needs to 
report their numbers at some point to the IRS so   to summarize accounting is recording summarizing 
organizing and presenting financial information   and exactly how do we get there well we get 
there by learning the ideas of debits and credits   now come on it's easy and fun if you try this 
video a little bit every day just patiently watch   a little bit each day and you will be amazed 
how easy and fun it is to learn accounting   part two the story of debits and 
credits chapter 2 what are assets   the only reason why people think that the 
accounting words sound complicated is because   the words are used in everyday life but when we 
use these words we're not using them the same way   that we use them in accounting we're using them as 
a metaphor for the way we would use it normally in   accounting for example the word asset we all know 
the metaphor it means something good or helpful   for example you might say she's an asset to the 
team however the real meaning of the word asset   is anything a business owns that has value now 
most assets are tangible assets because you can   physically touch them like a car or a Furniture 
item or a bank account but there are other types   of assets that a company could own like copyrights 
and patents and things that you can't physically   touch but things the company did pay for that they 
own that has value that will help the company earn   money into the future so you see asset is an idea 
it's something you can own that has value whether   you can touch the item or not chapter three what 
are liabilities we even have the same issue with   the word liability the word liability is usually 
used as a metaphor it usually means something   that's a hindrance or something that would work 
against you but the real meaning of the word   liability is money or some kind of obligation 
the company must pay give or do in the future   so if the company took a small business loan that 
would be an example of a liability that you would   have to record in the company books and Records 
if the company had a mortgage for a house that the   company owned or a building that the company owned 
that would also be a liability of the company   what if the company took a car loan well we 
know the car would be the asset but the loan   would be the liability and of course if the 
company had a company credit card or let's   say the owner had a company credit card the 
company credit card would be on the books and   records as a liability just like the bank account 
would be on the books and records as an asset   but remember a liability can also be a future 
obligation to do something for example if a   customer paid in advance before getting a 
product or a service between the moment we   got the money and the moment we give the 
product or service our company books and   records must reflect that we have this liability 
a future obligation to pay give or do something   you probably already know that the three most 
important accounting words that we learn at   the beginning are assets liabilities and owner's 
equity but I think owner's equity deserves its   own special video because all the other ideas of 
accounting come from the idea of owner's equity   so don't forget to tune in to the next video 
what is owner's equity a conceptual overview   I thank you for listening to my definition of 
these words I know they're going to help you   chapter 4 what is owner's equity the textbook 
definition of owner's equity is the amount of   ownership rights or ownership claim that someone 
has in an asset or even an entire business   in accounting we can measure this in dollar 
amounts the ideas are common sense and we   deal with them all the time every day any object 
or business can be owned by one or more people   and the idea is that there must be fairness 
or equality regarding the ownership   the textbook definition of owner's equity is 
the amount of ownership rights or ownership   claim that someone has in an asset or even an 
entire business in accounting we can measure this   in dollar amounts the ideas are common sense 
and we deal with them all the time every day   any object or business can be 
owned by one or more people   and the idea is that there must be fairness 
or equality regarding the ownership   the idea is to share the value in a fair and 
equal way when there's more than one person   that owns something so the accounting equation was 
derived by measuring the value of something like   a car or a house or a company all the assets of a 
company together have a value that you can measure   and the accounting equation created the idea of 
owner's equity when we assert that the value of   these assets must be equal to who has a claim 
to the assets so if there's only one owner the   owner owns the entire ownership equity and owns 
the entire asset but if there are several owners   we need a fair way to measure how much ownership 
claim or ownership rights is in the asset and how   much each owner is entitled to have or use so 
let's start with a simple example let's imagine   that Sharon and Sally buy a car together now if 
the car costs a thousand dollars and Sally only   gives 600 towards the purchase price and Sharon 
pays the other 400 what would the ownership   structure look like well very simply put Sally 
has 60 percent ownership claim or ownership rights   in the car and Sharon has 40 percent ownership 
claim or ownership rights in that very same car   so we could say that the car is equal to the value 
of who owns the car Sally owns 60 Sharon owns 40   and we could say that Sally has 60 owner's equity 
in the car and Sharon only has 40 percent owner's   equity in the car and you will notice that 
you know more about owner's equity than you   realize for example question one can Sally tell 
Sharon that Sharon cannot use the car of course   not you know from your life experience that if you 
bought 40 of something and someone else owns sixty   percent you can still use it and the person who 
paid more can't tell you that you could never use   it so that idea of owner's equity you already have 
but what about this question if they agree that   they must paint the car only one color they're not 
going to paint 60 percent of the car one color and   forty percent of the car or the other color 
they've already agreed they have to paint it   only one color should it be the color that Sharon 
wants or should it be the color that Sally wants   well common sense says from your own life 
experience if it's an either or question   about an asset that you share the one that 
sacrificed more contributed more and paid more   is the one that gets the either or question 
settled in their favor so when it comes to   painting the car one color Sally would get the 
color that she wants we all feel that's fair   now the car in that previous example was a 
metaphor for an entire company in other words   all the assets together of one business can be 
owned jointly in the same way that Sally and   Sharon share the car Sally could be a 60 owner 
of an entire business Sharon could be a 40 owner   of that very same business but when it comes 
to an either or question Sally would get what   she wants but Sally can't tell Sharon that she 
cannot participate so these ideas about owner's   equity come from common sense and fairness 
and we experience them in our everyday life   now this second example will make it clear 
how owner's equity relates to the fundamental   accounting equation let's imagine you want to 
buy a house and the value of the house costs   a hundred thousand dollars and of course we all 
know the house is an asset well in order to buy   the house you would have to come up with a certain 
down payment from your own personal pocket and you   would have to take a mortgage for the rest of the 
money to buy the house so you could say the value   of the house which is the asset is equal to the 
liability that you owe for the house which is the   mortgage and the down payment that you put in 
from your pocket which is the equity that you   invested yourself so this is the same equation 
as it was with Sharon and Sally but in this case   we have another type of claim against the value 
of the house the mortgage is a debt claim not   an ownership claim like owner's equity the way 
we were talking about Sharon and Sally before   but a debt claim is a certain type of claim 
against the rights and the usage and the   ownership of the asset so we know very well 
that if you had a restrictive mortgage the   bank has the right to tell you certain things 
but the bank does not have the right to have   their administrators come to your house at 
two o'clock in the morning and have a party   because that's not the type of ownership claim 
that they have and we've experienced both of   these types of claims in our lives so we 
already have some sense on how they work now clearly in this example the house is a 
metaphor for an entire business and what we've   just derived right here in this video is the 
fundamental accounting equation the assets of   a house or an entire business must always be equal 
to the liabilities plus the owner's equity of that   business and in this case the hundred thousand 
dollar house is equal to the eighty thousand   dollar mortgage plus the twenty thousand dollar 
down payment that came from the owner's pocket   so we're going to put it up here as the 
fundamental accounting equation and what you're   going to see is that the accounting equation 
will always stay equal after each transaction for example let's imagine we pay five thousand 
dollars towards the mortgage for the purposes of   decreasing the mortgage well if we pay five 
thousand towards the mortgage the mortgage   will decrease by five thousand but that 5000 did 
not come out of thin air that 5000 came from the   owner's pocket it means the owner took more of 
their personal money and put it into the house   if you take your personal money and you put it 
into an asset by investing in that asset or that   business you then have more owner's equity in 
that asset or that business so if we pay the   mortgage five thousand the mortgage balance goes 
down but the owner's equity which is the amount we   put in from our personal pocket will increase so 
the value of the house stays the same it's still   equal to a hundred thousand but now the balance 
of the mortgage has decreased to 75 000 but on   the other hand the total that we've invested in 
the house is now 25 000.

