WEBVTT 00:00:59.700 --> 00:01:02.940 LECTURER: Ok, hello everyone. 00:01:02.940 --> 00:01:06.156 Welcome again to the Accounting and Governance class. 00:01:06.502 --> 00:01:13.781 Could anyone please tell me if the volume is ok? 00:01:14.923 --> 00:01:17.629 Perfect. Ok, thank you. Thank you. 00:01:18.638 --> 00:01:24.888 So, I hope you have had a very good week, 00:01:26.114 --> 00:01:29.753 and I hope that you will do well in your first assessable homework 00:01:29.753 --> 00:01:32.972 that is in the process of marking 00:01:32.972 --> 00:01:38.613 by another lecturer, that is the person who will mark 00:01:38.613 --> 00:01:41.588 all our assessment. 00:01:41.798 --> 00:01:47.735 So just be a bit patient, during this week 00:01:47.735 --> 00:01:53.179 we will release the results of the first assessable homework. 00:01:53.948 --> 00:01:59.586 Now today we will continue with what we started last week. 00:01:59.586 --> 00:02:04.860 Last week what you learnt was how to record transactions 00:02:04.860 --> 00:02:09.366 using debits and credits and preparing the journal entries 00:02:09.366 --> 00:02:12.343 and you know that for each journal entry 00:02:12.343 --> 00:02:17.655 you need at least two entries, one debit entry and one credit entry. 00:02:17.851 --> 00:02:19.922 it could be more than two, 00:02:19.922 --> 00:02:23.913 but normally we have one debit and one credit 00:02:23.913 --> 00:02:27.668 and of course the total debit and total credit should be the same, 00:02:27.668 --> 00:02:31.986 the same amount in each journal entry. 00:02:32.154 --> 00:02:37.300 So what we will go through today is 00:02:37.300 --> 00:02:41.935 another type of entries which is adjusting entries. 00:02:42.459 --> 00:02:47.257 I hope you have studied the material that is posted 00:02:47.257 --> 00:02:52.288 on the course learning at Griffith, you have watched the videos 00:02:52.288 --> 00:02:58.327 and looked at the PowerPoint too and have of course understanding of this. 00:02:58.327 --> 00:03:05.779 But as usual I will explain everything you need to understand well, 00:03:05.779 --> 00:03:09.846 how to deal with these different types of entries 00:03:09.846 --> 00:03:13.639 that are the adjusting entries. 00:03:13.639 --> 00:03:16.895 The purpose of this session is that you will end the session 00:03:16.895 --> 00:03:23.436 with a clear understanding of that, adjusting entries and also closing entries 00:03:23.436 --> 00:03:26.411 which is another type of entry. 00:03:26.411 --> 00:03:30.498 The journal entries that you learnt last week 00:03:30.498 --> 00:03:35.970 are entries that you prepare from transactions 00:03:35.970 --> 00:03:40.355 that you have in the business so when the accountant records these transactions 00:03:40.355 --> 00:03:46.595 the accountant receives information that is mainly through the cash received 00:03:46.595 --> 00:03:51.530 and cash paid so they are very based on the cash. 00:03:51.530 --> 00:03:53.938 Cash received and cash paid. 00:03:55.328 --> 00:03:57.987 I will answer that Jade 00:04:00.101 --> 00:04:03.233 They are mainly related to cash received and cash paid 00:04:03.377 --> 00:04:08.674 but sometimes the accountant also receives information of invoices 00:04:08.674 --> 00:04:15.518 that are sent to customers so they record an income or revenue and purchases 00:04:15.518 --> 00:04:18.472 so they record the purchase as well. 00:04:18.472 --> 00:04:25.105 So not all are cash journal entries but most of them I would say yes. 00:04:25.645 --> 00:04:30.274 The first difference with adjusting entries is in adjusting entries, 00:04:30.746 --> 00:04:33.493 we do not involve cash. 00:04:33.493 --> 00:04:38.857 Cash is never involved in an adjusting entry. 00:04:38.857 --> 00:04:43.227 So what are these adjusting entries? 00:04:43.227 --> 00:04:48.304 And in this I will answer what Jade asked. 00:04:48.304 --> 00:04:52.711 Why adjustments are not done each month as a normal activity 00:04:52.711 --> 00:04:56.797 then it will not be such a big adjustment at the end, 00:04:56.797 --> 00:04:59.407 and you are totally correct Jade 00:04:59.886 --> 00:05:02.316 But that depends... 00:05:02.316 --> 00:05:07.694 it depends on what is our accounting period. 00:05:08.103 --> 00:05:10.300 It depends on the company. 00:05:10.300 --> 00:05:13.995 The normal accounting period is one year. 00:05:13.995 --> 00:05:17.893 If a company does not prepare financial statements every month 00:05:17.893 --> 00:05:23.104 for example, or every quarter, well, it will happen what you said. 00:05:23.104 --> 00:05:27.199 The adjusting entries are at the end of the year. 00:05:27.199 --> 00:05:29.581 But what's happening there in the real world 00:05:29.581 --> 00:05:35.922 companies prepare the financial statement 00:05:35.922 --> 00:05:38.697 every quarter or even every month 00:05:38.697 --> 00:05:44.248 and in that case if we define the accounting period as one month 00:05:44.248 --> 00:05:49.276 that means at the end of the month we need to prepare the adjusting entries. 