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Business Accounting Bookkeeping The Ultimate Accounting Refresher Course The Accounting Equation - The Basis of Double Entry Bookkeeping
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Transcript

Hi, and welcome to this lecture today. My name is Justin light from think numbers. And in this lecture we're going to be talking about the top 25 transactions, we will start off by talking on the asset side, and actually going through all the typical kinds of transactions that would occur with the assets. And looking at both sides of the equation, the debit and the credit side of the transaction. And as part of this, what I'm going to do is I'm going to go through each of the four steps of understanding transactions that we talked about in the previous lectures, and actually apply this to examples of different asset transactions. And you'll actually start to understand how it works and how I think about things.

And initially, I will take this quite slowly just so you can really try and learn and absorb this. However, as time goes on and you've practiced this for more, you'll find it comes a lot more natural to you. And I think the encouraging thing to understand about understanding double entry accounting and debits and credits is once you've learned these 25, this is this would cover, I would say 90% of the situations in accounting, in business in all kinds of businesses and different industries. And the actual description of the type of expense or the type of account may be a bit more specific to the business, but the actual nature of how the accounting transaction works will be one of these 25. Alright, so let's get started. So, the first transaction we're going to look at is a cash sale.

So the four questions that we want to be looking at is is a cash is cash being affected? What is the nature of the transaction? Are there any future benefits, future sacrifices or negative future benefits? And was anything earned costs incurred or assets consumed? So I think the first thing to ask is is caching effective? Well, in this case, yes.

Okay. Because it's a cash sale cash is being affected. So therefore we know that an asset is being affected because we've made a cash sale, which means cash is flowing into the business, and therefore the asset has increased, which means it's a debit. Okay, so then what is the nature of this transaction? We may ask? Well, in this case, we're making a sale, right?

We've made a sale to a customer. So that could almost give you a clue of what the other side of the transaction is. If we've made a sale, then you could argue that well, owner's equity is increased, therefore, this is sales revenue. So that is quite an easy one to actually identify. However, if we if we continue to go through the other two steps was that were there any future benefits future sacrifices or negative future benefits? Well, in this case, yes, there was a future benefit because cash at Bank is actually considered a future benefit from a business perspective.

So if the first two questions didn't help you identify the caches or acid is being affected through cash. Then the third question, we'll we'll certainly flag it up. And then the fourth question was was anything earned, costs incurred or assets consumed? And yes, we had a revenue because we've made a sale. So when we look at T accounts, and how they're affected, you have a cash at Bank T account. And you have a sales revenue T account.

And the cash at Bank gets debited because the asset increase, so debits on the left credits on the right, so the cash or bank gets debited, and the sales revenue gets credited. Alright, so this is a simple cash. So let's say that we have a transaction where you've got a customer Cylon account, which is actually a credit side. So let's get through the steps in it when you have a credit sale, which is a customer account and credit is cash being affected, which means in this case, no, it's not because you've invoiced the customer, but the customer hasn't actually paid you, in which case cash won't be affected. So therefore, let's leave the cash account out. What is the net nature of the transit Well, in this case, it's probably very similar to the first transaction of cash sale because we're actually making a sale to a customer.

So we could almost say, well, owner's equity will be increased and sales revenue will go up, sales revenue is going to go up, which will cause owner's equity increase. Let's keep going. So is there any future benefits feature sacrifices or negative future benefits? And in this case, yes, there is a future benefit, because we're going to receive cash from a customer sometime in the future depending on on the terms of the invoice. So in this case, the asset has gone up, which is debited and the accounts receivable account is the account that is going to contain the future benefit. And the fourth question was anything around costs incurred or assets consumed?

In this case? Yes, we've earned revenue because we've invoiced that customer for service performed or good delivered. So in this case, owner's equity is increased and therefore to sales revenue and from a T account perspective, we have a accounts receivable account and we have a sales revenue account, which is similar to the first cash sale transaction. The main difference is that we have an accounts receivable asset account now because the customer will pay us in the future, and that gets debited, and the sales revenue gets credited. So the third transaction for assets, let's say, for example, you have a situation where you've decided to pay your rent up front in advance. And there are various reasons why you might do this.