The 20 000 was the down   payment and the additional five thousand went to 
pay the mortgage so that we could keep the house now I've updated the balances and let's try 
a second example let's imagine that we invest   ten thousand dollars to add a room to the house 
well if you pay ten thousand more for physically   more house than the value of the house is going to 
increase by ten thousand but of course that money   did not come from the bank that money is more 
money that we took from our personal pocket and   put into the house therefore the amount of owner's 
equity that we put into the house increases   the new value of the house is about a hundred and 
ten thousand dollars because we bought it for a   hundred thousand and added a ten thousand dollar 
room but the amount prior to this that we had put   into the house was twenty five thousand we now put 
another ten thousand dollars of our personal money   into the house so the total that we've taken from 
our personal pocket and put into the house at this   point is now thirty five thousand dollars and 
because we paid for the room the balance of the   mortgage didn't change which means the accounting 
equation stays equal after each transaction now let's apply this idea to an entire company 
we're going to imagine that the house was a   metaphor for all the assets together of 
a company and let's imagine we're going   to measure these transactions and record 
them in the fundamental accounting equation   let's imagine that this company is starting 
out with ten thousand dollars in cash   starting out with twenty thousand dollars of 
equipment that they paid for and starting out with   five thousand dollars worth of cars now let's also 
Imagine That in order to own some of these assets   the company had to take a small bank loan and if 
the bank loan only covered some of the cost of the   assets that means that the rest of the money for 
the assets must have come from the owner's pocket   so we're starting our little exercise 
with the assets on the left being equal   to the liabilities and owner's equity on 
the right and this company's accounting   equation is equal at the beginning and 
it will stay equal after each transaction let's imagine the company buys another car 
for three thousand dollars cash well if we   paid cash then the amount of cash the 
company has goes down but if we bought   a car the amount of car or the money value 
of the cars the company has will increase   so in this case the new balance of cash after 
this transaction is seven thousand but the new   balance of the cars that we have is now 8 000 and 
of course all the other numbers in the equation   did not change from this first transaction 
so those balances will stay the same and you   will notice the equation stays equal after this 
transaction now here's an interesting one let's   imagine the owner takes five thousand dollars of 
equipment that they were only using at home and   brings that to the business to be used only for 
the business well in that case the business will   have five thousand dollars more worth of equipment 
but on the other hand the business or the owner   has five thousand dollars more of owner's equity 
in the business because the owner just took more   asset value from their personal pocket and put 
it into the business the new value or the new   balance of the equipment is now twenty five 
thousand and now the new Total that the owner   invested is twenty five thousand and of course 
because none of the other numbers changed for   this particular transaction the accounting 
equation stays equal after each transaction now let's do one more for good measure let's pay 
2 000 to decrease the bank loan well of course if   we pay to decrease the bank loan we're paying 
money so our cash will go down by two thousand   but because the reason we're paying the money 
is to decrease a bank loan the bank loan will   also go down by two thousand the new amount of 
cash we have is only five thousand but the new   amount that we owe to the bank is down 
to thirteen thousand and again because   none of the other numbers changed during this 
transaction the accounting equation stays equal   after five the origin of debits and credits we 
learned in the previous video that the assets of a   company must be equal to the liabilities plus the 
owner's equity of that company and we also learned   that after each transaction the equation must 
stay equal but in the previous video we recorded   the transactions directly under the item name as 
if we were adding them up and down in one column   the correct way to record transactions when 
we study accounting at the beginning is put   them in things that look like this these are the 
same numbers and the same asset balance is on the   left these are the same liabilities and owner's 
equity balances on the right and it is still the   case that the assets equal the liabilities 
except now the numbers are in their proper   position inside something called a t account now 
a t account looks like the letter T hence the term   and like everything else in the physical Universe 
a t account has a left side and a right side now   here's where the word debit and credit come into 
play the word debit simply means left side the   original meaning of the word debit comes from 
Latin and all it means is left or left side and   of course the original meaning of the word credit 
comes from Latin and it means right side or right   hand side or whatever you want to call it that's 
all it means all the other times you have used   or heard those words spoken they were being 
used as a metaphor from the original meaning   from basic accounting now here's what makes it 
challenging sometimes we put the positive numbers   on the debit side but if it's a different type 
of account in a different accounting category   then instead we're going to put the positive 
numbers on the right side the credit side   and of course depending on the type of account 
we might need to put the negative numbers on the   debit side which is the left side but again 
a different type of account in a different   category would have the num negative numbers 
listed on the right side the credit side so   we're going to record the same transactions 
as before and they're going to be recorded   in the same items with the same positive and 
negative numbers that we put before the only   difference is the numbers will be on the debit 
side and credit side instead of having a plus   or minus in front of them the most helpful way to 
think of the relationship between our fundamental   accounting equation and the idea of debits and 
credits is as follows assets were presented in   this equation on the left side so you could think 
of them as normally being on the left side which   means they would normally have a debit side 
balance and in the less frequent occasion where   you have to put a minus to an asset you would put 
that on the credit side of that asset's t account   and of course for liabilities and Equity 
the idea is the same but the exact opposite   since they're listed on the right side of 
our accounting equation we could say that   they normally have credit side balances and in 
the rare occasion where we have to put a minus   to one of these we would put that on the debit 
side of that liability or that Equity account and this system will work perfectly so that 
after each transaction the accounting equation   will stay equal but only if after each 
transaction the debits equal the credits   that's the reason why you have to make sure 
that debits equal the credits because in   the system that you're looking at in 
this diagram it will make it so that   the fundamental accounting equation 
stays equal after each transaction   now we'll do the same transactions as before 
except every transaction will change two accounts   one will be debit the other will be credit and 
the result will be exactly as it was before now just like before we're starting with a total 
of 35 000 in debit and starting with a total of 35   000 in credit because the assets on the left are 
thirty five thousand and the liabilities plus   Equity are a total of thirty five thousand just 
like they were at the beginning of the previous   videos transaction set now transaction a paid 3 
000 cash for a new car now which two accounts do   you think would change well if we paid cash 
cash will change and we probably have less   cash if we paid so cash will be minus and since 
cash is an asset the diagram tells us that we   have to put that 3000 as a minus to cash on the 
credit side the right side of the cash account   but you can't make a credit without a debit now 
the transaction says the other account is the car   and Carr is an asset and we have more car as a 
result so if car is an asset and we have more   the diagram says we put the Plus on the debit 
side so for transaction a the answer is cash   credit and card debit three thousand and the 
fundamental accounting equation stays equal now let's try transaction B the owner invested 
five thousand of equipment from his home to his   business well we did this exact transaction in 
the previous video where equipment went up and the   amount that this t account measures as the owner's 
investment in the company also went up because the   owner invested more we know that equipment is an 
asset and if we have plus to an asset the diagram   tells us that we put that on the debit side 
and if equipment is debit and the transaction   says the owner's investment is the other 
account then the other account must be credit   the owner's investment is credit because 
the owner has more equity in the company   because she or he invested more value 
in the form of the asset equipment   transaction C is one that we also did in the 
previous video paid two thousand dollars to   decrease the bank loan well of course if we 
paid cash cash has less and of course if we   paid down the bank loan the bank loan has less 
well cash is an asset and the diagram says if   the asset has less we put that money amount on 
the credit side so therefore bank loan must be   debit in this transaction and you can see that 
bank loan is a liability and we know if we pay   to decrease the bank loan that the liability 
should be debit the way that we just put here   transaction d sold four thousand of equipment 
for cash now of course this type of transaction   is rare because we're not really in the business 
of selling equipment but if we sold equipment and   we got cash it seems to me that equipment would 
go down because we sold some and cash would go up   because we just got some cash they are both assets 
so if cash goes up cash should be debit and if   equipment goes down equipment should be credit so 
just to see that again in slow motion the answer   to D is equipment credit because we have less 
equipment and cash debit because we have more cash transaction e owner took home a car that costs one 
thousand well we had something like this in the   previous video or at least I think we did first 
of all if we took home a car this t account is   representing the businesses money amount of car 
not the owner the business is a separate entity   and it is the businesses T accounts that we're 
looking at so the business has less car and car is   an asset and it's decreasing and if the owner is 
taking asset value out of the company that means   they invested less so car must be credit because 
the business has less car and car is an asset and   car is minus so car will be credit and if car is 
credit the other account owner's investment must   be debit because the owner has less investment 
in the company because they took out some asset transaction F borrowed seven thousand 
more from the bank seven thousand more   cash that is so cash will go up because 
we have more cash but on the other hand   we owe more to the bank and this t 
account represents what we owe so   cash is an asset and because we have more cash and 
cash is plus cash is debit if cash is debit then   the other account in the transaction the bank 
loan must be Credit Now does it make sense to   credit bank loan well the bank loan is increasing 
and a liability that's increasing gets a credit   so bank loan must be credit for transaction f for 
the seven thousand therefore cash must be debit and finally transaction G borrowed six 
thousand more from the bank to buy a new car   well we know from a moment ago if the bank loan 
goes up that's a liability that's plus so bank   loan will be credit and if we have more 
car and car is an asset car will be debit   so six thousand credit the bank loan because 
we borrowed six thousand more from the bank and   debit card six thousand because we just got six 
thousand dollars more of a car this is the idea of   debits and credits it comes from the fundamental 
accounting equation and now that we're done we're   supposed to do what's called foot every account 
that means take all the positive and negative   numbers in each account and put them together and 
whatever remains shows up as the ending balance   if the positive numbers for assets are more that 
means you had more debit than credit and you wind   up with a debit balance so if you did the math 
yourself you will see cash has a debit balance of   Sixteen thousand if you take the equipment account 
and put all the positive and numbers together   put positive and negative numbers together you 
will see that they are left over with positive   twenty one thousand and since equipment is an 
asset a positive balance goes on the debit side   same thing with car if you put everything together 
you'll see that during this exercise Carr had 13   000 more debits than it did credits so it finishes 
with a thirteen thousand dollar balance how much   do we owe the bank at the end well we started with 
fit with fifteen thousand and twice borrowed more   and that was listed on the credit side and during 
this exercise we only paid back two thousand so   if we tried to find out how much is left on 
the bank loan we would see that we still owe   twenty six thousand and because we still owe that 
money to the bank it's listed on the credit side   now the owner's investment transactions are not 
really done exactly the way we showed it here   we only showed it for the main idea but you 
can put together everything the owner put in   and took out during the exercise to get the net 
result so the net result of what the owner put   into the business was twenty four thousand and 
now that we're finished you could probably do   a little bit more Elementary School math and you 
can see the ending total debits equal 50 000 and   therefore the ending total credits must also be 
fifty thousand that means the total assets are 50   000 and the total liabilities and Equity are also 
fifty thousand and we did everything right [Music] chapter six a simplified three-step plan for 
debits and credits presented by Serena May Jackson   to be working with five simple accounts we're 
going to be working with cash car owner's   investment bank loan and equipment if it's an 
asset then debit is plus and credit is minus   if it's a liability decent Equity it's 
debit for minus and plus for credit   every transaction changes two accounts One account 
has to be debit and the other account is credit   total damaging credits must be 
equal after every single transaction three-step plan one which two 
accounts change two is a plus or minus   three look at the chart decide which 
ones are debit and which ones are credit transaction a pay if you paid 3 000 for a new car 
the accounts that will change are cash and car   cash will be minus because you're giving away 
cash and car will be plus because you're getting   another car so the they're both assets so 
car would be debit and cash will be credit transaction B owner invested five thousand dollars 
of equipment from his home into his business   so equipment will change and owner's investment 
owner so the owner invested more more into   the job so there's it's plus and equipment 
is plus because the job's getting more   equipment is an asset and it's and it's plus 
so it has to be debit and owner's investment is   um inequity so it has to be credit transaction C paid two thousand 
dollars to decrease the bank loan   so cash will change and bank loan will change 
they're both minus because cash you have less   cash but you have but you decrease the bank loan 
too cash is an asset and if it's minus it has to   be credit bank loan is a liability so it has 
to be minus and it's credit yes it's done it and action D sold four thousand dollars of 
equipment for cash cash will go up and Equipment   will also change so cash you're getting more cash 
and your equipment is minus cash is an asset so it   has to be debit if it's plus equipment is also an 
asset and if it's mindless it has to be a credit production e I want to take home a car that cost 
one thousand dollars it's owner's investment   and car the company has less cars so it's 
minus and all their investment is also minus so car is an asset so it has and it's minus so 
it has to be it has to be on the credit side   owner's investment is an equity so it has 
to be on the debit side if it's a minus transaction f borrowed seven thousand dollars 
more from the bank bank loan will go up and   cash will go up because you have more of a bank 
loan because you're getting you have more so you   have to eventually you have to pay back the money 
and cash goes up because you have more attached   cash is an asset and it's plus so it 
has to be a debit bank loan is also   a plus and it's a liability so it has to be credit action G borrowed six thousand dollars more 
from the bank to buy a new car car and bank   loan will change because we have more of the 
bank loan because you you borrowed more so you   had to pay back the bank even more and car 
it's also plus because you have another car   um car is an asset and it's plus so it has to be 
a so it has to be debit bank loan is a liability   so if it's plus it has to be credit by 
the way folks Serena really does know her   debits and credits and if you would like 
to see the footage of Serena learning her   debits and credits you can vote Yes in 
the survey that's coming at the end of   the video You could also leave a comment 
or send me a message on this very website   and by the way please mention if you think this 
is a good intro to the videos hi I'm Uncle Mark okay and this and this is the 
debits and crowded show learn   your debits and your credits learn 
your debits and your credits today chapter 7 empowering definitions knowing 
the crucial words that will help you really   understand accounting first definition 
we will learn is income from service   it's a t account that we use to record each 
event when we earned income from a service   a service income is money you earn for doing what 
you normally do in business of course you don't   only have to have a service business you could 
have a merchandise business and you would earn   income in a merchandise business at the moment 
you deliver the merchandise to the customer you   earn income in a service business at the moment 
you deliver the service there's one t account   that you should record all the income which means 
all the money that comes in from that particular   service and it's very easy to record it in the 
t account income will only be credit never debit   that means if you are recording income and you 
record each event where you've done a service and   earned income you should see transactions listed 
only on the right side the credit side because   that's the way it goes and I'm going to show you 
the reason for that a little later in this video   and now I will introduce you to a very important 
account when we study accounting this account is   called accounts receivable accounts receivable 
is the total money that all customers owe you   for selling them stuff or doing stuff for them 
like the income that we mentioned a moment ago   if Alan owes you thirty dollars for delivering 
a service in the past and Betty owes you forty   dollars and another customer candy owes you fifty 
dollars then in that case the balance of accounts   receivable the t account at this moment should 
equal a hundred and twenty dollars that's the   reason for it it equals the total balances of 
all customers at any given moment so accounts   receivable is an asset because it represents 
money that you will receive in the future and   as you know assets are Plus for debit and minus 
for credit that means if a transaction requires   that you write down you will receive more in the 
future you'll put that on the debit side but if   you will receive Less in the future as a result 
of a specific transaction then that transaction   would be listed on the credit side so if we take a 
look at an example if Alan did a service or excuse   me if we did a service and Alan promised to pay in 
the future well that means you will receive more   in the future so the account receivable account 
will be debit because it's plus you will receive   more in the future and of course the other account 
will be credit and in this case like usual it'll   always be income credit now what about this 
we did a service for a different customer even   though we did a service for a different customer 
it should still be debit for accounts receivable   because that customer promised to pay in the 
future so the total money that we will receive   from all customers in the future will be more as a 
result of transaction B so transaction B is debit   however if we have a transaction that requires 
that we decrease accounts receivable because   the transaction means that we will receive Less 
in the future as a result of that transaction   then we would have to make a credit so if one of 
the previous customers who owed money pays some   of the money that would be accounts receivable 
credit because we will receive Less in the future   so even if a different customer paid any 
customer who pays we have to make a credit   to accounts receivable and a debit to the 
other account involved in the transaction   usually cash because we got more cash but this 
is how accounts receivable behaves and it will   be matched to each individual customer's balance 
so that the total of each individual customer's   balance will always equal the balance 
of this t account accounts receivable now most people already know the 
definition of this next word expenses   you could think of them as the opposite of the 
first definition that we learned in this video   expenses are like the opposite of income income 
is money that we earn for performing a service   expenses are money or monies that we must pay 
to be able to earn the income if we don't need   to pay the money in order to be able to earn 
income then it's not a valid business expense   and of course we would not write down all the 
expenses in only one t account if we needed to   pay for delivery in order to earn income from our 
customer we would record all of the deliveries and   only the deliveries in a t account called delivery 
expense if we had to pay for repair in order to   serve as a customer we would record all of the 
repairs or rather each time that we paid for   a repair we would record that instead into this 
account repair expense and expenses are only debit   never credit so if you are recording your expenses 
and you look at any of your expense T accounts   in your general ledger or your chart of accounts 
you will see only transactions listed on the left   side never on the right side because expenses 
are only debit never credit remember expenses   are like the opposite of income and earlier we 
learned that income is only credit never debit   so expenses are only debit never credit and I'm 
going to explain why at the end of this video   and just like expenses are the opposite of 
income accounts payable is the mirror opposite   of accounts receivable accounts payable is a t 
account it is a liability and it represents the   total money that your business owes to people or 
companies who did a service for you for example   if you owe Rex repair shop thirty dollars for a 
repair service or you owe FedEx forty dollars for   a delivery service then that means the balance 
in the t account accounts payable should equal   seventy dollars it represents the total money 
that you owe to all vendors at any given moment   accounts payable is a liability that means 
that it's minus for debit and plus for credit   so if we have a transaction that requires us to 
increase what we will pay in the future then we   will make a credit to account payable even if 
that transaction is from a different vendor we   will still make a credit to account payable and 
a debit to the other account usually an expense   like a service that we received from a vendor of 
course if we record a transaction that reflects   the fact that we owe less to our vendors in the 
future then for that transaction we would make a   debit because we would pay less in the future as 
a result of that transaction of course the other   account involved would be a credit usually cash if 
we're paying off some of our vendors so that's the   way accounts payable would behave in the general 
ledger when you record your debits and credits and finally I will clarify the proper way that 
owner's equity transactions should be recorded   they should not be recorded the way 
I demonstrated in previous videos   of course we don't have only one t account to 
represent the entire category of owner's equity   I only showed it that way before just for you to 
get the idea the real truth is that there are two   separate owner's equity accounts one is called 
owner's capital and the other is called owner's   withdrawals owner's capital is the t account where 
we record the owner's equity transaction when the   owner invests any asset cash or equipment or 
anything when the owner invests any asset we   record that only in the t account capital and we 
always make a credit because capital is always   plus to owner's equity because all it represents 
is what the owner put into the business from   his or her personal pocket so that's why 
capital is always a credit never a debit   now the exact opposite of that account is 
the one right here on the left withdrawals   this account will record anytime the owner 
takes out any asset from the business whether   the owner withdraws cash equipment or anything 
the owner removes from the business to be used   for non-business reasons would get recorded 
in this account on the left owners withdrawals   and every time the owner withdraws any asset from 
the business the owner has less owner's equity   so withdrawals is always minus to owner's equity 
and therefore you have to make a debit every   time the owner withdraws money or asset from 
the business in fact you could even say that   withdrawals is always debit never credit now 
in closing you should know that owner's capital   and owner's withdrawals are not the only accounts 
under the category of owner's equity the other two   accounts under the category of owner's equity are 
the two accounts that we learned about right here   in this video both expenses and income are also 
technically under the category of owner's equity   that's because expenses always make owner's 
equity go down because the person responsible for   the expense is the owner and income always makes 
owner's equity go up because if a customer gives   money to the business it's the owner's money that 
the customer is giving after the sale or after the   service so these four accounts are technically 
under the category of owner's equity and they   make debits and credits very easy I hope that you 
will use your accounting textbook to understand a   little bit better why these accounts are under 
the category of owner's equity but if you have   a transaction with any of them you should 
always know what to debit and what to credit   if one of the two accounts in your transaction 
is either withdrawals or an expense you will   have to debit the withdrawals or 
expense and credit the other account   if your transaction requires that you use the 
owner's Capital account or the income account   then you know for sure you're going to make a 
credit to either income or capital and the other   account in the transaction should be debit 
so now your adventure of debits and credits   should actually be easier by understanding the 
meaning of these four items under owner's equity   chapter 8 it's time for more advanced debits 
and credits with our friend Serena May Jackson these are the accounts that we used in last video 
we are going to be adding video income accounts   receivable delivery expense repair expense 
accounts payable honors capital and withdrawals   if it says no Then you cannot 
record a transaction on that side transaction a we did a service for customer 
Allen for a hundred dollars he promised to   pay in the future accounts receivable changes 
because we're because we can receive money   and video income changes because we did a 
service if there's a no X on the debit side   it has to be credit and if video income 
is credit accounts receivable is debit transaction B Rex repair shop did a repair 
service for us we promised to pay him 85.   so it's accounts payable and repair expense 
repair expense has a no X on the credit side   so it has to be debit and if repair expense 
is debit accounts payable has to be credit action C did a service for Betty and she 
paid us immediately with cash 95 so um service income changes and cash because 
cash changes because she immediately paid   us so we're getting more cash and service 
income because we did a service for her   if service income cannot be debit and 
it has an x on the debit it has to be   credit and if service income 
is credit cash is debited boom action D paid FedEx immediately with 
seven day 75 cash for a delivery today   so delivery expense and cash delivery 
expense has a low X on the credit side   so it has to be debit and if delivery 
spends is debit cash has to be credit transaction eat owner withdrew 
28 cash from the business   so um cash will change and I think 
withdrawals correct because so cash   well um well withdrawals has an x 
on the credit so it can't be credit so what draws is dead if withdrawals 
is that big then cash must be credit it's an F Alan paid us half of what he orders from 
transaction a so um so cash will go up because we   got more cash and accounts receivable because we 
received half of what was in transaction a so um   this so accounts receivable and cash neither 
of them have an X so we don't know immediately   which one is which which one is debit and which 
one's credit so cash you're getting more cash so   if you would get plus and it's an asset 
so Plus is this side and it has receivable   it's it's you have only 50 left to go and you 
um you you got you got half of what was in   transaction a so accounts receivable it is an old 
asset too and it's minus so it has to be credit we pay Rex repair shop only 65 
of what we owe for transaction   oh I meant to still uh B I meant to 
say well if if it was five dollars paid 65.