00:05:49.276 --> 00:05:55.677 The concept of adjusting entries is that we prepare adjusting entries 00:05:55.677 --> 00:06:00.624 at the end of the accounting period, ok? 00:06:00.624 --> 00:06:04.801 That is the thing. At the end of the accounting period. 00:06:04.801 --> 00:06:08.495 If the accounting period is one month we prepare adjusting entries 00:06:08.495 --> 00:06:09.814 at the end of the month. 00:06:09.814 --> 00:06:13.601 If the accounting period is the whole year we prepare the adjusting entries 00:06:13.601 --> 00:06:16.177 at the end of the year, ok? 00:06:16.177 --> 00:06:23.463 That is one concept that we need to have in relation to adjusting entries. 00:06:23.463 --> 00:06:30.566 The other thing is what we are adjusting because the name is adjusting entries? 00:06:30.566 --> 00:06:35.838 What we are adjusting with these entries. 00:06:35.838 --> 00:06:41.349 We adjust revenues or income and expenses. 00:06:41.349 --> 00:06:46.990 That is what we adjust to reflect in the financial statements, 00:06:46.990 --> 00:06:52.114 all the income or revenue that has earned in the period, 00:06:52.114 --> 00:06:59.503 and to reflect all the expenses that have been incurred during the period. 00:06:59.503 --> 00:07:01.932 That is what we show with the adjustment entries. 00:07:01.932 --> 00:07:06.662 That's why we cannot do adjustment entries in the middle of the month 00:07:06.662 --> 00:07:08.760 or at the beginning of the month, 00:07:08.760 --> 00:07:12.369 it's always at the end of the period because at the end of the period 00:07:12.369 --> 00:07:16.716 we want to have in our financial statement 00:07:16.716 --> 00:07:19.649 all the income earned in that period 00:07:19.649 --> 00:07:23.539 and all the expenses incurred in that period. 00:07:23.539 --> 00:07:28.260 So this is the most important concept 00:07:28.260 --> 00:07:32.403 to start with adjusting entries. 00:07:34.570 --> 00:07:38.998 Then as I said some expenses and revenue menu can be recorded exactly, 00:07:38.998 --> 00:07:42.858 that's the things, others, some expenses revenues cannot be recorded 00:07:42.858 --> 00:07:50.590 we need to adjust to have all the expenses incurred recorded 00:07:50.590 --> 00:07:53.370 and the same for income or revenue. 00:07:53.370 --> 00:07:57.897 To align with the business activity statement, 00:07:57.897 --> 00:08:02.468 the business activity statement is a tax concept. 00:08:02.468 --> 00:08:07.251 In many cases the tax period is the same as the accounting period 00:08:07.251 --> 00:08:10.572 in that case a year but we need to be careful that we do not mix 00:08:10.572 --> 00:08:15.090 with the tax concept when we are talking with accounting 00:08:15.090 --> 00:08:18.945 because there may be some differences. 00:08:18.945 --> 00:08:24.490 Ok, so we will start as usual today with the lecture 00:08:24.490 --> 00:08:29.132 in which I will pose four multiple choice questions. 00:08:29.132 --> 00:08:33.917 You will answer the questions, and this will be a good feedback 00:08:33.917 --> 00:08:38.195 for you and for me about the understanding of some basic concepts 00:08:38.195 --> 00:08:41.468 of this topic. 00:08:41.468 --> 00:08:46.565 If I see that the distribution of your answer is not very good 00:08:46.565 --> 00:08:52.326 which is a good feedback in the sense that that lets me explain 00:08:52.326 --> 00:08:55.349 why this answer is correct or why it's not correct 00:08:55.349 --> 00:08:57.717 for your own learning. 00:08:57.717 --> 00:09:02.980 We will discuss that and I will use these questions to explain 00:09:02.980 --> 00:09:07.100 probably some of the concepts if they are not clear. 00:09:07.100 --> 00:09:13.942 So please feel free as usual to ask any question during the lecture 00:09:13.942 --> 00:09:16.215 and then during the workshop. 00:09:16.215 --> 00:09:21.556 Last week we talked for more than four and a half hours 00:09:21.556 --> 00:09:26.232 in the whole thing because of the number of questions 00:09:26.232 --> 00:09:31.436 but probably today we will be less than that because the topic is more specific 00:09:31.436 --> 00:09:36.787 but I am happy to answer all the questions to explain well, 00:09:36.787 --> 00:09:42.499 my main purpose is for you to understand these topics. 00:09:42.499 --> 00:09:46.598 That is the main purpose because then you will be evaluated on this topic 00:09:46.598 --> 00:09:49.646 The second assessable homework will be next week 00:09:49.646 --> 00:09:53.290 after the topic four, module four. 00:09:53.290 --> 00:09:58.980 So that assessable homework two includes this module, 00:09:58.980 --> 00:10:01.683 module three, adjusting and closing entries 00:10:01.683 --> 00:10:03.744 and also the module four. 00:10:03.744 --> 00:10:08.630 That's why it's very important, if there is anything you do not understand 00:10:08.630 --> 00:10:11.634 please ask, ok? 00:10:11.634 --> 00:10:14.906 I hope no Jade (INAUDIBLE) 00:10:14.906 --> 00:10:20.200 Jade I hope it will not be four and a half hours. 