But let's say you're starting a new business, and you've leased a new premise. And the landlord has often offered you a an incentive by paying upfront, so therefore you decide to do this. So let's think through this. So is cash being affected? Well, if we've paid our rent in advance, well, we've paid something so therefore let's cash out of the business cash out to asset down, right. What is the nature of the transaction of war I've actually paid our rent in advance.

So if you recall the definite Have the various different accounts. If you pay something in advance, that's actually considered a prepayment. Is there a future benefit? Yes, because we're paying something in advance for for rental that we're going to use in the future so that there is a future benefits, therefore that's an asset. So we already know that half of this transaction is a prepaid rent account, because the asset is going up. And then was anything earned costs incurred or assets consumed?

Well, in this case, no, nothing has actually been earned. We haven't heard any costs yet because we haven't actually used the rent, because we've only paid it upfront for the future. And no asset has been consumed because we haven't actually used the prepayment. So what's actually going to happen is the cash is actually going to go down because we've actually paid our rent in advance. What's going to happen here is that the prepayment account and the cash or bank account, the prepayment account will get debited. The cash at bank account will be credited.

Okay, so the next transaction, let's say that now one month has actually passed into that lease where we've rented the premise and we paid up front. So one month has actually passed. So is cash being affected? Well, no, it's not being affected because we've previously paid this upfront. What is the nature of this transaction? Well, we're actually using some of the rent, so we're actually consuming some of that rent.

And it's not no longer going to be valid in the future, because we've used one month out of the three months. Is there a future benefit future sacrifice or negative future benefit? In this case? No, there's no future benefit of this transaction. If anything, it's going to consume some of the assets. So the fourth question we asked was anything around costs incurred or assets consumed?

Well, in this case, yes, costs have been incurred, because we've actually utilized some of the some of the prepayment and also the pre payments also been consumed. So in this case, the asset actually goes down because you've actually reduced the pre payments. If you started off with free months in the previous transaction. We've now got two months in the future. And we're actually going to owner's equity equity is actually going to decrease because our rent expense will increase. Okay, so remember, owner's equity, what drives owner's equity up is profit.

And what drives owner's equity down is the expenses. Okay, so owner's equity will decrease and how that will actually look from a T account perspective is the prepayment rent is an asset account, it will get credited in this case previously, it was debited in last transactions and that's credited to reduce it by that one month and rent expense actually goes up. Therefore it gets debited because owner's equity is decreasing. Next transaction is we actually purchased some inventory on account. Now when I say account, I mean a supplier account where they give you credit terms to pay it within a certain period of time. So is cash being affected in this transaction?

No, it's not because we're actually putting it on account. We're not actually transacting any cash. So therefore that doesn't affect that cash. Thank you Now, what is the nature of this transaction or actually purchasing inventory? So that's in the nature of what this actual transaction is, is about? Are there any future benefits future sacrifices or negative future benefits?

Will Yes, there is a future benefit because we've, it's we've actually got stock that we can sell into the future. Is there a future sacrifice? Well, yes, there's also a sacrifice because we will have to pay our supplier sometime in the future. And was anything earned costs incurred or assets consumed? Well, nothing's been earned. No costs have yet been incurred because we haven't sold any of the inventory and the asset hasn't gone down because we're only just purchasing the asset.

So in this case, the inventory goes up by asset increasing, the liability account also goes up. So as you recall, if an asset increases, it gets debited and if a liability account gets credited, so in this case, you have an inventory account accounts payable account, the inventory account increases, it gets debited and the accounts payable count increases the liability which gets credited. So next transaction is we actually bought equipment for cash. So this this could be any kind of property plant equipment, furniture, fittings or anything that you bought a business that is capital in nature. And what will determine if it's capital, the nature will generally if it's going to last you more than 12 months and not be consumed within that 12 month period, then you can put it on your balance sheet as a property plant equipment. And you can depreciate it over a period of time.