We still have a little bit left 
over and payable and um cash will change   neither of these have an x on either on 
any side so again we don't know immediately   so cash we have less cash and it's an 
asset so it has and it's minus so it has   to be on the credit side accounts payable is a 
liability and if it's minus it has to be a debit transaction H owner brought seven 
hundred dollars worth of equipment   from his home into the business equipment 
will change and owner's Capital will change   appointment will change because the company 
has more equipment and owner's Capital will   change because the the company well 
the owner is giving more equipment so equipment is an asset and it's 
plus so it has to be debit owners   capital is also plus but it's 
in equity so it has to be credit section j instead of paying cash we gave the 
bank 300 of equipment to decrease the bank loan   so bank loan will change and Equipment will 
change okay so bank loan will change because   you're decreasing the bank loan and Equipment 
will change because you have less equipment   so bank loan is minus and it's a liability so it 
has to be debit equipment is also minus and it's   an asset so it has to be credit it doesn't 
have to be one account debit and the other   account is credit as long as total numbers and 
credits equal each other after each transaction okay in service for customer candy was 
all 200 she paid 50 cash and promised to   pay 150 later so service income is 200 cash 
is 50 is 50 and accounts receivable is 150   and what are the debits and credits so the um 
service income has a no on the it has no X on the   debit so it has to be credit accounts receivable 
is is plus because it's an asset and plus is debit   so so it's debit and cash is also plus and 
it's also an asset so it has to be debit also there's action l did red stripes did a repair 
service for us was a hundred thirty dollars we   paid only thirty dollars now and promised to pay 
the rest later so it's accounts payable repair   and expense and cash so cash changes because 
we paid 30 dollars so we're giving away money   accounts payable because we can pay a hundred 
dollars later in repair expense because we have to   pay so an amount of money by the way folks Serena 
really does know her debits and credits and if you   would like to see the footage of Serena learning 
her debits and credits you can vote Yes in the   survey that's coming at the end of the video You 
could also leave a comment or send me a message on   this very website and by the way please mention 
if you think this is a good intro to the videos   hi I'm Uncle Mark [Music] seven credits 
show learn your debits and your credits   learn your debits and your credits 
learn your debits on your credits today because today chapter nine the full accounting cycle do you remember from the prior video how we 
found the results of each of these accounts   we got the total debits and total credits and 
put them together and the result we put on only   one side well what was that process and how is it 
done that process is called footing the accounts   and footing the accounts means find the total 
debits find the total credits put them together   and find the ending balance for example let's 
imagine we have a t account for cash or some   asset and every time you had a plus to cash you 
put it on the debit side and every time you had   a minus the cash you put it on the credit side 
then during the month you accumulated transactions   well how could you know your result at the end 
what you would do is you would take the total of   the credits and then you would take the total 
of the debits and then you would combine them   for example this account has a total of 
25 dollars in credits and it has a total   of sixty dollars in debits so the debits in 
this case are more than the credits so the   account will finish with a debit balance When you 
subtract the two that debit balance is the ending   balance and that's the number that would begin the 
balance of the account starting in the next month you would use the same procedures to foot an 
account that has the opposite Behavior like a   liability we all know that the bank loan is minus 
for debit and plus for credit so if you borrowed   money you'd put it on the credit side if you paid 
off money you put it on the debit side and so on   at the end of the month the t account bank 
loan would have a balance that you would   have to find out you would do the exact same 
procedure you would find the total credits you   would find the total debits and in this case 
the credits are slightly more than the debits   so that when you combine the debits and credits 
the resulting number goes on the side of the   higher one so in this case the bank loan is going 
to finish with a five dollar credit balance and   that will be the number that the t account 
begins with at the beginning of the next month   now in the days before the computer we 
did not use accounts that look like a t   in real life Accounting in the old days 
this is the way the accounts looked   the t account would not show you the balance after 
each transaction and it didn't really have a space   to put in all the information across the row about 
each transaction so the accounts really looked   like this and if you had a transaction that made 
the balance go up you would simply add it if you   had a transaction that made the balance go down 
you would simply subtract this way you would know   the balance after each transaction and you would 
also know the balance at any given moment in time   for example you can see that September 17th 
we owed 75 dollars but if I asked you how   much did we owe exactly on September 12 well 
September 12th is not listed in the date column   so you would go back to the last transaction 
before September 12th find that balance and   then you would know the balance on a particular 
day and time using the accounts like this helped   bookkeepers record more detail and keep 
more accurate track of the balance and   when the accountant would come in to find the 
results at the end of the month the accountant   would simply know bank loan is a liability 
and this five dollars is a credit balance   now footing the accounts was only the first step 
in the process of finding the results at the end   of each month after you found the results you 
would put the ending balance of each account in a   report called the trial balance the trial balance 
is a report that shows the results of all accounts   and if the account had a debit balance it would 
be listed on the debit side of the trial balance   and if an account had a credit balance it would 
be listed on the credit side of the trial balance   and as you can see the trial balance would give 
you some information about how your business is   operating but this data when it's in the trial 
balance is in its raw form you were not finished   when you made a trial balance but one of the 
reasons you made the trial balance is to make sure   that the debits equal the credits after the entire 
process of recording the transactions putting them   in the T accounts finding the balances and 
putting the balances up in the trial balance   we came up with this system of debits and credits 
thousands of years ago to make sure that we did   not make any mistakes when recording transactions 
or doing the math to find the results remember   accounting procedures were derived in the days 
before the computer and although you can see   some things about the business operation simply by 
looking at the trial balance you would gain better   insights into what is happening with the business 
if you took the numbers from the trial balance and   reorganized them into documents called financial 
statements and I'm sure you've all heard the   names of the typical common financial statements 
these are the documents that we look at in order   to make a judgment about how well the business 
is doing and to make certain business decisions   by taking the numbers from the trial balance 
and organizing them into these financial   statements the numbers present a more clear 
picture of what's going on in the business now in the days before the computer the 
T accounts were not the original books of   Entry instead you had something called the 
general journal and if you wanted to record   transactions here you needed to know your 
debits and your credits that's because the   transactions would first be recorded in the 
journal and when you record transactions in   the journal you would write down which account 
will be debit and which account will be credit   then later you would do what's called posting 
that means copying each transaction from the   journal to its appropriate t account and putting 
in the appropriate debit and credit you would   not post after each transaction the whole point 
of the journal would be to record everything on   one paper to save time then at the end of the time 
period when you wanted to assess your results you   would post all the debits and credits into the T 
accounts and if you did that correctly the results   and the T accounts would be the same as if you put 
the numbers in there directly like we did earlier   then of course you would foot the results of the 
T accounts and then again take the ending balance   of each account and put it in the trial balance 
so now you know the accounting cycle perfectly   we start with transactions that we 
would record in the general journal   then we would post from the journal to the 
T accounts that we have been working with   then we would foot the T accounts and put those 
results in a report called the trial balance and   then of course we would take the numbers from 
the trial balance and put them on financial   statements so people can look at those documents 
and understand what's going on with that business   chapter 10.

Now let's see some example of journal 
entries and how it looks when we use the computer   we remember the accounting cycle in the days 
before the computer involves several steps   before we could find our accumulated totals 
in the trial balance now with the computer   we can go directly from the journal and it 
will automatically post the transactions   foot the accounts and copy the results 
to the trial balance in a Split Second   so all those previous steps we learned about 
in the prior video happen immediately so all   we have to do is record the transaction in the 
journal and the results change and the trial   balance like that so if you are using QuickBooks 
Online this is the window that you would enter   the transaction in and then the accounts would 
change immediately in your QuickBooks Online   trial balance and I'm going to demonstrate this 
in QuickBooks Online if you're using QuickBooks   desktop this would be the window that you would 
record the debits and credits of a journal entry   and again in QuickBooks desktop the results in 
the trial balance would be updated immediately so first we will do these transactions with 
QuickBooks desktop and we will do the same   transactions as before let's get prepared 
I have my Quickbooks desktop with a blank   General Company open and for those of you who 
are new to QuickBooks you would open the trial   balance by clicking reports accountant and 
taxes trial balance and for those of you who   are new to my class we always change the date 
range to all transactions regardless of date   and I'm going to change the shape so we can put it 
here and put next to this window the window that   we actually record the journal entries in from 
the main menu click company make journal entry   and then this little pop-up don't worry about 
assigning numbers just click the don't bother   me box and click ok now you can't see much of 
this window unless you double click the words   in the ribbon to collapse the ribbon now the top 
half looks a little bit more like the general   journal that we learned about and let's read our 
transactions and remember as soon as we record the   transaction in the journal it will automatically 
post the accumulated results to the trial balance   now let's do the same transactions that we 
did earlier in the course except now we'll   do them on QuickBooks let's imagine on January 1 
of 2025 the owner invested fifty thousand dollars   cash into the business if you learn your debits 
and credits properly you would know that that   would be fifty thousand dollars cash debit and 
fifty thousand dollars owner's Capital Credit   first we put in the correct date 
by clicking the date box and going   forward or backward or even typing it in 
manually you should remove this check mark   because this is not an adjusting entry we 
will talk about those a little bit later   to record a journal entry in QuickBooks desktop 
click directly under the word account then click   the pull down arrow and choose the account you 
want to debit I choose cash and Chase Bank and   on the same row as that account I click under the 
word debit and type in the fifty thousand dollars if I keep clicking tab or pushing the Tab Key you 
will see that most software finishes the journal   entry for you by trying to balance it out in 
other words QuickBooks knows that there has to be   a fifty thousand dollar credit somewhere and that 
account is owner's Capital so this is the way that   debit and credit would look like in the general 
journal cash and bank debit owner's Capital Credit   now before we save it the trial balance is 
blank but when I click save and close you can   see the numbers show up for the first time 
on the trial balance cash and Chase Bank 50   000 and owner's Capital fifty thousand now 
let's imagine that on January 5th we pay   twenty thousand more for more equipment 
if you studied your debits and credits   properly that would be equipment debit and cash 
credit so company make general journal entry   okay the date is January 5th of 2025.

This 
is our second entry it's not an adjusting   entry and the account that will be debit will be 
equipment and the amount will be twenty thousand   keep pushing the Tab Key and the credit or in the 
row of credit the other account is Cash because   we know that if we pay cash and get equipment 
it's equipment debit cash credit now here's   the question what will the results be after I save 
this transaction well cash right now is 50 000. so   if I make a credit of twenty thousand what do you 
think the result would be that's right the result   would be thirty thousand what about this what do 
you think the equipment would be well equipment is   starting at zero so if I save this equipment 
should show up for the first time as twenty   thousand save and close and don't worry about this 
just click the don't bother me box click OK aha   cash went down to 30 000 exactly as we expected 
and Equipment showed up in the trial balance for   the first time as twenty thousand what about this 
one January 10 the owner took home equipment worth   five thousand dollars and he's not using it for 
business anymore well if you studied your debits   and credits you would know that that would be 
equipment credit and owners withdrawals a debit   again we click company make general journal entry 
in this case the date is on the 10th and this is   our third such journal entry I'm going to 
double click here so we can see it nicely   and now I'm going to choose owners withdrawals 
debit and put in the row of debit 5000.

And I'm going to tab over until it puts a credit 
of 5000 and I'm going to credit equipment now   here's the question can you predict the results 
what will equipment become well equipment right   now is twenty thousand so if we're decreasing it 
by 5000 it should become fifteen thousand if we   did this right and what will withdrawals become 
well withdrawals will show up for the first   time here as five thousand save and close aha 
equipment is down to fifteen thousand and owner's   withdrawals is five thousand on the debit side 
it means we recorded the transaction correctly   what about this one January 15th we 
borrowed thirty five thousand from the bank   what will Cash become well right now cash is only 
thirty thousand so if we borrow more from the bank   will have more cash so if we 
record this transaction properly   cash and bank will become 65 000 and bank 
loan will show up for the first time in the   trial balance so we change the date to the 15th 
and we make a debit to cash and bank for the 35   000 because we learned that when cash increases 
it's a debit and the balancing credit is here   bank loan and when I click save and close the 
numbers are exactly as we expected cash becomes 65   000 and bank loan shows up for the first time 
as 35 000.

Now we'll do a transaction that would   absolutely require a journal entry what if on 
January 20 the owner invested a vehicle worth 25   000 into the business what would be debit and 
what would be credit well we know Capital would   be credit because the owner invested an asset 
and capital right now has a credit balance of   fifty thousand so if the owner invests another 
twenty five thousand an asset that's right   Capital will become 75 000 and vehicle will 
show up for the first time in the trial balance so from the main menu company make journal entry 
this time the date is January 20. and the account   that's debit is the new asset that we are getting 
vehicle and we said that the vehicles are 25   000 or at least they're worth 25 000 at the 
moment the owner invests it into the company   and because the asset came from the owner the 
owner now has more capital and we make a credit   to Capital to increase the owner's Capital 
when we click save and close Capital became   the number that we expected it to become and 
therefore we recorded the journal entry properly   now here's one that you might not need to make a 
journal entry for but it is one we learned before   three thousand to decrease the bank loan well 
if this account represents what the bank loan   is now and what we owe if we decrease it what 
will it become if we record this properly it   should become thirty two thousand and what 
will Cash become well if we pay to decrease   the bank loan cash will decrease by three 
thousand and it will become sixty two thousand   so we're up to January 25th and we know that it 
will be cash credit because we are giving cash   so cash and Chase Bank 
credit by the three thousand and we know that we're decreasing the bank 
loan and the bank loan is a liability so   it will be bank loan debit now when we click 
save and close the results are exactly as what   we expected the bank loan became thirty 
two thousand and cash in Bank became 62   000.

Let's finish with a transaction that you 
would definitely need to make a journal entry for   let's imagine on January 27th we borrowed 
seventeen thousand more from the bank and   bought equipment that would be the same thing 
as just taking the equipment and assuming alone   in that case you have more equipment but you 
also have a higher balance or more of a bank   loan so we know that would be equipment debit 
and bank loan credit so company make journal   entry and this one is on January 30th and 
it will be equipment debit for the 17 000. and it will be bank loan credit can 
you predict what the results will be   well let's see if equipment goes up if bank loan 
goes up by 17 000 bank loans should become forty   nine thousand because bank loan is thirty two 
thousand right now and if equipment goes up by 17   000 equipment should become thirty two thousand 
because these are the numbers for equipment and   bank loan before I click save and when I click 
save and close you can see the numbers are exactly   as what we predicted bank loan is forty nine 
thousand and equipment is thirty two thousand   don't forget to watch the QuickBooks online 
version of this video chapter 11.