00:10:21.206 --> 00:10:25.567 Ok, for me it's ok. 00:10:25.567 --> 00:10:30.610 I have enough energy I think to beat four and a half hours. 00:10:30.610 --> 00:10:35.373 I feel sorry for you sometimes but maybe you're very tired after that time 00:10:35.373 --> 00:10:38.974 but we will do the best we can. 00:10:39.260 --> 00:10:44.334 Ok, so we will start with the questions... 00:10:57.922 --> 00:11:01.339 Here we have the first question, ok? 00:11:02.184 --> 00:11:04.950 Have a look. 00:11:05.935 --> 00:11:12.107 The question is when is the $1000 considered to be earned? 00:11:12.820 --> 00:11:17.461 So it's about the day in which this is considered to be earned. 00:11:17.461 --> 00:11:21.308 Look at all the dates that you have there and then define 00:11:21.308 --> 00:11:24.365 and you can vote for your answer 00:11:24.365 --> 00:11:29.500 When they are earned? Take your time. 00:11:31.638 --> 00:11:35.522 Pima can't see properly, ok. 00:11:35.868 --> 00:11:39.910 Pima, you can zoom, I will put a bit bigger. 00:11:42.112 --> 00:11:44.782 Maybe that can be... 00:11:53.909 --> 00:11:56.381 Ok, good. 00:13:09.415 --> 00:13:12.776 Ok, what is the answer? 00:13:12.776 --> 00:13:17.340 We have a distribution of answers in the poll 00:13:18.974 --> 00:13:21.144 so it's good to explain a bit. 00:13:21.144 --> 00:13:23.801 That is the feedback I need, so if there are 00:13:23.801 --> 00:13:26.612 a whole distribution of your answers means, yeah. 00:13:26.612 --> 00:13:33.348 I need to explain how can we determine when the $1000 are earned. 00:13:34.472 --> 00:13:39.410 Most of you actually answered correctly but there are of course, 00:13:39.410 --> 00:13:42.541 there are many other different answers. 00:13:42.541 --> 00:13:47.799 So this question is about when revenue is earned, ok? 00:13:48.500 --> 00:13:51.934 That is the question, we are using accrual accounting. 00:13:51.934 --> 00:13:56.342 In accrual accounting revenue is recorded when it is earned 00:13:56.342 --> 00:13:59.621 not when cash is received, 00:13:59.668 --> 00:14:05.533 and expenses when they are incurred not when they are paid, ok? 00:14:05.533 --> 00:14:12.060 So we need to identify from the dates when these $1000 are earned. 00:14:12.060 --> 00:14:15.282 The dress manufacturer received a purchase order for 10 dresses 00:14:15.282 --> 00:14:19.310 for a total price of $1000, 15th November. 00:14:19.310 --> 00:14:23.807 On 15th November the manufacturer received the order, nothing happened, 00:14:23.807 --> 00:14:26.863 so the revenue is not earned, ok? 00:14:26.863 --> 00:14:32.705 The 10 dresses were delivered on 30th November. 00:14:32.705 --> 00:14:36.748 Delivered means that revenue is earned. 00:14:36.748 --> 00:14:38.574 When is revenue earned? 00:14:38.574 --> 00:14:41.859 When the products are delivered to the customer. 00:14:41.859 --> 00:14:46.926 They are passed from the company to the customer. 00:14:46.926 --> 00:14:50.703 At that point, revenue is earned. 00:14:50.703 --> 00:14:55.576 In the case of services, it's when services are provided. 00:14:56.586 --> 00:15:01.390 When the service is provided, service revenue is earned. 00:15:01.602 --> 00:15:08.390 So that is the correct answer, ok? 00:15:08.827 --> 00:15:14.429 There is some echo, probably somebody has the microphone on. 00:15:15.981 --> 00:15:20.219 So this is the correct answer, and the other dates, 00:15:20.219 --> 00:15:24.512 the customer is sent an invoice on 5th December. 00:15:24.512 --> 00:15:29.596 No, the producer already delivered it, doesn't matter that the invoice was sent 00:15:29.596 --> 00:15:33.893 after the delivery of the products. 00:15:33.893 --> 00:15:36.982 The payment, that means the check is received 10th December. 00:15:36.982 --> 00:15:41.189 Again, it's not related with when we receive the payment 00:15:41.189 --> 00:15:44.902 or when we bank the payment. 00:15:44.902 --> 00:15:50.514 So, the correct answer is that. any questions? 00:15:50.514 --> 00:15:51.846 What is the answer Adash? 00:15:51.846 --> 00:15:55.674 I put here, can you see the blue... 00:15:56.423 --> 00:16:02.393 I wrote in the screen, the blue circle. 00:16:02.870 --> 00:16:05.235 It doesn't save. 00:16:05.235 --> 00:16:08.794 30th November, that is the correct answer. 00:16:09.675 --> 00:16:16.633 I'm not sure if... Can you see because I drew a blue circle in C 00:16:17.786 --> 00:16:20.631 Can you see that? 00:16:20.631 --> 00:16:26.204 Ah, it's not a line. Double is in the white space. 00:16:26.204 --> 00:16:32.772 Ah, I didn't know that. Ok. Ok, interesting. 