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Case Study - Worksheet Method

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Transcript

Hello, welcome back. I'm Justin light from thick numbers and in this lecture today we're going to be going over the short fill automotive case study using the worksheet method. This method is a much simpler method to use than general journals. And what it's actually going to do is help us translate the 22 transactions in the case study into the accounting equation, both the debit side and the credit side. But we're not necessarily thinking about it in debit and credit yet, we're just thinking about each side of the transaction what which account is going to be impacted either an asset liability or owner's equity account and think about it if an asset is increasing, decreasing liability increasing decreasing owner's equity can increasing decreasing and we'll try and then classify according to what the actual components actually belong. So let's start with the first question.

The first part The first transaction is that Tom injected $50,000 of his own cash to start a company. So we already know that just from that, that if you inject cash cash is going to go up by $50,000. And at the same time, if you're going to inject money into a business, well, it could be classified as a loan. But in this case, he's starting his own company. So we're actually gonna classify that share capital. So owner's equity is going to go up then CIC approval increased by $50,000.

So, cash or bank goes up share capital goes up. Second question, is it Tom spent $3,000 registering the trademark of short veal automotive with a patent attorney and paid in cash. So paid in cash, decrease $3,000 asset decreases cash cash at Bank goes down. And what would be a trademark? Well, a trademark if you recall, what are some of those assets that actually are He can't physically see it's the intangibles, right? So they're actually long term assets.

So that is actually going to increase by $3,000. Because that's actually something that we can amortize over a period of time. And at the same time paid in cash, so cash at Bank has gone down. The third question is that Tom spent a week painting and fixing up the shop and the total cost four or $5,000, that he had to pay for painting supplies and materials to set up the shop. That generally if you improve an asset, like so, you paint it or you carpet it a shop, for example, you can actually capitalize this. And so how do we pay for this now we spent, we actually paid for in cash by the looks of it.

So cash is going to go down. Now at the same time, because these items are capital in nature, and they're actually improving the asset with the long term future economic benefit, we're actually going to break Going to increase a property plant equipment and that's where those painting and improvements is going to sit. Number four, a deal was negotiated with the landlord to rent premises at the back of the local petrol station paying six months up front, we'll say one month in rent and the cost of $8,000 for six months. So let's have a think about that was any cash outlay? Yes, there was cash out light. So that's actually going to decrease cash by $8,000.

And when you pay something up in advance, well, there's a future economic benefit that hasn't yet been where cost has been incurred. This is actually going to be prepaid rent. The fifth question Tell me guys the services of a local marketing agency, which costs $2,500 times 30 days. So marketing agency costs, it sounds to me like this is something that will belong in your p&l as an expense. And so therefore, we're going to create At a negative, well, it's gonna be a negative owner's equity. So it's a negative p&l, which is a cost and the amount is $2,500.

So we've got half of that. Now, what is the other side of this? Well, it had terms of 30 days, so that implies that cash wasn't actually outlaid. However, owner's equity accounts payable was actually we've actually incurred a liability because we're going to in the future, we're going to have to pay the supplier in 30 days time. So we're going to increase our liability at the same time we're going to increase our expense for marketing. So I would write this on the side of the p&l, so you'll know what that relates to.

So the six questions set up a mobile contract, with telco costing $100 per month paid $100 for the first month. So paid implies that there's been cashed out light and telephone costs generally Profit and Loss which will decrease owner's equity telephone costs. So we're decreasing our profit and we're also decreasing our cash. Okay, seventh question. purchase supplies for $10,000 by setting up a local account trade account with supply which is due at the end of the month so something jus ended the month in flaws that are actually incurring a liability because there's a future economic sacrifice and what are we actually purchase with purchase supplies which is like an inventory so that's actually going to increase inventory. Okay, so, eight invoice customer a for $5,000 for services, servicing the fleet of 10 cars.

So if you invoice a customer, you have earned revenue. Okay, so and the amount of that is actually four $5,000 Sounds revenue and did this did the customer actually pay us? No just invoice them so that sounds like they're going to pass in the future so we're going to put that on our accounts receivable because just an invoice sitting on our on the customer's account. Number nine paid wages for stuff for the week $3,000 paid implies that you've actually paid money out and wages have we actually incurred a cost? Yes we have and if it's going to decrease our owner's equity for $3,000 wages expense number 10. invoice the customer be for $10,000 for mechanical repairs to the vehicle so invoice again. To me that sounds like sales revenue.

So that's $10,000 sounds revenue and invoiced again. isn't a cash you've been out light so it's $10,000 only account for accounts receivable. So number 11 customer a paid 5000 also they're extending invoices from a statement. So the customer pace, that's actually going to increase the cash bank $5,000 and at the same time if it's from their account, we're gonna have to decrease it off the account 12 pushes to plus $15,000 on account we've supplied eight terms 30 days, so purchase supplies, again, future economic benefit $15,000 on account counts payable, increases liability 15,000 volts. Number 13 purchase customer see made upfront payment of 1000. Those work to be completed next week.

So if a customer has made a payment, that means your cash has actually gone up. And how much was that $1,000. But the thing about this question is it says that the actual work is not Epic played it. So have we actually earned this? No, we haven't. And so we actually need to classify that as a unearned revenue, which is a liability.

And when it gets earned it will then be transferred to the p&l 14 customer deed paid $2,500 for cash for what to be performed on the car. Okay, so I'll say for what performed on the car, so the work has actually been performed. They paid cash, the $2,500 has come into our bank account, and the work has been performed. So we're actually going to call that revenue and that increases owner's equity. Sales Revenue 15 Tom purchase a new crane lifts for 10,000 those 50 simple 50% was paid cash and 50% through a new bank loan. So if you purchase a new crane lift, what is that classified as well?