Now let's   practice what we've learned about journal 
entries debits and credits this service business   transaction practice set is literally just like 
an Accounting 101 textbook practice exercise   you have to set up the T accounts on something you 
can write on in the old days we would use a paper   or and a pen or pencil but of course you could use 
word or Excel or anything else what you will do is   after you make the T accounts you'll record the 
transactions that I give you and you'll compare   your results to mine if they're different you will 
use logic to find and fix mistakes and I'm going   to give you some logical tips that will always 
help you find and fix mistakes after you're done   recording transactions in accounting so what are 
The Specific Instructions of this project first   create a t account for each of the accounts on 
the account list in the given chart of accounts   two record all transactions from the transaction 
list to the T accounts that I have provided for   you three find the balance of each account after 
you're done recording all the transactions and   then make a list of all the account balances and 
that list is something called the trial balance   then once you have your trial balance you can 
compare your results to mine and use logic to   find and fix mistakes and don't worry about a 
thing because everything you physically need to   do this project is inside the downloadable Excel 
file that I have put in the resource tab of this   video just download it open it up and follow the 
steps you can easily access the files for all of   these projects by clicking show more just like you 
did before to reveal the table of contents but if   you look all the way down at the very bottom of 
the description field you will see that there are   links to each of the project sheets for each 
of the projects and if you just click on any   one of the links to download them all you have to 
do is Click where the link is for this particular   exercise and you should be given an option to 
choose which folder to download the file to in this Excel spreadsheet that you will use for 
this project there is one particular sheet with   a t account for every account in this list 
of accounts which is also called the chart of   accounts and it is those T accounts that you will 
record the transactions into now also in the sheet   is this list of transactions you should record 
every debit and every Credit in proper order   using this list go slowly and record it exactly 
as you saw us record each of these transactions   in the lectures where I gave you similar examples 
and record them in the T accounts that you either   draw on a pencil and piece of paper or record them 
in the T accounts that are provided in the Excel   sheet now in order to use this Excel sheet you 
don't need to know any excel at all just type in   the numbers you want and Excel will automatically 
add them for you it's just a simple convenience   but if you're having any trouble at all just use 
a pen and paper so if you download the file and   you open it up you would click down here to get 
the different sheets and if you can't see all the   sheets you would scroll right and scroll left the 
leftmost sheet are the general instructions the   next sheet is the list of transactions that you 
will record the net sheet are the T accounts and   if you don't know Excel watch carefully how they 
work if you're going to make a debit to an account   you should click in the top left and put just the 
date and hit enter and Excel will record the date   then click next to it just like we showed in the 
video and put the money amount type it in and to   save it in the field push enter and notice Excel 
will add it for you if you want to make a credit   put the date in the rightmost column hit enter 
then on the inside put the type the money amount   hit enter and Excel will add it for you if you 
need to make a second transaction go to the   next line and do the same thing as soon as you hit 
enter it will automatically add the column so that   you don't have to do any math and the numbers will 
stay nice and neat and you will save huge amounts   of time putting in your debits and credits when 
you finish putting in your debits and credits you   will see that there is a sheet provided for you 
to make a list of every remaining debit balance   and credit balance for each of the T accounts 
that you were using during the transaction set   try to put the list of the final balances 
into that sheet and make it look like this   Excel will add and do the math for you now the 
name of this report that you're constructing when   you finish putting in all the ending balances 
which are the results of all transactions this   report is called the trial balance and the trial 
balance was a very important report for both the   bookkeepers and the accountants in the days before 
the computer you see the trial balance is a list   of ending balances of the chart of accounts after 
a specific period of time usually some accounting   period like after one month or after one fiscal 
quarter where you would stop and assess everything   the account balances must be separated into debit 
and credit columns so that you can see if it's a   debit balance at the end or a credit balance at 
the end while reading the accounts from the list   so the reason to make this is to be sure that 
you have not made any mathematical mistake before   putting these numbers on your formal financial 
statements if the debits equal the credits then   there is no mathematical mistake so if there's 
still a mistake even though there's not a   mathematical mistake you have to use logic and use 
the logical steps and The Logical thinking that   you're about to learn here to fix the differences 
and to make your final numbers the same as mine   first you have to ask yourself if you finished 
with any number that's different than what it   shows in the answer ask yourself what 
specific account balances are different   just by isolating those two you'll be able to 
also hone in on how much they are different by   and by thinking of which specific accounts are 
different and how much they're different by you   should then also consider which account 
is too high and which account is too low   thinking about all these things will help you 
focus on what were the only transactions that   were recorded in only those accounts the mistake 
must be from one of those transactions so if you   know which specific transactions change these 
specific accounts or which specific transactions   are the money amount of the amount that's too 
high or too low or which specific transactions are   of the money amount that the wrong accounts are 
different by you can use logic to fix the mistake   check any transactions you put into only those 
accounts or maybe should have put into those   accounts when considering what mistakes you could 
have made for example if cash in the bank is too   high and accounts receivable is too low what 
could be the only reasons that those would be   the only two accounts that are different well 
if you give yourself a moment to think about it   it could be that if you recorded receiving cash 
for a service of a sale rather than recording it   an account receivable that's something that might 
make cash too high and accounts receivable too low   so you might want to double check any transaction 
where you were doing a service for a customer   or what if you recorded receiving a payment 
from a past service twice if you duplicated   an entry and you duplicated both the debit 
and the credit they would still balance   in the trial balance but the individual 
numbers of the accounts would be different   find out which specific accounts are different 
and see if they have any duplicate entries in them   also look at the money amounts to determine the 
mistakes it's very rare that you would have two   mistakes in one account so if you know how much 
a difference is in one particular account you   know that you can look back on the transaction 
list and find the transaction with that specific   money amount and there's your mistake so have 
confidence that you will find whatever mistake   you might have made don't peek at the answers 
until you absolutely must good luck doing the   exercise and please stay in touch and give 
me feedback about how well you did and how   you felt it might have helped you learn thank 
you again and I'll see you in the next video   thank you so much for learning this with us 
there's more great stuff to come and remember   you have the benefit of a live teacher if you ask 
me your questions in the comments section below   and don't forget to click like And subscribe to 
help support the free channel that helps everyone   part three end of cycle procedures chapter 
12 end of period accounting adjustments adjustments are journal entries that we make 
periodically to correct our financial records   for the passage of time it also helps us prepare 
for financial reporting by acknowledging the   cutoff dates of certain amounts we also make 
adjustments to correct for mistakes and we   usually make them monthly or immediately before 
reporting our financial statements to someone   because we want to adjust our general ledger to 
make sure our financial statements are accurate the idea behind this is that assets 
and expenses are really the same thing   think about the definition of expense   it's when you pay for something after you use the 
value of whatever service that you're paying for   things like salary expense repair expense 
utilities expense delivery expense usually   you pay for them before you use them and of 
course we always think of them as expenses   but assets are something you pay for before you 
use the value for example a car usually you buy   the car before you can drive it and use the value 
of the car so we always think of car as an asset   what about furniture usually you buy the furniture 
you don't sit on it for five years and then when   it breaks you pay the person you took it from 
usually you pay for it first which means assets   are paid for before you use up the value of 
whatever you need them for but what about   things like rent insurance and supplies we usually 
think of these things as expenses and they are but   these things we usually pay for them before we use 
them so even though we think of them as expenses   technically at the moment we pay for them they are 
assets and they become expenses as we use them so   therefore if at the moment you pay for something 
it still has value you can use into the future   you just paid for an asset but if at the moment 
you pay for something you have already used the   value or you could say you have already expended 
the value then at that moment you have an expense   and if it was an asset don't worry wait a little 
while and you will finish using the value and the   amount you use let's say the amount you expend 
will become the amount you record as the expense   for example supplies you always pay for 
them before you finish using them then   over time you use some supplies and the amount 
of supplies you have used the amount of supplies   you have expended then gets recorded as 
supplies expense now this idea is also   the same for paying office rent you usually pay 
office rent in advance of staying in the office   so technically at the moment you pay the rent 
you have an asset you have something of value   that you can use into the future you have the 
ability to stay in the office but over time as   you stay in the office the amount of time that 
you've used or expended becomes your real rent   expense and that's the amount you record on your 
income statement for that month as rent expense   insurance is the same thing you always pay 
insurance in advance of the time in which   they protect you then over time you're using 
the coverage and your coverage is elapsing   after you've used a certain amount of time during 
the policy the amount of time of the policy that   has elapsed is your insurance expense and the 
remaining amount still stays on your books as   an asset so let's see how this would work let's 
imagine on January 1 Holden the owner of the   company paid Staples seven hundred dollars for 
supplies well on January 1 we did not finish   using the supplies so we cannot record this into 
supplies expense on January 1 we have a new asset   and just like we did in previous videos we make 
a debit to the asset for the amount that we paid   of course cash is credit if we paid cash but we're 
not really focusing on cash right now we're just   focusing on the asset that we bought that we 
will use into the future now the most important   date is January 31.

Let's imagine it's one month 
later and we physically count the supplies and we   see we only have three hundred dollars worth of 
supplies left well the first question is how much   of supplies did we use obviously we used 400 you 
could also say we expended four hundred dollars   worth of supplies during January and that means 
supplies expense should be debited four hundred   dollars for the amount that we actually used 
during January and that four hundred dollars   will go on the income statement profit and loss 
as supplies expense for the month of January   now of course if we made a debit to supplies for 
400 we have to make a credit of 400. we credit the   asset if the value is going down and of course 
it is correct to credit supplies for the 400 so   that the ending balance of supplies at the end of 
the month truly reflects what we physically have   we physically have three hundred dollars worth 
of supplies and as you can see that's the new   ending balance the supplies expense account is an 
expense so that will get closed at the end of the   month so that you can measure more uh starting 
from zero how much supplies you used in the next   month so you will see in the following videos 
expenses become zero after each period so that   you can start counting fresh what you used 
in the next month but this 300 remaining in   supplies goes up top as the beginning balance 
on February 1 for the asset account supplies   now that idea will help you understand a 
special type of asset called prepaid expenses   these are time-based expenses things that 
we use just because of the passage of time   -based expenses are things like rent when 
we pay office rent or Insurance something   we pay that we will use in the future but 
we would normally consider it an expense   for example let's imagine on January 1 
Holden the owner paid Farmers Insurance   one thousand two hundred dollars for 
the whole Year's office insurance now   we know that the office insurance is 
only really a hundred dollars per month   we're really only using the value of what we 
paid at the rate of a hundred dollars per month   now you can put the whole 1200 into the insurance 
expense account if you only report once a year   so if you don't need to show anyone your financial 
records until December 31 it really wouldn't   matter if you put this into Insurance expense 
at the beginning however if you need to report   monthly financial statements you must put the 
1200 into an asset called prepaid insurance and   then adjusted each month just the way you 
saw in the previous example with supplies   prepaid insurance is another current asset type of 
account so what's the difference why can't I just   put insurance and insurance expense when I pay 
or rent into rent expense when I pay well let's   think about it if you recorded this the wrong way 
and it all goes into Insurance expense when you   write the check that means January's income 
statement is going to list Insurance expense   as one thousand two hundred dollars because 
that's what you paid in insurance for January   in February you didn't pay anything for 
insurance so on February's income statement   Insurance expense will be listed as zero March's 
income statement Insurance expense will be listed   as zero and so on do you think you can fairly and 
reasonably compare your operations between January   and February by comparing January's income 
statement to February's income statement of   course not you cannot compare them in a fair way 
because you recorded all of the year's insurance   as an expense for January and none for February so 
January and February's profit and loss statement   cannot be compared in an accurate and Fair Way 
but if you do it the right way and adjust it the   way I'm about to show you the then January's 
Insurance expense will be only what you used   during January and February's Insurance expense 
will be only what you used during February and   so on this way you can properly compare January's 
income statement to February's income statement   and make a fair and clear judgment about the 
difference in how well you did each month   because now it shows the real amount of insurance 
expense that your company is using each month   so how do you actually do this so it comes out 
correct well when you pay the insurance put the   money into the account called prepaid insurance 
which is another current asset like supplies   then make a journal entry to adjust at the end of 
each month decrease the prepaid insurance for what   you did use and put it into Insurance expense 
to reflect that it was used during that month   so it's going to look very similar to 
what we did a moment ago with supplies   let's imagine on January 1 Holden paid Farmers 
Insurance 1200 for the whole Year's office   Insurance well we did not use the value or we did 
not finish using the value on January 1 so we do   not have an expense on January 1.

On January 1 
we have an asset debit the asset and of course   credit cash but we're not examining cash so just 
believe me cash will be credit now the interesting   part happens at the end of the month what should 
the numbers be well you know that this 1200 is not   accurate as of January 31. it was accurate back on 
January 1 before the insurance company protected   and covered US during January but on January 31 
they are finished protecting us they are finished   covering us for January so we have actually used 
a hundred dollars worth of insurance during the   month how do we record this in our records to 
reflect this well Insurance expenses debit for the   amount that we actually used during January and 
of course we have to credit a hundred dollars the   asset to bring the value down to what it really 
is as of January 31.

There are only 11 months   left on the policy so on January 31 the balance of 
this asset is eleven hundred dollars now of course   the hundred dollars in Insurance expense will go 
on January's income statement to show that during   January we used a hundred dollars of insurance 
and then of course that gets closed and becomes   zero so we can start measuring March's Insurance 
expense fresh at the beginning of the next month   and of course the eleven hundred dollars 
goes as the balance on the balance sheet   as of January 31 to show what we had in prepaid 
insurance going forward at the end of January   chapter 13 closing entries and partnership 
distribution we all know that every account   in your chart of accounts has a debit side and a 
credit side and depending on the type of account   sometimes the transactions are listed on the debit 
side for certain types of accounts and on the   credit side for other types of accounts the most 
important owner's equity account is the owner's   Capital this is an account in your chart of 
accounts that reflects or shows the total money or   value that the owner took from his or her personal 
funds or personal assets and put into the business   and of course every chart of account should 
have a separate account for each separate   asset so you can account for how much 
value of that asset is in the business   in this example let's imagine that the company has 
ten thousand dollars in cash and the company has   twenty thousand dollars worth of equipment well if 
that's the case when the company starts that means   that the owner of the company has invested thirty 
thousand dollars worth of assets into the business   and the account that keeps track of how much the 
owner has invested in the business should say   thirty thousand dollars now of course the 
owner should also have a separate account   called withdrawals the reason for that account 
is to keep track of and take a total of all the   money or all the assets that the owner took out 
of the business for personal non-business use   for example if the owner takes two thousand 
dollars of company cash out of the business   for non-business use that means that he or she 
would have to record that two thousand dollars   in withdrawals and the new amount of cash that 
the company has would be eight thousand dollars   the owner could also take home any other asset 
like equipment for example if the owner took home   five thousand dollars worth of equipment you would 
still have to record a withdrawal of asset from   that owner of five thousand dollars that means 
the new value of equipment would go down to 15   000 and the new balance of the withdrawals 
account is seven thousand dollars   so as you can see the owner invested thirty 
thousand from his or her personal funds into the   business but withdrew seven thousand dollars 
of cash and other assets from the business   and obviously you would have to net out these 
two accounts to know that the actual amount of   owner's equity that the owner has in this 
company is twenty three thousand dollars   so then you might ask how do you distribute the 
net income from the income and expenses accounts   to the owner's equity accounts well we will use 
the same two owner's equity accounts we used a   minute ago except now we're showing other accounts 
in the chart of accounts let's imagine at the end   of the quarter or the end of the fiscal year 
the service income is twenty thousand and let's   imagine in this example company there are only 
two expenses six thousand and four thousand here   now this example is showing you how to 
distribute the income when the company   is a sole proprietorship that means there's 
only one owner in order to find out what the   net income is as well as distribute it or give to 
the owner or put into the owner's equity account   the net income we use a special account in 
the chart of accounts called income summary   this is a temporary account that begins with 
xero and also ends with zero when we're finished   we make a series of debits and credits in order 
to move the income to the income summary account   and make all our income accounts zero we also move 
all of our expenses to the income summary account   and make the balance of all of our expenses zero 
and the days before the computer this would help   make sure that the income and expenses do not 
accumulate into the next accounting period and   they begin with zero at the beginning of this 
uh fiscal year or this accounting period with   the computer it's not necessary to do it this way 
anymore but at least we know in the income summary   account that we can calculate the net income as 
ten thousand dollars that's because we moved 20   000 to the credit side and that was the income we 
moved ten thousand worth of expenses to the debit   side and the net difference shows ten thousand 
more on the credit side than on the debit side   so we know the ten thousand is the net income as I 
mentioned a moment ago income summary also becomes   zero we take the ending balance of income summary 
and we bring it to the owner's Capital account   this makes sure that the owner's Capital reflects 
not only what they invested from their own   personal pocket but what they earned as their 
share of the net income and of course the last   step in the closing process is to move the owner's 
withdrawals also to the owner's Capital account   this way withdrawals also starts with zero for the 
next accounting period so you can clearly identify   the withdrawals just for that time period and when 
you find the end result of the owner's Capital we   can see in this situation the owner is left with 
twenty three thousand dollars of owner's equity   all of which will be in the owner's capital 
account when you finish doing the closing entries   if you need to know how to make debits and credits 
you can watch the supplementary videos about   journal entries included in this course but the 
end result is that we now know the ending period   capital for this fiscal year which is also 
the amount of capital that will begin as the   beginning balance in the next fiscal year now 
let's see what it's like to distribute the net   income in a partnership here we have a situation 
where the company has two owners Holden and Gary   and as you would imagine each individual 
partner has to have their own Capital account   which keeps track of the amount that they 
physically invested into the business   and each partner should have their own withdrawals 
account that keeps track of how much money or   asset that particular partner took out of the 
business so these numbers for Holden are left   over from the previous example Holden invested a 
total 30 of 30 000 of cash or other assets from   his personal funds and he withdrew seven thousand 
from the business for non-business reasons   whereas Holden's partner Gary only invested 20 
000 from his personal funds and he withdrew a   total of three thousand from the business so far 
this fiscal year now let's imagine in this example   Holden and Gary share the profits sixty percent 
Holden and forty percent Gary so just like in our   previous example income summary is the account 
where all the income and expenses get close to   so we can determine the net income and distribute 
the net income to the partners but in this example   we see that the the net income is the same as the 
net income in the previous example except sixty   percent of it belongs to Holden and the other 
40 percent of it belongs to Gary that means   that Holden will have an increase of six thousand 
in his capital and Gary will have an increase of   four thousand in his Capital when we finally make 
income summary zero to distribute the net income   now of course both owners have to net out their 
own withdrawals into their own Capital account   so the seven thousand of Holden's withdrawals 
gets close to Holden's capital and the three   thousand of Gary's withdrawals gets 
close to Gary's capital and Holden's   capital or total owner's equity at 
the end of this fiscal year is 29   000 up here and Gary's owner's equity at the 
end of this fiscal period is twenty one thousand foreign something about our new friend income 
summary we all know income summary is where   we move all of the accumulated income for the 
fiscal year and all of the accumulated expenses   of the fiscal year this way the income and expense 
accounts don't accumulate into the next period and   we can isolate exactly how much income and 
expense came in and out during a particular   time period and the income summary will give us 
our net income but you should know that income   summary is a temporary account the account that 
we actually use as a permanent account to show the   difference between income and expense and a prior 
accounting period is called retained earnings   so retained earnings will still show the 
difference between income and expense in but only   in a prior period and that's how QuickBooks works 
so for example if you look at reports dated in the   current period you will see the income and expense 
and you will not see them in retained earnings   however if you look at a report dated 
after the fiscal year end you will not   see any income or expense accounts listed 
instead you will see the net amount as net   income or at least the accumulated net 
income in the retained earnings account   for example if Holden's fiscal year ends on June 
30.