00:16:32.772 --> 00:16:40.402 In my screen it's exactly in C but probably there are differences in this 00:16:44.198 --> 00:16:46.833 Probably just zoom each, probably. 00:16:47.383 --> 00:16:54.598 I move my zoom in and out and the circle is in C, it doesn't move. 00:16:55.971 --> 00:16:59.822 Ok, we go to the next one. 00:17:04.149 --> 00:17:08.510 If a resource has been consumed but an invoice has not been received 00:17:08.510 --> 00:17:13.460 at the end of the accounting period, which of this is correct? 00:17:13.550 --> 00:17:21.200 I will update... It doesn't move the page. 00:17:42.470 --> 00:17:49.924 Ok, if you cannot follow this I can change to put... 00:17:50.823 --> 00:17:53.240 Yes, I will reset the board. 00:18:55.814 --> 00:19:00.555 Ok, so if a resource has been consumed but an invoice has not been received 00:19:00.569 --> 00:19:05.395 at the end of the accounting period, what is the situation? 00:19:06.434 --> 00:19:13.655 We have some different answers but most of you are correct. 00:19:14.550 --> 00:19:17.378 The correct answer is B. 00:19:19.290 --> 00:19:26.507 Ok, B, an adjusting entry should be recorded to recognize the expense. 00:19:26.507 --> 00:19:32.515 Why is this? Because the resource has been consumed. 00:19:32.515 --> 00:19:39.791 When expenses are incurred is when the resources are used or consumed. 00:19:39.791 --> 00:19:44.575 That means that we need to record an expense, ok? 00:19:44.575 --> 00:19:48.364 So in this case the only one, and adjusting entry should be recorded 00:19:48.364 --> 00:19:52.682 to recognize the expense. 00:19:52.682 --> 00:19:55.791 Any question on this? 00:19:58.614 --> 00:20:01.673 Is it clear? 00:20:01.673 --> 00:20:07.627 Ok, we will go to the next one, thank you Jade. 00:20:11.169 --> 00:20:13.788 Number three, 00:20:14.830 --> 00:20:18.290 if an entity fails to adjust the prepaid rent account 00:20:18.290 --> 00:20:20.727 for rent that has expired, 00:20:20.727 --> 00:20:25.324 what effect will this have on the monthly financial statement? 00:20:25.324 --> 00:20:28.969 Here you need to think a bit more because it's what's happening, 00:20:28.969 --> 00:20:34.770 the adjusting entry was not recorded, what would be the effect on that? 00:20:37.834 --> 00:20:40.140 I will update the poll. 00:20:58.284 --> 00:21:01.244 The previous answer was B. 00:21:44.867 --> 00:21:49.980 It is prepaid rent failed to adjust for the month that was paid. 00:21:49.980 --> 00:21:54.599 This is the prepaid rent that was recorded as a prepaid rent 00:21:54.672 --> 00:21:59.697 but now in this month the rent has expired so it was used, 00:21:59.697 --> 00:22:04.971 the office or the building that we are renting was used, yeah. 00:22:37.111 --> 00:22:42.686 You see in my poll you still chose number one, is it correct? 00:22:44.310 --> 00:22:47.416 Ah, yes, yes. I didn't change the numbers, 00:22:47.416 --> 00:22:54.344 I just updated the poll solutions, but I didn't change the number. 00:22:55.914 --> 00:23:00.270 This is for the question three, for each question I update the poll, 00:23:00.465 --> 00:23:03.747 I do not change the number because that takes a bit more time 00:23:03.747 --> 00:23:07.582 to change that number so I just update the answers 00:23:07.582 --> 00:23:13.600 to lead them in zero, you come out again for each question. 00:23:17.106 --> 00:23:24.370 Ok, so we have a distribution of answers and now there is a whole distribution 00:23:24.370 --> 00:23:29.226 of the answers, so I think this is important to explain. 00:23:29.229 --> 00:23:33.348 If an entity fails to adjust a prepaid rent account 00:23:33.348 --> 00:23:36.624 that means we have a prepaid rent account 00:23:36.624 --> 00:23:42.107 we pay in advance the rent of the office, 00:23:42.107 --> 00:23:45.580 we'll assume that this is the rent of the office. 00:23:45.580 --> 00:23:50.779 We pay in advance the rent of the office before we use the office, we pay. 00:23:50.779 --> 00:23:52.569 How do we record that? 00:23:52.569 --> 00:23:58.389 We record that as a prepayment which is an asset, we debit that, 00:23:58.389 --> 00:24:01.433 and we credit cash. 00:24:01.433 --> 00:24:04.457 So we debit prepayment, we credit cash. 00:24:04.457 --> 00:24:07.522 That was the original entry. 00:24:07.522 --> 00:24:13.218 Now at the end of this period, it says that the rent has expired 00:24:13.218 --> 00:24:18.629 so we used the office for this period so that is what we need to adjust. 00:24:18.629 --> 00:24:26.923 We need to credit the prepaid rent for the amount of the rent that expired 00:24:27.624 --> 00:24:31.838 we need to credit prepaid rent and we need to debit the expense. 