So in this case, is cash being affected by this transaction? Yes, it is. So we know that cash is going to be one of the accounts that will go down because we're actually purchasing and buying equipment. So that will already tell you half of the transaction. What is the nature of this transaction? Well, we're buying equipment.

So if you think of what is equipment equipment is an asset. is a non current asset of property plant equipment account. So that could already determine what the two transactions are that property plant equipment is actually going up because we're buying an asset, which is a future benefit. So that's the third part of the question. Is there a future benefit? Yes.

And has anything been earned costs incurred or assets consume? No, it hasn't. So in this case, you buy equipment, so the equipment goes up in the future benefit to use that in the future, at the same time your cash at Bank has gone down, and how that looks from a T account perspective. The PP and E or property plant and equipment account is an asset account, it goes up by getting debited and the cash or bank account goes down by being credited. All right, so let's say for example, now we bought a vehicle on it alone. So in this case, is cash being affected?

Well, no, it's actually being affected because we were not actually using our cash to actually fund the vehicle we're actually borrowing money. So in which case Cash isn't affected. What is the nature of this transaction where we're actually buying a vehicle? Okay, so vehicles, you might think non current assets. You go to the third question future benefit, yes, we have a future benefit because we bought a vehicle. At the same time we've got a future sacrifice because the loan will have to be paid back to wherever we borrowed the money in the future.

Was anything earned costs incurred or assets consumed in this case? No, it hasn't, because we haven't earned anything and no cost has yet been incurred. And the asset is not consumed as yet. So in which case, the property plant equipment account goes up because asset goes up, the borrowing goes up, so the liability goes up. Therefore, the property plant equipment account gets debited and the barn account gets credited. Now let's say for example, another transaction we bought a titan on account.

So what is a patent? If you recall, in the in the previous lectures, we talked about a patent being an intangible type of assets. Let's go through the four questions. So is cash being affected? Well, no, it hasn't been affected because we've bought this on an account so that we paid in the future. So cash no cash is not affected.

What is the nature of this transaction? Well, we're buying a patriot. So you would think paitent intangibles, so therefore that would go up. Future benefit. Yes. Because the patient will be it's classified as an asset and will have a benefit in the future.

Future sacrifice Yes, because an account will need to be paid to a supplier. And is anything earned costs incurred or assets consumed? No, not as yet. So, asset goes up, which is intangibles, which is debit, and the accounts payable account goes up, which is a liability. Therefore, the intangible account gets debited and the accounts payable account gets credited. Now let's say we actually bought some shares in another company, pot cash pot loan, okay.

So we this could be done on the share market where you actually buy the shares just via an exchange, or it could be where you actually have bought into another business and you own a part of business. So, is cash being affected? Well, there is a part of it that is being affected. So I would say yes, there's going to be some impact to cash. What is the nature of this transaction? Well, we're actually investing our money into to buy another share another business.

So therefore, that may indicate to you that this is an investment. Is there a future benefit? Or Yes, if we bought shares, there are benefits because we may get dividends in the future or growth? Other few other sacrifices will Yes, because we've actually taken a loan out on part of the shares. And there's also another benefit, which is the cash as well. And was anything earned costs incurred or assets consumable?

No, not as yet. So, in this case, this will have three parts to it. The actual investment, which is asset increases because we're actually making an investment so it could be shares or As I sit in on a publicly listed company or private company, the cash or bank has gone down for 50% or whatever the share is of how much you've purchased in cash. And your borrowings will actually go up because you've borrowed some of the money to fund that investment. So therefore, investment goes up, therefore gets debited, it's an asset, cash at Bank goes down, it gets credited, and borrowings goes up, which which means it gets credited. It's a liability cap.

And that's how the whole transaction balances

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