Any report dated before June 30 will show   this the income in the income accounts the expense 
and the expense accounts and nothing in retained   earnings however any report dated after June 30 
will show that you have zero income and expenses   and the net amount of net income has been moved 
to retained earnings now let's check how well we   understand all of the end of month procedures 
by doing this Hands-On end of month project the end of month procedures that we just learned 
were adjusting entries after all the transactions   have been recorded during the accounting cycle 
and then after the adjusting entries we learn how   to make closing entries and after the closing 
entries were mostly done we then were able as   part of the closing entries to distribute the 
partnership income now you only saw a brief   overview of these three steps in the end of the 
month procedures but let's see if you can figure   out what to do and finish with the correct numbers 
and the project you're about to try you see The   Specific Instructions start with asking you to 
download the Excel file that's in the resource   tab of this video and everything you need is in 
the downloadable you can easily access the files   for all of these projects by clicking show more 
just like you did before to reveal the table of   contents but if you look all the way down at the 
very bottom of the description field you will see   that there are links to each of the project sheets 
for each of the projects and if you just click on   any one of the links to download them all you 
have to do is Click where the link is for this   particular exercise and you should be given an 
option to choose which folder to download the   file too so what are The Specific Instructions of 
this project well first use the end of the month   information that's given in the Excel file to make 
the adjustment in the T accounts that are given   then record the closing entries in the accounts 
make a post-closing trial balance when you're   done and then compare your results to mine 
see if you finish with the same numbers by   doing all the correct steps that we learned 
about in the end of the month procedures   now what do I mean by using this file well if 
you download the Excel file says end of the month   project you see that first you use the end of the 
month information and make the adjustments in the   t account now you can see there are different 
tabs across the bottom if I click here I get   a clear description of what the end of the month 
procedures are I should probably get rid of this   so if it fits in a little better here so this is 
the information you need for the adjustments and   this is the information you need for the closing 
entries and you can even pause the video here   because there's not that much to remember and then 
just go ahead and enter them now you will enter   them here oh excuse me this is the trial balance 
actually before you do the exercise this is where   what all the beginning balance numbers are in the 
general ledger that you're given so then you will   read this information and record the appropriate 
debits and credits in this tab called the general   ledger now it's zoomed out a bit but if you zoom 
in you can see that it's set up like the previous   one where all you have to do is enter a number and 
it will do the math for you so you don't have to   stress or do any work so again you can zoom in and 
out here from the bottom if you click the bottom   right you can zoom in and zoom out and I left the 
view zoomed out so you can better see the you know   most of your accounts but if you scroll down 
a bit by using the scroll bar here you can see   I've provided every account in the trial balance 
that I just showed you every account including the   income summary account that we learned about in 
a prior video so you physically have everything   you need to record all the debits and credits 
and all of the beginning balances are already   input from the trial balance that you're given 
to set up with and when you finished compare   your trial balance to mine and I gave you a 
special sheet for you to put in the results   in your trial balance to tell me what you think 
the ending numbers are good luck and stay in touch [Music]   part four have some appreciation for depreciation 
chapter 15 what is depreciation now you may   well ask what is depreciation well the word 
depreciation is a noun and it means the amount   of decrease in value of an asset that happens 
over time the verb to depreciate is what we are   doing when we record the decrease in value of 
an asset over time you see there's two kinds of   depreciation there's the type of depreciation 
that happens when an asset is no longer needed   or desired and that's not the type of depreciation 
that we account for when we keep books and records   of a company we are instead talking about the 
type of decrease in value that happens to the   asset as you use it or use up the resource that 
the asset represents you see when an asset is no   longer needed or desired that condition is called 
obsolescence or the asset has become Obsolete and   that means that an asset is less desired and 
therefore less valuable for example you can   buy a beautiful house worth a lot of money and 
rest assure that if a week after you purchase   the house they open up a nuclear power plant just 
two blocks down the road you can be sure that the   asset value will decrease but that's not the type 
of decrease we're talking about you can't control   a nuclear power plant being built next to the 
house that you lived in for 20 years you can't   predict it regardless of how you actually use the 
house or the asset and that's the reason why we   do not use this thing called market value you see 
the market value of an asset is what people would   be willing to pay for it at any given moment and 
we know that it's volatile so we do not use the   market value of the asset when we record things 
in our accounting records you see the market value   changes but not related to the business operations 
and if there's no relationship between using the   asset and using up the value then we really can't 
record the depreciation in our records because   then when we look at the resulting financial 
statements it won't really be a reflection   of how much of the asset we used it'll only be a 
reflection of how much people are willing to pay   and that won't really help a person when judging 
how well a company is doing and utilizing their   assets to run the company and that's why that type 
of depreciation is not what we're talking about   when we record depreciating assets we 
instead use something called historical cost   only record what you actually paid for the asset 
or to extend the life of the asset that's what it   means to record assets under historical cost 
that does reflect a change in value as you   use the asset and it's the only legitimate 
way to compare financial statements between   two different time periods so let's explore 
using the idea of historical cost together   you see when an asset value is being used up 
you can picture the asset diminishing as you   use it and the amount of the asset you use over 
time becomes the expense just like we learned in   the prior video for example supplies are an asset 
at the moment you buy them because at the moment   you buy them you have something of value you can 
use into the future then as you use the supplies   the amount of supplies that gets used up becomes 
the amount of supplies expense that you record   same thing with Prepaid rent like we learned 
in the prior video when you first pay rent you   have something of value that you can use into 
the future you have the right to use the space   that you rented But as time goes by the amount 
of time that you rent it for is being used up   and the amount that's used up becomes the rent 
expense that you report on your profit and loss   now of the three examples here the clearest 
one is when supplies becomes supplies expense   you see at the moment you purchase the office 
supplies like pens and paper clips and so on   you have them you own them they are assets at 
the moment you buy them because you can use   them into the future then as you use the supplies 
the money you paid for the specific supplies that   you use is the amount that becomes supplies 
expense on the next monthly profit and loss   you see the remaining supplies still have value 
as of the balance sheet date so whatever the money   value is of what you paid for for the supplies 
that you still have should be the balance of   the asset account supplies at the end of the month 
and the amount that you report as supplies expense   is the amount you actually used during the time 
period of the profit and loss or income statement   and it's the actual amount expended or used and 
that makes for accurate financial statements that   give a true picture of what's happening in the 
business and how well it runs now this is the same   idea for fixed assets a fixed asset is an asset 
that you expect to have for more than one year   it could be things like a company car or a company 
truck or it can be the office furniture that   you buy and expect to use in the office for many 
years it can even be a restaurant that owns a big   freezer that they're going to use over many years 
to operate the restaurant the idea is all the same   it's the idea of an asset being used up over time 
and becoming an expense and the example asset or   should I say the example fixed asset that we're 
going to use in this case is a car you see we know   that a car only has a certain number of drivable 
miles that you can actually drive or use during   the life of the car and we all know that the 
more miles you drive in the car the more you use   up or depreciate the value and the expense that 
represents a fixed asset decreasing over time is   depreciation expense so it's still the same idea 
of an asset losing value over time as you use it   and the important part that we learned in Prior 
video chapters is that we record these in the T   accounts in the chart of accounts we know that the 
asset supplies represents the physical supplies   that we still have on hand and we know that as 
we use the supplies over time only the specific   supplies that we use become the supplies expense 
and the money amount of what we used gets recorded   as a debit to the supplies expense and a credit 
to the asset supplies you see we have less of the   asset supplies and that's why we make a credit 
to decrease the value and therefore the value is   lower on the next balance sheet and only reflects 
what we paid for the remaining supplies we then   of course debit the supplies expense account only 
for the amount that was actually used or used up   during the time period that the income statement 
or profit and loss is reporting on and that's the   amount that will show on the income statement or 
profit and loss and since the idea is the same we   can make t accounts that represent the car and 
depreciation expense except in this case what's   being used over time is the drivable miles of the 
car at the moment that you buy the car you see a   car only comes with a certain number of drivable 
miles that you can physically drive as you use the   car in the future to run the business and as you 
drive the miles over time whatever miles you drive   or let's say the cost associated with whatever 
miles you drive will decrease the value of the   car in your books and records and those miles or 
the cost associated with those miles will become   the depreciation expense that you report on your 
profit and loss during the time period that you   actually drove those miles using the car and of 
course as you drive the car over time there are   fewer miles available in the future to drive 
the car and that's why you would credit the   asset to lower the value exactly the way that we 
learned in the prior example and the prior video   that makes a lower balance on the balance sheet 
to represent what the car is worth when someone   looks at the value of the car on the balance 
sheet and of course the actual miles expended   or used up or let's say the cost associated 
with the miles that were expended or used   up go as a debit to the depreciation expense 
account to show the amount that you will put   on the profit and loss as the amount of expense 
associated with lowering the value of the car   but then the question is how do you record it in 
your books and records at the end of each period   Well the idea is exactly the same as what it was 
when we used supplies in our previous example   we would make a normal monthly adjustment to 
adjust for the decrease in value of the asset   and to acknowledge the amount that was expended 
during this period we would have to make a credit   to the asset account to lower the value and we 
would make a debit to the depreciation expense to   show how much was used or the cost associated with 
whatever was used up during that accounting period   chapter 16 how much to depreciate if you want to 
know how much depreciation to record you first   ask yourself how much of the car did you use and 
when we asked that question we're talking about   the money value of the amount of car you used 
regarding the miles that you're able to drive   so how do you calculate and credit adjustment for depreciation well the first 
important new phrase that we will learn regarding   finding out how much to debit and credit for the 
depreciation adjustment is the phrase useful life   you see useful life means how many years will the 
asset give service and produce value that we can   use in our business and in the case of the car 
it means how many miles will the car be drivable   and produce valuable services that the business 
can use now how do you calculate and find useful   life well first you have to figure out how much 
of the car did you use now what does that mean   well you have to use a logical comparison to 
determine during any period of Time how much   of the car you actually used and logically the 
way we do this is We compare how many miles you   actually drove this particular accounting period 
whether it's a month a fiscal quarter or a year   and we compare that many miles that we actually 
used to how many miles you could have driven if   you completely used up all of the useful miles 
in the car by logically comparing this you can   figure out how much of the car you used and then 
mathematically what's the money amount of the   car that you used during the period that's your 
depreciation adjustment so useful life you should   know is always an estimate based on past data and 
past statistics if you buy a car it's not going   to be exactly the numbers in miles they predict 
but based on past services and past information   about that car you should be able to estimate the 
useful life in Miles pretty accurately for example   for example let's imagine on January 1 of 2025 we 
purchased a car for ten thousand dollars and let's   imagine that the estimated useful life on this 
car is ten thousand drivable miles in its lifetime   well how would we record the purchase we already 
learned how to do that in Prior videos with simple   debits and credits if we paid cash then we 
would credit cash ten thousand because the   asset cash decreases and we would debit the 
car ten thousand for the amount that we paid   for the car and that would reflect the value 
of the car in our books now continuing in the   same example let's discuss the difference between 
how much we could drive and how much we did Drive   how do we find that out well we know we 
paid ten thousand dollars for the car   and we know that there's ten thousand drivable 
miles that we can drive during the life of this   car before we have to scrap it therefore we could 
consider the money value of every mile driven to   be one dollar per mile that means that the value 
of the car from the point of view of someone who's   using the car not planning on selling it the value 
of the car decreases one dollar every time a mile   is driven that's in theory that's the idea of 
depreciation based on usage so in theory each   mile you drive you would use or expend one dollar 
of the value from the original purchase that means   that we have to then use that one dollar per 
mile to figure out the monthly adjustment amount   and if we know that we lose one dollar in value 
every time a mile is driven then what we need to   do is look on the odometer and see how many miles 
have been driven since the last accounting period   so let's imagine on January 31 the odometer on the 
car shows 500 Miles have been driven during the   first month of using the car and if it's one 
dollar per mile that we figured out a moment   ago that means in theory you expended or used 
up five hundred dollars worth of car or let's   say accumulated five hundred dollars worth of 
depreciation on the car for driving at 500 miles   so then what would we do we would have 
to debit depreciation expense car for   the monthly adjustment amount and that's the 
expense that would show up on the profit and   loss to show how much of the car's value was used 
during that period and of course the balancing   credit would go towards the asset so that the 
net amount would show up on the balance sheet   as the actual value of the car reflected in 
drivable miles in other words there would be   9500 remaining drivable miles in money value as of 
the date of the balance sheet and of course five   hundred dollars of depreciation expense is the 
money value of the actual driven miles and that   would show on that particular periods in this case 
January's profit and loss as depreciation expense   now let's do a different example so the numbers 
are not as round for example let's imagine instead   on January 1 we purchased a car for fifteen 
thousand and in this case the estimated useful   life is 30 000 drivable miles in its lifetime 
so therefore the first thing we need to do is   calculate the cost per mile in theory regarding 
the purchase cost and how many miles we can use   so if we paid fifteen thousand dollars to be able 
to drive 30 000 miles that means in theory each   time we drive a mile we are using up 50 cents out 
of the fifteen thousand that we paid for the car   because the reason that we paid fifteen thousand 
is to be able to drive thirty thousand miles to   use the car for our business but what would 
be the monthly adjustment amount in this case   we know the car in this example would start off 
with a thirty thousand dollar debit balance but   in order to know the monthly adjustment amount we 
would have to again look on the odometer and see   how many miles were driven during the specific 
month that we are preparing our financial   statements for and we see in this example that 
we drove the car 1450 miles during January   and if it costs us 50 cents in value every time we 
drive the car it means we have expended or used up   725 dollars of what we paid for the car during 
January so that's the amount of depreciation   expense that we would record and again we always 
debit depreciation expense for the value that was   expended or used up and we always in theory 
credit the asset so that when we get the net   value of the asset we can see that the remaining 
drivable miles in money value as of the balance   sheet date shows up as the balance of the car 
and of course only the money value of the miles   that were driven or expended and used during the 
period will show up as depreciation expense for   that particular month's profit and loss chapter 17 
depreciation methods you see we actually learned   one way already our first example with the car 
is the example of the unit of production method   you see this method is depreciation based on usage 
you would first divide the total Purchase cost of   the asset by how many units in the useful life 
this will give you the depreciation amount per   unit like we did with the car when we divided the 
total Purchase cost of the car by the estimated   number of miles that the car could be driven in 
its useful life that gave us the cost per mile but   if it's another asset it's cost per unit you then 
multiply the unit amount by how many units were   used or in the case of the car driven during this 
specific accounting period and that would give you   the money amount of the adjustment to debit the 
depreciation expense and lower the value of the   asset that's the one that we already did and you 
can go back and look at that and apply that to any   kind of asset whether it's a car or a piece of 
manufacturing equipment or anything you needed   the second common method of calculating the 
amount of depreciation expense is called the   straight line method and it's called the straight 
line method because every year has the same amount   of depreciation for the asset this method is 
based on the time that you spent using the asset   you divide the purchase cost of what you paid 
by the total number of years in its useful life   that's the amount of depreciation each 
year if you make an annual depreciation   adjustment and if you report monthly then 
you divide the annual amount you found by 12.