00:24:33.538 --> 00:24:35.454 What happens if we do not do this? 00:24:35.454 --> 00:24:40.405 I will write in the same paper what this means, 00:24:40.405 --> 00:24:42.575 so we will... 00:24:42.600 --> 00:24:49.440 when we do the adjustment we will increase, ok, the expenses, 00:24:55.636 --> 00:24:59.595 we increase expenses, that is one of the entries, 00:24:59.595 --> 00:25:06.405 we debit rent expense and we will decrease the prepaid rent, 00:25:06.638 --> 00:25:08.785 the prepayment, ok? 00:25:08.785 --> 00:25:11.908 I will just put prepayment, pre. 00:25:12.194 --> 00:25:17.522 This is the prepaid rent which is an asset. 00:25:19.352 --> 00:25:24.170 What effect will this have on the monthly financial statement 00:25:24.170 --> 00:25:26.418 if we do not record this? 00:25:26.418 --> 00:25:30.440 If we do not do this, what is the effect? 00:25:30.440 --> 00:25:33.648 What happened with the expenses? 00:25:34.162 --> 00:25:41.853 Expenses will be understated because we didn't record this. 00:25:42.472 --> 00:25:49.549 What happens we will have in assets, assets will be overstated. 00:25:49.549 --> 00:25:53.708 So to find the right answer here you need to look at all the answers. 00:25:53.708 --> 00:26:01.214 What answers we had that assets are overstated? Only D and E. 00:26:01.493 --> 00:26:05.820 In C, well... Sorry, C, D and E. 00:26:05.962 --> 00:26:12.841 In A it doesn't say anything about assets 00:26:12.841 --> 00:26:15.556 B, nothing about assets, 00:26:16.629 --> 00:26:21.285 so only C, D and E assets will be overstated. 00:26:21.516 --> 00:26:27.499 That is one thing because of this, because we didn't decrease the prepayment 00:26:27.499 --> 00:26:28.566 which is an asset. 00:26:28.566 --> 00:26:32.200 Assets will be all overstated. 00:26:32.200 --> 00:26:36.210 How will we know which one is correct? C, D or E? 00:26:36.193 --> 00:26:41.571 We need to look at those expenses will be understated, 00:26:41.571 --> 00:26:49.357 but we don't have this, C, D and E talk about profits. 00:26:49.357 --> 00:26:54.517 Then you need to relate profit with expenses. 00:26:54.517 --> 00:26:59.553 If expenses are understated, what happens with profits? 00:27:00.559 --> 00:27:06.496 Profit will be overstated, ok? Profit will be overstated. 00:27:07.860 --> 00:27:11.175 That's why E will be incorrect answer. 00:27:12.558 --> 00:27:16.328 Is that clear that, very well? Profit increases? 00:27:16.449 --> 00:27:20.356 So we need to relate this, you can see now we are using 00:27:20.360 --> 00:27:23.443 all the elements that you had planned before, ok? 00:27:23.609 --> 00:27:26.557 Profit equals revenues plus expenses. 00:27:26.849 --> 00:27:31.723 These expenses are understated, profit is overstated. 00:27:32.790 --> 00:27:34.965 Any question? Ok. 00:27:46.522 --> 00:27:51.855 Yes, (INAUDIBLE) I need to add one more thing. 00:27:51.855 --> 00:27:57.600 Profit will be overstated and that is the answer for question D and E. 00:27:57.600 --> 00:28:00.725 What is the difference between D and E? 00:28:01.689 --> 00:28:08.929 Equity in D will be understated, in E equity will be overstated. 00:28:09.835 --> 00:28:13.982 So now we need to relate the profit with equity. 00:28:14.467 --> 00:28:19.708 So when profit is overstated, equity is overstated. 00:28:19.708 --> 00:28:22.770 If profit is understated, Equity is understated. 00:28:22.770 --> 00:28:24.761 So what is correct? 00:28:24.761 --> 00:28:30.813 Asset overstated, profit and equity would be overstated. 00:28:31.891 --> 00:28:39.361 Ok, that answer your question Jade? Good. 00:28:41.334 --> 00:28:44.658 Ok, so we will go through the last one. 00:28:51.710 --> 00:28:54.504 Here you have the last one 00:28:56.892 --> 00:29:04.447 On 1st September Carlson Limited borrowed $10,000 from the bank for three months 00:29:04.447 --> 00:29:11.960 at the annual interest rate of 9%. Annual interest rate 9%. 00:29:11.960 --> 00:29:16.571 Principal and interest are payable to the bank on 1st December, 00:29:16.571 --> 00:29:21.837 so this is for three months long. 00:29:21.837 --> 00:29:24.678 If the company prepares monthly financial statements 00:29:24.678 --> 00:29:29.530 the adjusting entry that the company should make for interest on 30th September 00:29:29.530 --> 00:29:35.440 that means after one month would be which of these ones? 00:29:35.440 --> 00:29:39.570 I will reupdate the poll. 00:31:38.220 --> 00:31:44.868 Ok. So how we determine this, 00:31:44.868 --> 00:31:50.112 we need to look at what is the interest for one month 00:31:50.112 --> 00:31:54.790 because the expense incurred in this case the interest expense, 00:31:54.790 --> 00:31:59.175 is the interest that... 00:31:59.175 --> 00:32:03.364 that is the interest for only one month. 00:32:03.364 --> 00:32:07.633 We are preparing the adjusting entry at 30th of September. 00:32:07.633 --> 00:32:14.645 The loan started on 1st September so it's the interest for one month. 