Is it that sounds like something that will be used for the long term? It's something is probably a non current asset. So really, to me, it looks like a property plant equipment purchase 50% was paid as cash. So that means the cash has gone down by half of that $5,000. And the same time we've actually got a bank loans to the other 50% of it. So that's actually an increase our liability for $5,000.

Okay, so number 16, Tom paid electricity bill for 1250. Now, the fact that it's been paid would indicate the cash has actually gone out the bank, so we'll put that to cash. And now, if we received electricity bill previously, then this would come out of accounts payable because we would have previously recorded this on accounts payable. However, we haven't ever done this in the past. So we're actually we've actually incurred a cost for electricity. And we're going to need to put this for expenses for 1250.

That's a decrease owner's equity. And that's electricity. expense number 17 received a water bill for $250 June next week. So there's nothing here indicating the cash has actually gone out if something's due next month means that we're gonna have to pay that next month. So that's going to increase a liability for $250. And the thing is, relates to the current period because we've already been billed, so therefore there's been a cost incurred so it's actually going to decrease our owner's equity and it's going to be a water water expense.

Okay, so number 18, we need to organize for O'Brian glassworks to fix the Smash window in the shop and invoice for $500. So, if we've actually been invoiced, that means that we've incurred some kind of cost that we're going to have to pay in the future. So accounts payable go up. And at the same time, we've actually looks like we've got to fix the window in the shops therefore I've got some repairs and therefore repairs is always an expense and therefore As it decreased the owner's equity $500 for repairs and maintenance. Okay, so number 19 paid wages for staff for the week $3,500 so paid $3,500 cash out and the staff have already worked so therefore paying them and therefore have incurred a cost, therefore, our owner's equity go down we've got wages expense 20 paid amenities for staff room for $300 so we've paid so therefore $300 out now what are amenities amenities, General expenses for, for staff to I guess things like you know, tea and biscuits and, and things around the around the workplace.

So that's really a cost of doing business. So therefore we're going to the costs always go to p&l, so $300 This will come out as amenities expense. Okay, so question 21 pay to play for $10,000. Now, if you recall back to question seven, we actually purchase some supplies and put it on the accounts payable. So what's happening now is we're actually paying them. And so you can see from the question that we're actually paying cash, the cash is going to come out for $10,000.

And then we're actually going to actually pay out of our accounts payable. And what that's actually going to do is it's actually going to offset this effect of when we had a liability, so there is no liability left anymore for that particular supply. There you go. That's how you pay a supply. Okay, so question 22 work has been completed for customer c plus further $1,000 for other charges. So if you recall, customer C was question 13, where the customers actually paid up front, but the revenue hasn't been earned.

So now What we're saying is the work has been completed. So if you've completed work means you've earned revenue. So that's actually going to decrease your unearned revenue. Because now earned, and it's going to actually be revenue, sales revenue. However, this question also mentions that this further $1,000 for other charges. So, to me that indicates they originally paid a deposit, but now they've actually spent $2,000 on repairs to the car, not $1,000.

So it's actually that's actually going to go up to $2,000. And the difference when you can only assume them either paid cash or there's an account for it, but we're going to treat this as a cash. And what they've done is the customer had to pay a further $1,000 of cash. Sorry, that's actually a positive Paid further $1,000 of cash, reduce the liability of unearned revenue. And we've actually earned $2,000 worth of revenue. Okay, so we've now completed all of the transactions, the 22 transactions, there are still further adjustments to be made to this, but this is the initial, these are all the initial transactions that we've translated into the CAD equation.

Now what you should, what you should do from here is I've actually removed all the pluses and the minuses here, just to make to be able to add this but what you can then to his credit, some at the bottom of each of the rows, and you can actually then total every single account. And what that actually will do is it can actually give you all of the closing balances all the closing balances for every single account. So you've got a cash bank account your accounts receivable, supplies, prepaid rent, property, plant equipment, intangibles, accounts payable unearned revenue, bank loans share capital. Those there are no retained earnings, because as you know, that just started this business. And we do have a profit of $8,100. And if you recall in my previous lecture talking about retained earnings, that retained earnings is made up of all your accumulation of profits, less any dividends.

So, once we actually transfer this profit to the balance sheet, because this is this really separates, just here, it separates the profit and loss that's reported on the profit loss statement. And everything else is on the balance sheet. And so when we transfer this profit into retained earnings, this balance on the balance sheet will be reported as $8,100. But in saying that, we do have to still make adjustments and so That could actually end up changing this profit number. So we're not going to do that as yet. So I think a lot of you will find this method quite easy to follow and quite easy to use in practice.

However, it's not actually the, the method that's used by accountants in practice. The method that I'm going to go through in the next lecture, we'll be around general journals and T accounts. And that's actually the the proper method that accountants use in practice. It is a lot more, it's a lot more time consuming to put together so it will be a slightly longer lecture. However, it is the way that accountants and the way that accounting systems are set up to actually transact these transactions in practice in saying that this is a very useful method for introductory accounting and a way for you to understand and get to a profit figure and balance sheet position very, very quickly. So we're going to go into the next lecture and we're going to be talking about the general journal takeouts and then we will come back to looking at it adjustments in a future lecture as well.

And then we'll start talking about balance sheets and profit and loss. Okay, so thanks everyone, and we'll see you in the next lecture.

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