And the third method of calculating depreciation 
is called accelerated depreciation it's when you   record more depreciation expense in the early 
years of the asset and less in the later years   in Accounting 101 we learned some number 
trick patterns that we use to calculate   more depreciation in the early years 
of the asset's useful life and less   depreciation expense in the later 
years of the assets youthful life   and for taxes it helps us deduct more depreciation 
expense in the early years if we choose to   and then this will help the business save on 
taxes and until until it can grow and get strong   now let's do an example of straight line 
depreciation let's imagine on January 1   we purchased a fifty thousand dollar truck 
with the estimated useful life of 10 years   of course the truck will have a fifty thousand 
dollar debit balance in the asset account after   you purchased it but what's the annual 
adjustment amount that you have to record   well if you paid fifty thousand dollars for a 
truck that you're able to use for ten years then   in theory you're using up five thousand dollars 
of the fifty thousand that you paid every year   that you continue to drive the truck so then how 
do you record the annual adjustment well of course   it would be debit depreciation expense five 
thousand and credit the truck five thousand   just like we learned in the prior example 
however that's not the proper way to record   and display the depreciation adjustment 
or the depreciation against the truck   you see of course we have to debit the 
depreciation expense account five thousand   because this shows the value that was used during 
the period and that expense will go with the rest   of the expenses on the profit and loss but the 
balancing credit does not go directly to the asset   account instead the balancing five thousand dollar 
credit goes to another account that's connected   to the truck account and instead of putting the 
credit directly to the truck we put a credit to   this account here and it's called accumulated 
depreciation an accumulated depreciation is   a t account in the chart of accounts that 
only exists to be able to hold the amount of   depreciation that has accumulated on any asset 
so you can compare it to the actual asset cost now this is your first introduction to the idea 
of something called a contra account you see a   contra account is an account that exists 
only to decrease another existing account   so these two accounts go together they must be 
shown together on the financial statements or   they mean nothing you can think of them like 
conjoined accounts where you can't have one   without the other and you must present both of 
them together so someone looking at the financial   statements can see how much you paid compared to 
the theoretical value of the amount that was used   so if you look at the fixed assets section of 
a balance sheet you will see three numbers for   every asset that you have to depreciate because 
looking at only one number is not really enough   information for people looking at your financial 
position to really understand the value of the   truck as it relates to how the company uses the 
truck for business but if you display all three   numbers together that will give the reader of 
the financial statements a whole picture of   the value of the truck as an asset in the company 
and you may well ask what happens the second year   that you depreciate well we know that each Year's 
depreciation amount is five thousand so no matter   what at the end of each year even the second 
year we have to make a debit to depreciation   expense to show the value of the truck that was 
used up during only the second year but after you   make the debit to depreciation expense again the 
balance and credit goes to the conjoined account   accumulated depreciation on the truck and that's 
why they call it accumulated depreciation because   now a second Year's depreciation has accumulated 
and that means the total decrease in value since   we purchased the truck was 10 000 against the 
fifty thousand that we purchased and at the end   of the second year the amount of accumulated 
depreciation in the account would show up in   the fifth fixed asset section as ten thousand and 
therefore if the depreciation was five thousand   more that means the second year the book value 
would be five thousand less so this shows the   reader we purchased the truck at 50 000 but ten 
thousand out of the fifty thousand has been used   as we use the truck in business and therefore the 
real value of the truck is forty thousand dollars   so simply put more accumulated depreciation means 
a lower Book value for the truck shown on the   next periods balance sheet and this was a pretty 
simple example because each Year's depreciation   was the same amount but what about accelerated 
depreciation how would you handle it in that   case well accelerated depreciation means that 
you record more depreciation in early years and   less depreciation in later years you notice the 
overall amount of depreciation is the same but   you get to deduct more expense in earlier years 
when your business might need the deduction more   so there are two common methods of accelerated 
depreciation one is called some of the year's   digits and the other one is called double 
declining balance and they're both under   generally accepted accounting principles 
when you report your financial statements   they're both very simply number patterns that 
give us a depreciation table that tells us how   much depreciation to deduct each year where the 
numbers at the beginning of the table for the   earlier years are higher and the numbers at the 
end of the table for the later years or lower   and this makes the more depreciation expense 
in the earlier years and less in the later   years there's no point in getting into them now 
they're simply Elementary School number tricks   that you can find from your textbook chapter 18. 
depreciation for taxes the IRS explains everything   the Internal Revenue Service makes available 
publication number 946 which explains everything   about how to depreciate property and in this 
publication they give charts and tables that   break down different type of fixed assets into 
categories and these categories are called class   life and if you can look up the type of asset you 
have and find what class life the asset belongs to   then you can use these columns and rows to make 
a separate depreciation schedule for each asset   you see the way it works is that some property 
falls under three-year property in that category   things like some cars but then there's other 
property that's considered five-year property   like farm equipment and so on so you would First 
Look up in the tables which category or how many   years it would take to depreciate that specific 
asset then once you do that you would then make   a separate depreciation schedule based on the 
category of that asset for example if the company   car was three-year property then you would use 
the three-year column numbers to make the full   schedule and the only reason for the full schedule 
is to be able to see how much depreciation you   will deduct for that specific asset for each of 
the years of the assets life so the numbers for   each individual tax Schedule for each asset come 
from the tables in the publication from the IRS   this is an example of three-year property and 
this is what this schedule would look like if   it were five-year property like some farm 
equipment then again the schedule for that   piece of equipment would come from the column of 
five-year property and that's what that would look   like if it cost ten thousand to purchase and 
here are two separate depreciation schedules   for two separate example fixed assets and the 
way to find Total depreciation expense for the   year would be to use the amount of depreciation 
for the specific year for each asset for example   let's imagine that this is the second year 
of using the equipment so we would look on   the second row and deduct the amount that the 
schedule indicates as the depreciation expense   for the second year for this specific fixed 
asset but let us also Imagine in this same   year that it's actually the third year using the 
company car so we would look in the row of the   third year of depreciation to determine how much 
depreciation expense we should have for the car   and if these were the only two fixed Assets 
in this example company that means you would   add them together and total depreciation 
expense in this example would be 7242.

Many companies only have one fixed asset 
account for all their assets and for all their   depreciation and if that were the case then the 
7242 would go as a debit to one specific account   depreciation expense and the balancing credit 
would go to one specific account accumulated   depreciation on all fixed assets you could 
have a separate set of uh T accounts for each   individual fixed asset but many companies lump 
them together and use the separate depreciation   schedules to keep track of them separately from 
year t part five all about merchandise inventory   Chapter 20 The Perpetual inventory system we have 
already learned how to record an income from a   service it's just one t account that represents 
the total money that came in from what we earned   in previous cases it was just one number the 
service fee and it represented the price of   the service so you previously made a credit to 
this income account for exactly what the customer   gave you however when we have merchandise that 
we're selling we still have an income account   that represents the total money that came 
in from the customer for merchandise sales   but in a case of a merchandise company we're not 
dealing with one number in the income section   we're really dealing with three numbers the 
sales price of the merchandise which will get   recorded as a credit to this income account 
the same way the income from a service got   recorded to the service income account but with 
merchandise we also have to consider how much   did the merchandise cost you when you bought it 
because the difference between the price that   you record as income and the cost that you 
pay for the merchandise will be your profit   now the most important words in this video 
are the words cost and the words price and you   have to make sure you know the difference 
between the word cost and the word price   cost means the amount that we paid to 
purchase the merchandise from the vendor   but for that very same merchandise the word 
price means the amount we received from the   customer when selling the merchandise and 
of course the difference is your profit   price Minus cost equals profit and we all 
know that but only if the goods are sold so we   therefore have to clarify our definition we should 
really say the price of the goods that were sold   minus the purchase cost of the goods that were 
sold is what really equals our profit the price   of the goods that are sold is the value that the 
customer gives us the cost of the goods that are   sold is the value of what we gave to the customer 
it's what we paid for the goods that went out   the word Perpetual means continuously changing 
that means if we're using the Perpetual inventory   method to record the sale the account inventory 
asset changes after each transaction that means   it changes after we buy the merchandise and 
it also changes after we sell the merchandise now of course in the top right here we have our 
sales income account this is very similar to   the service income account that we were using in 
previous videos you record a credit for what the   customer gives you because that's the income that 
you earned so previously we made a credit for the   price of the service when the customer paid us or 
when we earned the service income so now when we   deliver the goods we make a credit to sales income 
for the price of the goods that are sold because   that's the income that we earned and that's a 
t account just like service income however the   interesting stuff happens down here in the cost 
of goods sold account this is not technically an   expense even though it behaves like an expense and 
even though it has the same effect on income it   would go in the income section as a contra income 
account not an expense account because it's part   of the income cycle you have to buy then sell then 
you can subtract your expenses to find your net   income so that explains a little bit about this 
new account in the bottom right cost of goods sold   and now let's see how to use these accounts 
when we purchase and sell merchandise   first let's give cash a beginning balance that's 
not a transaction we're just pretending that we're   starting off with ten thousand dollars cash now 
here's our first transaction paid 300 to purchase   merchandise well we know if we pay cash is minus 
cash is credit and just like purchasing any other   asset exactly what we paid for the asset becomes a 
debit to that asset for that date so this purchase   transaction is no different than the ones we've 
learned before when we purchased other assets but   the interesting part comes here when we sell with 
Perpetual we record it twice once for the cost and   once for the price now that's a lovely little 
rhyme so let's say it again when we sell with   Perpetual we record it twice once for the cost and 
once for the price let's take a look at an example   let's imagine on January 8 we sold the specific 
merchandise that we purchased on January 1 but we   sold them for one thousand two hundred dollars 
so you can see this is the merchandise that   we purchased back on January 1.

This is the 
merchandise sitting here waiting to be sold   now if we sold it for twelve hundred dollars it 
means that the customer gave us twelve hundred   dollars and it also means we've earned twelve 
hundred dollars worth of income for selling   the merchandise so what would be the debits and 
the credits well if we've earned twelve hundred   dollars worth of income for sales and we know 
that income is credit on January 8th we would   have to credit the sales income account for the 
one thousand two hundred dollars that we earned   on the other hand the customer gave us one 
thousand two hundred dollars so we have no   choice but to debit cash on January 8th 
for the one thousand two hundred dollars   so this first step in credit looks just like 
it looked when we sold the service credit the   income and debit the cash however there is now 
an extra step for this same January 8th sale   for this January 8th sale we also have 
to credit inventory because this three   hundred dollars of inventory is no longer 
here it went out so we have to remove it   from inventory by making a credit of 300.

So 
then what would we debit 300 and obviously the   answer is cost of goods sold credit inventory 
for the merchandise that went out and debit   cost of goods sold for the purchase cost of the 
specific merchandise that we gave to the customer can you guess the profit from this particular 
sale of course the profit is nine hundred dollars   anybody could figure that out because it was 
only one sale watch another one let's imagine   on January 20 we purchased 500 more of inventory 
again that's the easy one we have 500 more of this   asset and on the other hand we have 500 less of 
cash so we know purchasing under the Perpetual   system is very easy debit the inventory that you 
got and credit the cash now again the interesting   part is when you actually sell let's imagine 
on January 31 we sold the specific merchandise   that we previously purchased on January 20.