00:32:14.645 --> 00:32:20.658 This will clarify the answer for if you calculate the interest for the year. 00:32:20.658 --> 00:32:27.210 The annual interest rate is 9%, for one month it will be 9% divided by 12 00:32:27.210 --> 00:32:31.367 that is the interest per month, and then you multiply by $10000 00:32:31.521 --> 00:32:36.512 to calculate what is the interest per month which is $75. 00:32:36.895 --> 00:32:40.380 So at the end of September we need to record, 00:32:40.380 --> 00:32:46.192 debit interest expense $75, and credit interest payable 00:32:46.192 --> 00:32:52.384 because it will not be paid until 1st December. 00:32:52.659 --> 00:32:59.989 So we debit interest expense $75 we credit interest payable, $75, 00:32:59.989 --> 00:33:03.741 the correct answer is D, ok? 00:33:07.344 --> 00:33:09.995 Ok at that? 00:33:12.221 --> 00:33:16.332 When we have a loan we need to pay interest. 00:33:16.413 --> 00:33:18.833 What is that interest? It's an expense. 00:33:18.833 --> 00:33:23.468 It's the expense incurred because we borrowed money. 00:33:23.468 --> 00:33:28.886 And we can calculate based on the interest rate. 00:33:28.886 --> 00:33:33.540 The interest rate is always given and always is given per annum 00:33:33.866 --> 00:33:36.567 so what is the annual interest rate? 00:33:36.567 --> 00:33:41.911 In this case it is 9%, you can see here. 00:33:41.911 --> 00:33:45.858 9% is the interest rate, but this is the interest rate 00:33:45.865 --> 00:33:48.263 for 12 months, ok? 00:33:49.134 --> 00:33:52.998 So to calculate, very well Joshua, to calculate per month 00:33:52.998 --> 00:33:59.918 we need to multiply the 9% by 112, or simply divide it by 12, ok? 00:33:59.918 --> 00:34:04.126 And then you will have what is the interest per month 00:34:04.126 --> 00:34:09.735 because between the 1st of September and 30th September 00:34:09.735 --> 00:34:13.765 we need to prepare the adjusting entries, it's one month. 00:34:13.765 --> 00:34:19.705 so the interest expense will be the interest for only one month, ok? 00:34:20.148 --> 00:34:26.750 So very good. Good Adash and that is $75. 00:34:27.648 --> 00:34:30.242 Ok, so we've finished the multiple choice questions, 00:34:30.242 --> 00:34:36.580 do you have any questions about concept because now we will apply the concept 00:34:36.580 --> 00:34:40.856 in exercises about adjusting entries, 00:34:40.856 --> 00:34:45.518 so any question about concepts that you would like to ask at this point? 00:34:49.307 --> 00:34:53.115 All good? Ok. 00:34:53.808 --> 00:34:58.440 So, we will go... Excellent Ruby, thank you. 00:34:59.341 --> 00:35:06.655 Yes, yeah, we will go through the practice questions now. 00:35:07.450 --> 00:35:12.416 And I will start briefly with a very... 00:35:13.150 --> 00:35:15.980 a very brief review of what you have learnt 00:35:15.980 --> 00:35:18.499 about adjusting entries. 00:35:21.465 --> 00:35:24.459 It is only three months, just another. 00:35:24.459 --> 00:35:28.102 It's only three months long because it starts on 1st September 00:35:28.102 --> 00:35:32.437 and is payable on 1st December. 00:35:32.555 --> 00:35:35.413 The interest and the principal both. 00:35:35.413 --> 00:35:43.740 So you pay back the $10000 on 1st December with all the interest of the three months. 00:35:45.972 --> 00:35:54.631 Ok, now we will talk a bit about adjusting entries. 00:35:59.407 --> 00:36:03.119 I will explain using this diagram that you have in your PowerPoint 00:36:03.119 --> 00:36:07.590 and you have seen in your videos, I will not go into whole detail of course 00:36:07.590 --> 00:36:12.646 but just with this... this is the big summary. 00:36:12.837 --> 00:36:15.274 The big summary of adjusting entries. 00:36:15.793 --> 00:36:21.928 We have two types of adjusting entries 00:36:21.928 --> 00:36:25.435 or I would say four types if we combine revenues and expenses. 00:36:25.435 --> 00:36:30.214 But we have the accruals and we have the prepayments, ok? 00:36:30.214 --> 00:36:34.442 They are two different adjusting entries. What means accrual? 00:36:34.442 --> 00:36:39.583 Accrual if we're talking about revenue means receivable, ok? 00:36:39.583 --> 00:36:47.481 Accrued revenue it will be the same as to say revenue receivable. 00:36:48.178 --> 00:36:52.611 Accrued expenses when you see this term, accrued expenses, 00:36:52.611 --> 00:36:56.630 that means expenses payable, ok? 00:36:56.630 --> 00:37:00.659 So accruals means receivable or payable 00:37:00.659 --> 00:37:05.097 depending on whether it's revenues or expenses. 00:37:05.830 --> 00:37:08.825 And then we have the prepayments. 00:37:08.825 --> 00:37:14.014 Prepayments means payments in advance, ok? 00:37:14.274 --> 00:37:20.879 We can receive a payment in advance and that is what we call 00:37:21.161 --> 00:37:25.809 unearned revenue or revenue received in advance, ok? 00:37:25.809 --> 00:37:30.018 That is the payment received in advance, 00:37:30.168 --> 00:37:36.344 Or we can pay in advance and that is what we call prepayments. 