And we 
sold it for three thousand three hundred dollars   well here's the merchandise that we purchased 
back on January 20 so we know that has to come   out of inventory but what should we do first well 
we've actually earned three thousand three hundred   dollars by receiving that from the customer for 
giving them the merchandise so always income is   credit for what we earned and if the customer 
gave us 3 300 in cash we have to debit cash   so the debit and the credit for the price of the 
January 31 sale is credit sales income and debit   cash but we're not finished this specific five 
hundred dollars of inventory went out on January   Thirty One so we credit inventory 500 then what 
do we debit 500 well 500 was the purchase cost of   the goods that we gave the customer on January 
Thirty One the specific Goods so here we have   the debit and the credit for the cost so we have 
four accounts changing when we make a sale credit   sales income and debit cash for the price and the 
income we earned credit inventory for the cost of   the goods that are sold and debit cost of goods 
sold now obviously at the end of the month or the   end of the period we would get the total of the 
sales income and the total of the cost of goods   sold and we would eventually put them together 
to find the profit from our merchandise operation   in this case the profit is three thousand seven 
hundred but when you're an accountant you're   not finished when you calculate the profit the 
profit is the result of the income section of   our operation we then have to subtract out all the 
other expenses that we learned about in previous   videos to get the final number the net income 
in fact sales income and cost of goods sold are   together in the income section of the income 
statement and the expenses are at the bottom   they're both in the income section because both 
buying and selling are part of the revenue cycle   and if you have a merchandise business the 
gross profit is the result of the income section   you then simply record all your other expenses 
and subtract them the way you did when you had   a service business to find your final net income 
chapter 21 the Perpetual inventory system project   let's check your knowledge and skill regarding 
merchandise transactions and will also check   your knowledge and skill regarding the 
income statement of a merchandise business   so The Specific Instructions in this project 
are to download the Excel files in the resource   tab of this video everything you need is 
in the downloadable Excel you can easily   access the files for all of these projects by 
clicking show more just like you did before   to reveal the table of contents but if you 
look all the way down at the very bottom of   the description field you will see that there 
are links to each of the project sheets for   each of the projects and if you just click 
on any one of the links to download them   all you have to do is Click where the link is 
for this particular exercise and you should be   given an option to choose which folder to download 
the file to you see The Specific Instructions are   record all transactions into the general ledger 
provided find the results of each account and   make a trial balance with the ending numbers of 
the general ledger and then from those numbers   make an income statement of a merchandise company 
from the resulting numbers in the trial balance   when you click to open the file you this is what 
the file will look like it'll say the name of it   up here and you'll have the general instructions 
in the first tab the second tab gives you the   starting trial balance the third tab gives 
you the list of transactions that you need   to read and remind you that the purchase what the 
purchase cost and the sales price of each item is   now here's the blank general ledger for you to 
physically put the debits and credits you can zoom   in or zoom out if you want to see more of them at 
once and if you click and put in a number like a   debit or a credit you will see it automatically 
adds it for you so that will save you time rather   than using a pencil and piece of paper when you 
finish make your own numbers in the final trial   balance and then from those numbers here we have 
a blank sheet for you to make your profit and loss   don't pick peek at the general ledger results or 
the final trial balance or profit and loss unless   you've really exhausted every ounce of energy that 
you have trying to get the final numbers correct   I wish you good luck and I'm here if you have any 
questions chapter 22 the periodic inventory system   the periodic inventory method is appropriate if 
you cannot keep records of specific quantities   on hand after each transaction if that's the case 
then you must use the periodic inventory method   of recording your transactions the you see with 
this method you can only Calculate cost of goods   sold when you are ready to report your profit and 
loss and the rest of your financial statements   you don't calculate it in the accounts like we 
learned with the Perpetual method you instead   calculate the cost of goods sold right on the 
income statement now what am I talking about   well the profit and loss of a merchandise company 
has sections and subsections the numbers are in a   relationship to each other and cost of goods sold 
still means the same thing but you can only find   it at the end of the month or the end of the 
accounting cycle when you're ready to report   your numbers so what did we already learn about 
the profit and loss of a merchandise company well   we know that we first calculate how much money 
came in from the customers for the merchandise   we gave them and common sense says we then 
subtract what we paid for the merchandise   that we gave the customer and the amount that we 
paid for the merchandise we gave the customer is   the cost of the goods that were sold and if we 
subtract them out then we get our real profit   from buying and selling the merchandise now most 
of you remember this from your elementary school   days but when you find your gross profit from the 
merchandise you're not really finished you still   have to subtract out operating expenses and any 
other service you needed to pay for in order to   be able to buy and sell to get your real final 
result which is the net income and hopefully   you've seen this before in your accounting class 
or in your travels and hopefully this structure   makes sense to you and should be very simple 
however you should know that when you use the   periodic method of inventory cost of goods sold 
is comprised of four separate elements you see you   can't have a t account for the cost of goods sold 
if you have too many products to keep track of   so you do a series of logical steps to find and 
calculate the cost of goods sold first you start   with beginning inventory which is a t account 
in the general ledger that doesn't change as you   purchase merchandise if you are using the periodic 
method instead when you purchase merchandise all   of your purchases gets recorded in a t account 
called purchases and then of course logic suggests   if you add what you had in the beginning inventory 
plus your purchases you would then get a number   that represents the goods that were available 
for sale and the last logical step to back into   finding what the cost of goods sold is is to 
subtract out your ending inventory and then   once you get that result then you have the cost 
of goods sold to put into your income statement   subtract from your sales income to find your gross 
profit and these are the four elements of the   logical steps that you would do at the end of the 
month and show on the income statement in order to   show that you have an accurate cost of goods sold 
and therefore an accurate gross profit and so on   but why is it that the cost of goods sold steps 
seem a little challenging it's only because you're   using the words in accounting instead of using 
Common Sense words think about what cost of goods   sold is it's what we paid for what went out it's 
what we paid for what we gave the customer so all   we have to do is use different words and it will 
be clear and Common Sense exactly what cost of   goods sold is instead of using the words beginning 
inventory let's just say we had some because   whatever your beginning balance of inventory is 
recognize uh you know represents what you had at   the beginning you had some but that during the 
month when you record your purchases you bought   more so instead of calling it purchases call it 
how much more you bought and logic dictates if   you add what you had at the beginning plus what 
you bought then you get a number that represents   what you could have sold so Goods available for 
sale is the total that you had the ability to sell   we then subtract what we did not sell and logic 
dictates if you subtract from what you could   have sold the amount you did not sell then 
the number that remains is what you did sell   so logically speaking Goods available for sale 
which is what you could have sold minus ending   inventory which is what you did not sell equals 
what you did sell and what you paid for what   you sold is the cost of goods sold so here's a 
practical example from an Amazon online store   keeping in mind that any company with too many 
different types of products and large volumes   can cannot keep track of the cost of goods sold 
for each sale and just like a supermarket they   must count the inventory after each period that 
they want to report their numbers and use the   periodic system so here's the Practical example 
you cannot know your profit unless you know how   many items were sold during the month and how much 
money of item costs were sold during the month in   other words how much you paid specifically for 
the products that you gave the customers most   Amazon sellers do not keep count of the quantity 
of items after each sale or after each purchase   so how do you know how many items and how much 
money of inventory was sold during the month   the solution is to use old school elementary 
steps to basically back into the amount of   cost of goods sold during the month so what 
does that mean well let's think of it from   an elementary school's point of view let's 
imagine at the beginning of the month you had   some inventory for example you had 10 items then 
let's imagine during the month you bought more and   you kept track of how many you bought during 
the month and that was 20 items now you don't   know exactly how many you sold because you did 
not keep quantities of that which were sold but   what you can do is physically count the ones that 
remain and are with you at the end of the month   and if you count the amount at the end of 
the month in this example and you have five   items left over how would you find out how 
many actually were sold and went out well   in order to know that you would have to be able to 
add the first two numbers together in other words   you would have to find out how many you were able 
to sell and then of course you would subtract out   the amount that you did not sell which is the 
amount left over so if we were able to sell 30   and we did not sell five then how many did we 
actually sell and of course the answer is 25.   logically if we had some for example in this 
example we had 15 at the beginning of the month   then during the month we bought 45 more well we 
don't know how many were sold but we know we can   physically count the ones that are left over at 
the end of the month and in this example there   were 25 left over so remember in order to find out 
how many you did sell the first step is finding   out how many you were able to sell and in this 
example you were able to sell 60 and had 25 left   over so in this example how many did you sell well 
you sold 35 because 60 that you were able to sell   minus 25 that you did not sell because 25 was left 
over logically equals the 35 that you did sell   and now we will do the same thing we just 
did but we will do it with money amounts   instead of counted quantities for example 
let's imagine at the beginning of the month   we knew we had 250 dollars worth of 
merchandise inventory that means we   paid 250 dollars for the items that were 
sitting here at the beginning of the month   then during the month we kept track of 
how much we paid to buy more inventory   and therefore we know the money amount that we 
were able to sell we could also check the amount   left over in ending inventory and figure out what 
we paid for that so we know the money amount of   what remains and logically we could figure out 
the money amount of the goods that were sold   and we know in this example it was 300 because 
eight hundred dollars worth of inventory that   we were able to sell minus five hundred dollars 
worth of inventory that we did not sell equals   three hundred dollars worth of inventory that we 
did sell and since we paid the cost for that 300   that we did sell the three hundred dollars in this 
example is the cost of goods sold and now we will   do the same thing we've been doing but using the 
proper accounting words for example instead of   saying we had some we're going to say beginning 
inventory was 250 dollars worth of merchandise   and instead of saying we bought more we'll call 
the amount that we bought more the very important   word purchases so these are the words that we 
would use when doing accounting and calculating   our cost of goods sold now the word able is in 
the phrase able to sell so instead of saying the   amount we were able to sell the official word 
for this number is Goods available for sale   and of course instead of saying the amount left 
over we call the amount left over ending inventory   so what's the proper word for the result well 
the result is what you paid for the goods that   you sold and went out so if in this example three 
hundred dollars worth of merchandise went out then   that's what we call the cost of goods sold because 
three hundred dollars is what we paid for what   went out because in this example eight hundred 
dollars worth of merchandise is what we were able   to sell that was the goods available for sale 
500 is what we did not sell that was the ending   inventory so logically we sold three hundred 
dollars worth of merchandise and 300 is the   cost of goods sold now let's do another example 
with the proper words beginning inventory was 400.   then during the month we purchased 
350 dollars more worth of inventory   and when we physically count the inventory at 
the end we know we have a hundred and fifty   dollars worth of inventory still sitting here so 
of course the next step is to find out how much   money worth of inventory we were able to sell and 
that's the goods available for sale so beginning   inventory plus purchases equals Goods available 
for sale and goods available for sale minus ending   inventory equals the cost of goods sold and in 
this example it is six hundred dollars because   seven hundred and fifty dollars were the goods 
available for sale a hundred and fifty dollars   was the ending inventory therefore the cost of 
goods sold in this example was six hundred dollars now we need to know the cost of goods sold so 
that we can subtract it from the money that   came in in sales income to calculate the gross 
profit because Common Sense dictates the money   that came in from sales minus the cost of goods 
sold which is what we paid equals the profit on   the sales of the merchandise so how was this done 
in the old days in the chart of accounts well   the sales were recorded this way we had a separate 
account in the chart of accounts just to record   all the money that came in from sales and only 
the money amounts that the customers paid us got   recorded in the sales income account because that 
was recorded at the same time in the cash and bank   account that we used in our general ledger to 
keep track of how much money we had in the bank   so we knew if it came in and it was a plus 
to the bank account that it was also sales   income and each individual sale was recorded 
on the credit side of the sales account to   keep track of the income and the debit side 
of the cash and bank account to keep track   of how much money was in the bank or came 
into the bank account then of course at the   end of the month we would total the money that 
came in from the sale and that amount would be   the sales income that we would subtract out 
the cost of goods sold to fine the profit   so then you may ask how were purchases recorded 
well we had a separate account to record the money   amount each time we purchased inventory and of 
course that was matched to the deduction of the   bank account every time we paid for the purchase 
and in the purchases account we only put the   purchase cost we only put what we paid for the 
merchandise that we purchased and every time we   did that we put a of the money amount on the debit 
side of purchases to keep track of everything we   paid and the credit side of the cash and bank to 
keep track of each reduction to the bank account   and after each purchase was recorded in the 
purchases account during the month at the end   of the month we would get the total purchases and 
the total purchases would help us find the cost of   goods sold to be able to subtract from the sales 
income to be able to determine our profit but we   know that what we paid for the purchases is not 
exactly equal to what we pay to what the cost of   goods sold is so how did we actually find the cost 
of goods sold well we had our purchases account   and we had another account to keep track of the 
inventory which is an asset and that account   kept track of what's physically here at the 
end of one month and the beginning of another   and then of course we had a separate t account 
just to show us the amount of cost of goods sold   and what would we do well we would start with the 
beginning inventory that means that if we looked   at the inventory asset account in our chart of 
accounts at any given moment it would only show   the amount of inventory we had at the beginning 
of the month now let's just remind ourselves   what the calculation was beginning inventory 
plus purchases equals Goods available for sale   Goods available for sale minus ending inventory 
equals cost of goods sold so the first thing we   would do is remove the beginning balance from 
inventory asset and move it to cost of goods   sold we would do that by making a credit to the 
inventory asset to wipe it out because that's no   longer the inventory amount that was the amount 
at the beginning so since the number at the end   of the month is not the same we make a credit to 
wipe it out and the balancing debit goes into the   account cost of goods sold now the inventory 
asset is zero after step one now what would be   step two move the purchases to cost of goods sold 
purchases normally had a debit balance so we made   a credit to wipe it out and make purchases zero 
so that we could account for only the purchases   in each individual month and purchases will become 
zero as a fresh balance to record the purchases in   the next month and the balancing debit of course 
goes to cost of goods sold now cost of goods sold   now has this final third step the ending inventory 
will go as a decrease to cost of goods sold and we   know the amount that we physically count at the 
end which is the amount left over gets subtracted   in our little calculation so that's why it goes 
on the credit side of cost of goods sold because   it gets subtracted and of course the balancing 
debit goes into the asset account inventory so   that now is the ending inventory of this month 
and now going into the next month the inventory   account reflects what's the beginning inventory 
in the new month and now our cost of goods sold   account in the chart of accounts has every part 
of the calculation on the left left it has the   beginning inventory and the purchases so the total 
on the left is the goods available for sale and   we know that on the right side it has what's left 
over that we subtract out as the ending inventory   so when we take the total debit side of cost of 
goods sold minus the total credit side of cost   of goods sold we get the actual balance of cost 
of goods sold and in this example that's eight   thousand dollars and that's how we found out 
the cost of goods sold by managing the chart   of accounts in the days before the computer and 
that cost of goods sold is what we would subtract   from the sales income to get the gross profit from 
buying and selling merchandise after that we would   subtract our general administrative 
expenses to get the net taxability   chapter 23 the periodic inventory system project 
the profit and loss of a merchandise company has   sections and subsections the numbers on the profit 
and loss are all in a relationship to each other   and it's remembering and understanding this 
relationship that will help you learn and remember   the merchandise accounting that you studied in 
this course you see The Specific Instructions   to this puzzle are as follows download the two 
Excel files in the resource tab of this video   then use the Excel file to fill in the missing 
numbers by using your knowledge of the different   parts of an income statement of a merchandise 
business and everything you need is in the   downloadable you can easily access the files for 
all of these projects by clicking show more just   like you did before to reveal the table of 
contents but if you look all the way down at   the very bottom of the description field you will 
see that there are links to each of the project   sheets for each of the projects and if you just 
click on any one of the links to download them   all you have to do is Click where the link 
is for this particular exercise and you   should be given an option to choose 
which folder to download the file to   we know that sales income is the money 
the customers give you for the merchandise   that you give them and we subtract from that 
the cost of goods sold and we know that the   cost of goods sold is what we paid for the 
merchandise that we just gave the customer   so logically if you subtract the money the 
customer gave us in sales minus what we paid   for the cost of goods sold for the merchandise 
that we gave the customer that difference we all   know is your gross profit and we all know what 
profit from a sale means but of course we're not   finished with the income statement once you get 
the gross profit because that only accounts for   buying and selling the merchandise we know very 
well that if you buy and sell merchandise there   are additional expenses that you have to subtract 
from the profit of the sale of the merchandise to   finally arrive at the true amount of money 
that you actually made called the net income   and most of you remember this from your elementary 
school days when you did practical simple projects   however what you learned in Accounting 101 is that 
cost of goods sold actually is comprised of four   elements to get the cost of goods sold you need to 
have your beginning inventory counted last month   you have to add the amount that you that you paid 
for all the merchandise that you purchased during   the month or the period and that would give 
you a number called Goods available for sale   and what you were able to sell minus what you did 
not sell because it remains an ending inventory   then you will know your cost of goods sold 
then you will know the amount that you paid   specifically for only the items that went out 
to the customer so since these are the elements   and this is the math relationship you should be 
able to do this exercise so let's take a look at   what the sheet looks like you'll notice there are 
one two three four five six seven little puzzles   across seven little sheets in this Excel exercise 
and all you have to do is find the missing numbers   by using the math relationship you learned about 
a moment ago okay now most of them should seem   easy but if purchases is the number that's 
missing how do you figure that out how do you   figure out what purchases is when you're usually 
given beginning inventory and purchases and you   have to find the goods available for sale but in 
this case you're given the goods available for   sale and beginning inventory and you have to 
find the purchases so how do you do that well   we know that beginning inventory plus purchases 
is equal to Goods available for sale and if you   think about that for just a couple of minutes 
you'll remember from elementary school that it   follows therefore that Goods available for sale 
minus beginning inventory equals the purchases   just think about the math relationship and some 
of the puzzles you did in elementary school and   you will understand why this is true so if we 
know beginning inventory and goods available   we can find purchases purchases is equal to the 
goods available minus the beginning inventory   now again you don't have to use Excel and you 
don't have to use math formulas if you don't   know Excel just use a calculator and type in 
the number in the empty space so we used this   logic going backwards in order to find out the 
missing number now to find the remaining three   missing numbers that's easy we just go back to the 
math relationship that we learned about a moment   ago and we can finish putting in the rest of the 
numbers for example what's the cost of goods sold   well we know that it says here Goods available 
for sale minus ending inventory equals cost   of goods sold no problem Goods equal to Goods 
available for sale minus the ending inventory equals cost of goods sold just like it says 
in the layout of the diagram of the income   statement of the merchandise business now how 
to find gross profit well it says it right here   income Minus cost of goods sold is equal to gross 
profit so that's what we put we put equal sales   minus the cost of goods sold which is in B8 and 
now that's your gross profit and then of course   we look One Last Time gross profit minus total 
expenses equals the net income so gross profit this one minus total expenses which is in B10 
equals the net income so that's how you do it   you don't need to use Excel just click in the 
field and type in the number and hit enter   and just by doing these little puzzles you 
will be an expert by the time you finish   try the rest of the sheets yourself I know you'll 
be an expert if you give yourself time to finish   each sheet stay in touch good luck and if you have 
any questions please reach out to me immediately   chapter 24 the weighted average inventory system 
changing purchase costs can be a challenge when   you're trying to track your cost of goods 
sold to subtract it from your sales income   to determine your profit Purchase cost of 
items sold as you know get recorded in the   cost of goods sold account QuickBooks needs to 
know the purchase cost of the items that were   sold in order to be able to calculate the amount 
of cost of goods sold for that particular sale   if all purchase costs always stay the same then 
QuickBooks will always know how much to put into   the cost of goods sold account when you sell your 
merchandise unfortunately if purchase costs change   on new items purchased then you have different 
purchase costs for the same item in inventory   and that's the problem the problem is if you have 
different costs for the same item the question is   how does QuickBooks know which costs to use 
when you sell an item and need to find the   cost of goods sold for the items that were in 
that sale for example let's imagine on April   1 you have three apples in your inventory that 
you previously purchased for ten dollars each   now let's imagine on April 2nd you purchased 
two more apples each for twelve dollars   now here's where the interesting part comes 
in on April 3rd you sold three of them   which three did you sell they all look 
alike when they're sitting in the bunch   and then if you don't know which particular three 
apples you sold then what costs get assigned to   those apples for you to determine the cost of 
goods sold to subtract from your sales for that   particular sale that's the issue well QuickBooks 
desktop uses a special accounting method called   the weighted average method it's the average 
of all of the different costs that you paid for   the item with consideration to the quantity of 
the item after each step so let's first discuss   what a normal average is let's imagine you have 
one apple for ten dollars one apple for twelve   dollars and one apple for fourteen dollars if 
these were the three apples sitting in your   inventory then you know you paid a total of thirty 
six dollars for each of those three apples and you   know that the normal average cost for those 
three separate costs would be twelve dollars   and then you could use twelve dollars as the 
cost of goods sold for the apples that went out   however you would not normally use the normal 
average because that only considers the different   costs without considering the quantity purchased 
at each cost the weighted average method considers   quantity in the average so let's imagine 
we have one apple for fourteen dollars   one apple for twelve dollars and we have three 
other apples that we previously paid ten dollars   each now we have way more of the ten dollar apples 
so you can't just add 10 plus 12 plus 14 and   divide by 3 because you're not considering that 
most of the apples were purchased for ten dollars   so you have to factor this into your average and 
we still have three different prices but we have   more of the apples that were purchased for ten 
dollars so you can't just add them up and divide   by three and use the number 12 as your cost of 
goods sold because the real average would have to   be closer to 10 because you have way more at the 
ten dollar cost so here are the steps to finding   the weighted average so that you can assign a 
cost of goods sold to the items when you sell   step one find the total quantity well that's 
pretty easy especially if you're using a computer   step two add all the costs of all the items 
together to get the total cost and of course   step three divide by a used division divide cost 
by quantity and then you will have come up with   a weighted average for each individual apple 
that you could then use as the cost of goods   sold the very next time you sell so if this 
were the situation and we sold three apples   the cost of goods sold for that sale would be 
three times the eleven dollars and twenty cents   notice it's a little bit closer to ten dollars 
than the original Twelve dollar regular average   that we had because if we have more at the lower 
cost that tends to pull down the weighted average   now let's try a second example just to make 
sure you got it before we go over to QuickBooks   let's imagine an inventory right now we have five 
apples at 13 each eight apples at eighteen dollars   each and three apples at sixteen dollars 
each now we know that the weighted average   should be a little closer to 18 than anything 
else because you have eight apples at the 18   Purchase cost each so the total quantity is easy 
to calculate and the computer will give you that   but this is displayed a little differently so 
how would you get the total cost five apples   well what you would have to do is find the cost 
of each separate purchase and add it together   so for the five apples that you purchased at 
thirteen dollars you would multiply and find   those five apples cost you sixty five dollars to 
buy for the eight apples that you purchased at   eighteen dollars each those eight apples cost 
you a hundred and forty four dollars and for   the three apples that you purchased at sixteen 
dollars each they cost you forty eight dollars   so these apples together in total cost you two 
hundred and fifty Seven dollars and there's only   16 of them so then when you divide you come 
up with a result that's sixteen dollars and   six cents and that is the weighted cost of 
each unit the weighted average of each cost   and it would be that number sixteen dollars 
and six cents that you would multiply by   the quantity whenever you sold to find the 
cost of goods sold for that particular sale now let's see this in action in our QuickBooks 
file right now in our inventory if you've been   following along properly you should have 273 
apples physically available for sale and your   report should show that you paid ten dollars 
to purchase each of those 273 apples worth 2730   altogether so what if we purchased a hundred more 
apples but we purchased them at twelve dollars   each what would happen well what would be the 
new cost per Apple that QuickBooks would give us   right now we have 273 apples at ten dollars each 
making 27.30 for the money amount of our Apple   inventory if we bought another hundred apples at 
twelve dollars each that means we'd be paying 1   200 more for those hundred additional apples and 
we know the total quantity after that purchase   would be 373 and we know the total Purchase cost 
of all apples after that purchase would be 3930   therefore the weighted average per Apple would be 
10.54 so if we recorded this purchase QuickBooks   would then show us the new unit cost per Apple in 
the report that we just show showed a moment ago   but it would not say ten dollars it would say 
10.54 cents and that means that any subsequent   sale would have 10.54 cents assigned to the cost 
of the apples to calculate the cost of goods sold   for that particular sale so let's record that 
purchase let's imagine on May 2nd 2019 we paid   Sam's Farm twelve hundred dollars for ten Apples 
uh basically 100 apples twelve dollars each well   it's very simple banking write a check and 
we said that was May 2nd of we're doing 2019.