00:37:38.188 --> 00:37:43.141 So these adjustments, and these are all the adjustments, 00:37:43.141 --> 00:37:47.460 there are no other adjustments for timing differences. 00:37:47.460 --> 00:37:50.797 There are adjustments to correct errors, we will not go there, 00:37:50.797 --> 00:37:53.416 we are talking about the timing difference 00:37:53.416 --> 00:37:57.612 that means to record revenues when they are earned, 00:37:57.612 --> 00:37:59.852 expenses when they are incurred. 00:37:59.852 --> 00:38:03.301 All the purpose of adjusting entries is that, 00:38:03.301 --> 00:38:06.594 to record the revenues in the accounting period 00:38:06.594 --> 00:38:12.992 that are earned in that accounting period and to record expenses that are incurred 00:38:12.992 --> 00:38:16.222 in that accounting period. 00:38:16.222 --> 00:38:20.810 From the normal transactions that you learnt last week, 00:38:20.810 --> 00:38:25.358 we may have many cases in which revenue was not recorded, 00:38:25.358 --> 00:38:30.128 expenses was not recognized as well, and we need to adjust them 00:38:30.128 --> 00:38:33.167 because the main purpose of the financial statements 00:38:33.167 --> 00:38:38.850 in particular the income statement is to show the revenues 00:38:38.850 --> 00:38:43.144 earned in that period, in the period of the income statement 00:38:43.144 --> 00:38:48.143 and to show the expenses incurred in the same period. 00:38:48.143 --> 00:38:51.120 So that is the purpose of adjusting entries, 00:38:51.120 --> 00:38:58.742 to reflect revenues earned and expenses incurred in the accounting period. 00:38:59.127 --> 00:39:03.012 So this is the big summary. Now how do we deal with this? 00:39:03.012 --> 00:39:09.316 Well, in the case of prepayments 00:39:09.316 --> 00:39:11.691 in the case of prepayments 00:39:11.691 --> 00:39:18.496 we have different accounts that can be considered as a prepayment. 00:39:18.496 --> 00:39:23.228 One is the prepaid expenses like 00:39:23.228 --> 00:39:27.064 prepaid insurance, prepaid rent, 00:39:27.064 --> 00:39:32.587 but there are others that we can give the same treatment of this prepayment 00:39:32.587 --> 00:39:36.644 which is supplies or depreciations. 00:39:36.644 --> 00:39:41.831 That means the payments that the company makes in advance 00:39:41.831 --> 00:39:45.224 and therefore they are considered as prepayments. 00:39:45.224 --> 00:39:50.326 So what are the terms involved in this prepaid expenses? 00:39:50.326 --> 00:39:56.233 Well, we have an asset that has an unadjusted balance. 00:39:56.233 --> 00:40:03.169 For example, we have prepaid insurance. That is an account of asset. 00:40:03.169 --> 00:40:09.239 And we do not adjust this because we pay for that at the beginning of the t, 00:40:09.239 --> 00:40:15.375 ok, 1st of January for example, and then on the 30th June we are halfway 00:40:15.375 --> 00:40:19.095 of the total period provided by the policy. 00:40:19.095 --> 00:40:24.319 The policy normally, the insurance policy covers 12 months. 00:40:24.319 --> 00:40:27.631 So we are using the policy during 12 months. 00:40:27.631 --> 00:40:30.099 But what's happening in June? 00:40:30.099 --> 00:40:35.796 Well, we do not have the same amount in assets because we already consumed 00:40:35.796 --> 00:40:41.811 half of the policy, six months, so half of the policy has been consumed. 00:40:42.597 --> 00:40:46.739 Then we need to adjust the amount in assets. 00:40:46.739 --> 00:40:52.340 Here you had the unadJusted balance of the asset, 00:40:53.010 --> 00:40:56.220 that is the total amount of the policy, we need to adjust that. 00:40:56.422 --> 00:41:00.526 How do we adjust that? We need to record an expense. 00:41:00.526 --> 00:41:05.873 An expense for the six months use of the policy. 00:41:05.873 --> 00:41:10.485 So we will record debit expense, that is the adjusting entry, 00:41:10.485 --> 00:41:15.689 we debit the expense, and we decrease the asset 00:41:15.689 --> 00:41:21.224 that means we credit the prepaid insurance. 00:41:21.224 --> 00:41:26.732 So you can see here, this is your adjusting entry. 00:41:26.732 --> 00:41:29.940 We have a debit entry, we have a credit entry. 00:41:29.940 --> 00:41:35.539 We debit insurance expense, we credit prepaid insurance. 00:41:35.539 --> 00:41:39.956 So this is one case. 00:41:39.956 --> 00:41:43.882 And the same we will use for prepaid rent, 00:41:43.882 --> 00:41:49.556 for supplies, for depreciation, ok? 00:41:49.556 --> 00:41:52.519 Jade did the question. 00:42:00.957 --> 00:42:03.840 Oh good, excellent Jade. That's my purpose, 00:42:03.921 --> 00:42:08.760 just to explain in detail what it means, this thing. 00:42:08.760 --> 00:42:12.478 Is there anybody that might have a question on this? 00:42:15.421 --> 00:42:19.849 We will go through the four that are adjusting entries. 00:42:19.849 --> 00:42:24.651 This is related to the prepaid expenses. 