Might as well do it right we bought it from 
Sam's Farm and no we're not using a past   purchase order and yes we're still writing 
a check don't worry about those two pop-ups   but do not fill in the money amount go to the 
items choose apples and the quantity is a hundred however we are changing the purchase cost from 10 
to 12. now it's going to ask you should we update   with the new cost no because this might just be 
a fluke who knows or you might want to say yes if   you really feel that it's a permanent change but 
the point is we're buying a hundred apples for 12   each and we're paying Sam's Farm one thousand two 
hundred dollars now after we click save and close   we're going to open the inventory valuation detail 
haha the new cost for apple as of May 2nd is now   10.54 that means when we sell apples right now 
the amount of apples or the quantity of apples   that we sell will be multiplied by 10.54 in order 
to calculate the cost of goods sold so let's sell   with the new cost on May the 4th we sold 10 apples 
to candy and received cash let's talk about this   the sales income will still be 500 because the 
sales price each apple is 50 and we're selling   10 of them so 500 is coming in how much will be 
the cost of goods sold how much did how much does   QuickBooks say that we paid for the apples that 
for the 10 apples that we just gave candy well   QuickBooks is going to tell us that we pay 10.54 
for each of the 10 apples that we just gave candy   and therefore if we're selling 10 of them that 
means 105.40 is the amount of cost of goods sold   for that sale let's see if that's what QuickBooks 
does we click sale receipt and change the date to   May the 4th be with you now we're selling to 
candy and we're selling her apples now the   sales price certainly didn't change so if we're 
selling 10 apples we know that's 500 in income   but after I click save and close I can 
open the trial balance and I can see if   I go to sales and double click the sales 
number yes 500 in income for sales however   if I go to the cost of goods sold account and 
double click and go down to the most recent sale   receipt here on May the 4th you can see that the 
amount of cost of goods sold for that sale that we   just recorded is exactly the number we expected 
a hundred and five dollars and 36 Cents [Music] thank you foreign the first in first out inventory system also known 
as fifo in order to know the gross profit and net   income of our merchandise business you must have 
an accurate calculation of the cost of goods sold   you must properly track your purchase cost 
of all items that were sold as well as items   still on hand there are three acceptable 
accounting methods to track your perch uh   products changing Purchase cost the accounting 
method that QuickBooks Online uses to track   changing Purchase cost is called First in 
first out also known by the acronym fifo   first in first out assumes the items of the same 
type are sometimes purchased at different costs   when selling the items the accountant or the 
bookkeeper does not know which specific items   were physically given to the customer in that 
sale as you know all apples look alike even   though we paid a different Purchase cost for the 
different apples that are sitting in our inventory   some of the apples you gave to the customer 
were purchased at one cost and the rest of   the apples that you gave the customer were 
purchased at a different cost and you don't   know which ones were purchased at which costs all 
you did was grab the apples and give a bunch to   the customer for the sale therefore you cannot 
know for sure the purchase cost of the goods   that were sold because you don't know which 
cost you purchase the apples that were sold   so what do you do well fifo assumes that the 
very first items in this example apples that were   purchased were the first ones to be sold so if you 
know the cost of each purchase then you can assign   the cost to the ones that were sold for example 
let's imagine we start off with four apples in our   inventory that we paid ten dollars each to buy now 
if we sell two of them we know the cost of goods   sold is twenty because we know for sure we pay ten 
dollars each for the two apples that just went out   but now we buy two more and we pay twelve dollars 
each for the two new ones that we just bought   so now after that if we sell two of 
these do we know the cost of goods sold   well it depends on which two did we sell if 
we sold the two red ones we know the cost of   goods sold would be twenty dollars each because 
we know we paid ten dollars for each of them   but if instead we sold one red and one green 
that means we sold one for ten dollars and   the other one we paid twelve dollars for 
so in the second example if we sell one   of each the cost of goods sold would instead 
be twenty two dollars for that very same sale   fifo assumes the first ones in were the first 
ones out and the red ones came first so which   two did we sell according to fifo according to 
fifo we sold the two red ones and in our first   example the cost of goods sold for that 
first sale would have been twenty dollars   but now let's imagine we buy two more and we 
pay fifteen dollars for each of the two new   apples that we just bought now in the next 
sale let's imagine we sell three of these   apples so there are four in front of us and 
we sell three well which three did we sell   the green came first and fifo says first in 
first out so we sold the two twelve dollar   ones so so far that sale is up to twenty four 
dollars in cost of goods sold but we didn't   sell just those two we sold three so we need 
to sell one blue one and that means that adds   an additional fifteen dollars what we paid for 
the blue one and that gets added to the cost of   goods sold for the sale so for that sale of those 
three the cost of goods sold would be 39 dollars now we'll try examples with larger numbers and 
if you need to pause the video to do some math   calculation on a calculator or Excel just 
to verify what we're doing that's fine or   you might want to watch the whole video 
and then the second time around that you   watch it pause and verify the numbers 
that we're calculating are correct   so let's imagine we're starting in inventory 
with 150 apples that we paid ten dollars each   now let's imagine we buy 200 more 
apples and we paid 13 for each of them   well that's fine we now have 150 at 10 and 200 at 
13 and you could multiply and figure out what the   cost of inventory asset is however let's imagine 
now that we sell 175 apples remember the first   one's in or the first ones out so if red was first 
and we sold 150 apples that means all of excuse me   red was first and we sold 175 apples that means 
that all 150 apples at ten dollars each are sold   and we didn't have enough from the ten dollar 
apples we actually have to have 25 of the 13   apples to make the 175 for the sale so we're 
going to also take away 25 from the 13 apples   so that after this sale we're left with 
only 175 apples that we paid 13 for each of   them and multiplying 175 times 13 would be the 
inventory asset cost of apples after that sale so we now have 175 apples at 13 
each remaining in our inventory   but what was the cost of goods sold for that 
sale well we sold all 150 apples that were   purchased at ten dollars each so that contributed 
fifteen hundred dollars to the cost of goods sold   and then we needed to add another twenty 
five dollars to make the total 175 apples   for the sale and we paid thirteen dollars for 
each of those so that contributed 325 dollars   to the cost of goods sold so the cost of goods 
sold for that particular sale was 1825 dollars QuickBooks Online is keeping track 
of these numbers behind the scenes   there is no report that shows the breakdown 
of the purchase cost of each item on hand   the inventory valuation detail can help you figure 
this out but you have to look carefully at it it's   not always clear so if we go now to QuickBooks 
online and we go reports inventory excuse me   excuse me inventory valuation detail let's scroll 
down to bananas and let's use bananas for our real   life example I'm going to stretch this a bit here 
you can see that right now on hand we have 280   bananas and we paid two hundred dollar excuse 
me we paid twenty dollars for each of these   280 bananas and that's why the cost specifically 
the asset cost of just bananas is 5600 right now   so the inventory report before we buy bananas at 
a different cost is showing right now we have 280   bananas at twenty dollars each now let's imagine 
on January 25th we purchase 300 bananas from Sam   and we pay twenty two dollars each well if we 
do that what will be an inventory we'll still   have 280 bananas at twenty dollars each 
and then we'll have another 300 bananas   at 22 each so let's go ahead and record 
that in the top left click new expense this is January 25th of 2020 we bought from Sam's Farm oh don't forget 
that we're paying from cash don't forget we're   paying from cash and by the way let's close 
this because this is not related to any prior   transaction so we're paying from cash and bank to 
to Sam's Farm on January 25th product and service   is bananas and the quantity is 300 and this is 
the first time we're going to change the rate   the rate is twenty two dollars instead of twenty 
dollars now look what happens when we click save   and close at the bottom of the inventory 
valuation detail it's not exactly clear   you have to look closely we had on the 22nd we 
had 280 bananas that we paid twenty dollars each   now we bought an additional 300 
bananas that we paid 22 dollars each   now the quantity on hand is now 580 
bananas where 300 of them we paid 22   and 280 of them we paid 20.

So it's not laid 
out as clearly as it is in my little PowerPoint   but basically we have 280 bananas that we pay 20 
each and we have another 300 bananas that we pay   22 each now here's where it gets interesting on 
January 26th we sold for cash 400 bananas to candy   now if we sold 400 bananas which ones did we sell 
remember red was first so that means we sold more   than the 280 that means we sold all of the 280 
at 20 each that went out as part of this sale   but you see we didn't sell 280 we sold 400. that 
means we need to take another 120 bananas from the   bunch that we bought for 22 dollars each and 
if we bought 300 at 22 each and we needed to   take another 120 bananas out of that bunch to 
complete the 400 quantity sale that means that   if we that means that what's left in inventory 
after this sale will be a hundred eighty bananas   at 22 each that's what will be left in inventory 
after the sale because we had 300 of those 22   dollar bananas but we had to give up 120 of 
them as part of the sale with the other 280.   so let's take a look and write what's 
left will be 180 at 22.

Let's take a   look at what happens when we make that sale 
so that was click new and go to sale receipt   okay because the date was January 
26th and the customer was candy   and the item that we sold her was bananas and the 
quantity that we sold to her was 400. now again   it's you know don't worry about the sales price 
we're focusing on the purchase cost but what we   should have left in inventory is 180 bananas at 
22 dollars each so let's go ahead and save this   now scroll down to the very bottom scroll down 
to the very bottom you can see that what's   left in inventory is a hundred and eighty bananas 
that's the ending quantity on hand after the last   transaction 180 bananas and they're 22 dollars 
each and if you multiply the 22 times the 180   that explains the asset value 3960 but before we 
look at anything else let's ask this question what   was the cost of goods sold for that sale well all 
of the 280 bananas that were twenty dollars each   were given as part of that sale so five thousand 
six hundred dollars was that part of cost of goods   sold and we needed to take 120 of the twenty two 
dollar bananas to make a total of 400 for the sale   so 120 bananas that we pay 22 each adds 
another 2640 to the cost of goods sold   so the cost of goods sold for that sales receipt 
was eight thousand two hundred and forty dollars   you can pause the video to check the math but 
let's do this if I double click this sale receipt   and then I click on more and go to transaction 
Journal you can see that the sales price you see   they break it up all crazy they break up the cost 
of goods sold into pieces so it's really hard to   kind of determine what it is okay what you could 
do is Click reports trial balance when they they   make it harder for you to understand cost of goods 
sold if I double click this and I scroll down you   see what it does when you have a sale that has 
more than one purchase cost for cost of goods   sold QuickBooks breaks it up crazy it breaks it 
up you see 10 14 1 2 3 4 5 6.

It scattered it   to six different lines but I'm gonna show you 
something these six lines together where is it   can I do this these six lines together for these 
for this one sale receipt add up the money amount   I guarantee that it equals eight thousand two 
hundred and forty dollars so it would be nice if   it would just show you eight thousand two hundred 
and forty dollars but it doesn't it breaks it up   crazy but that's the way QuickBooks shows it so 
fifo would be challenging enough to understand   if it put everything in one line and none of the 
tech people actually gave a logical reason why   uh why it uh that it spreads it out 
like that so if you click reports inventory valuation detail go to the bottom 
where we have bananas you can see what was   given you can see on the 26th you can see that 
as part of this sale receipt 120 bananas were   given at the rate of twenty two dollars and 
that's what we actually said we said part of   this 400 banana sale 120 of those 400 bananas 
were 22 dollars each and that is showing on the   bottom line 120 of the quantity that went out 
for this sale is for twenty two dollars each   and it's all we also know that the other 280 
bananas that are part of the 400 quantity sale   we're at ten dollar we're at twenty 
dollars each so but what they did was   they scattered that across several 
lines so if you look at this these these are adding up these will all add up to 120 
guaranteed so these are the excuse me these will   add up to the 280.

So these one two three four 
five lines are the 280 bananas that we gave to   the customer for twenty dollars each and in that 
same sale one zero one four we also gave them 120   bananas that we paid twenty two dollars each so 
fifo would be a lot easier to understand if they   didn't split it up like this and to be honest with 
you I really don't know and neither do the tech   support people know why it splits it up like that 
in the report but you will only have a transaction   listed on several lines one transaction for 
several lines you will only have that in a   transaction where there's more than one purchase 
cost for the item that you're buying and selling we thank you so much for watching 
this video to the very end   we hope you'll come back and visit if you 
need any help with QuickBooks or accounting   and please support the free help for Everyone 
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