00:42:26.994 --> 00:42:30.579 Ok, we go through the second one. 00:42:30.960 --> 00:42:35.972 The second one is what we call the un-earned revenues. 00:42:35.972 --> 00:42:41.869 So revenues received in advance, what is the concept? 00:42:42.343 --> 00:42:46.967 Imagine that the company has a building, 00:42:46.967 --> 00:42:50.618 and they are renting offices 00:42:50.618 --> 00:42:56.641 from this building so they have a number of clients that rent offices. 00:42:57.331 --> 00:43:02.371 And they ask the tenants to pay in advance 00:43:02.371 --> 00:43:05.526 before they start using the building, 00:43:05.526 --> 00:43:10.682 they have to pay for example three months in advance. 00:43:10.682 --> 00:43:14.341 So the company received the cash for this, 00:43:14.341 --> 00:43:18.327 but the tenant still is not using the office, 00:43:18.327 --> 00:43:20.480 so how will we record this first entry? 00:43:20.480 --> 00:43:22.776 This is the entry that you learnt last week, 00:43:22.776 --> 00:43:24.505 this is a normal transaction. 00:43:24.505 --> 00:43:28.881 The company receives cash so we will debit cash, ok? 00:43:28.881 --> 00:43:33.829 And we will have this unearned revenue 00:43:33.829 --> 00:43:37.820 or rent revenue received in advance 00:43:37.820 --> 00:43:42.335 which is a liability for that amount. 00:43:42.515 --> 00:43:44.388 Why is this a liability? 00:43:44.388 --> 00:43:49.347 Because at this point the company has not provided yet 00:43:49.347 --> 00:43:53.167 the office for the tenant to use, ok? 00:43:53.167 --> 00:43:58.676 The tenant has not used the office yet, they pay in advance. 00:43:58.676 --> 00:44:02.515 So we have a liability because we have an obligation to provide the office, 00:44:02.515 --> 00:44:05.800 the tenant already paid. 00:44:05.800 --> 00:44:09.097 Now, what happens after one month 00:44:09.097 --> 00:44:12.168 if we are doing financial statements every month. 00:44:12.168 --> 00:44:17.360 We need to prepare an adjusting entry because we already provided this service 00:44:17.360 --> 00:44:20.024 to the tenant, we already provided the office, 00:44:20.024 --> 00:44:24.569 the tenant used this resource already one month, 00:44:24.569 --> 00:44:29.265 so we need to adjust our liability accounts. 00:44:29.265 --> 00:44:33.740 So the liability account has an adjusted balance, ok? 00:44:33.740 --> 00:44:38.921 When the tenant pays in advance, and now after one month 00:44:38.921 --> 00:44:44.526 we need to reduce this for the month the office was already used. 00:44:44.526 --> 00:44:50.036 So we will debit this liability that is part of the adjusting entry, 00:44:50.036 --> 00:44:57.010 and we will credit revenue because now we earn this revenue, 00:44:57.010 --> 00:44:59.862 that is the rent revenue. 00:44:59.862 --> 00:45:03.753 We earn that because we already provided one month 00:45:03.753 --> 00:45:09.106 the renting of the office to the tenant. 00:45:09.106 --> 00:45:13.480 So here you have again, the adjusting entry. 00:45:13.480 --> 00:45:17.149 We have one debit entry, 00:45:17.149 --> 00:45:22.003 the rent revenue received in advance, 00:45:22.003 --> 00:45:25.405 a debit entry, and we will have a credit entry 00:45:25.405 --> 00:45:30.128 which is simply rent revenue. 00:45:33.221 --> 00:45:36.352 Any question on this second one? 00:45:40.498 --> 00:45:44.468 We will practice with many exercises today 00:45:44.468 --> 00:45:50.096 for you to have a very, very clear understanding of the adjusting entries. 00:45:51.183 --> 00:45:54.743 Ok, the last two. 00:45:54.743 --> 00:45:59.424 The last two I would say they are simple adjusting entries. 00:45:59.852 --> 00:46:04.864 We have accrued revenues. As I mentioned before, 00:46:04.864 --> 00:46:11.580 accrued revenues means revenues receivable. 00:46:11.580 --> 00:46:18.933 This is the case when the company sells products or provides services 00:46:19.146 --> 00:46:23.979 but we still do not record that sale 00:46:24.077 --> 00:46:27.947 and we have not received the cash yet, 00:46:27.947 --> 00:46:32.154 but the service is provided or the products are delivered 00:46:32.154 --> 00:46:34.165 so we need to record revenue. 00:46:34.165 --> 00:46:38.985 If we have not recorded this in the normal journal entry 00:46:38.985 --> 00:46:44.525 that you learnt last week, we will need to record the revenue. 00:46:44.525 --> 00:46:49.439 Sales revenue or service revenue, so we credit this. 00:46:49.439 --> 00:46:53.925 What will be the other accounting ball? It will be the receivable. 00:46:53.925 --> 00:46:56.579 An accounts receivable which is an asset 00:46:56.579 --> 00:47:00.844 so here you have debit the accounts receivable 00:47:00.844 --> 00:47:05.273 credit service revenue or sales revenue, 00:47:05.273 --> 00:47:10.324 depending on whether we are selling produce or providing services. 00:47:10.324 --> 00:47:13.454 So that is the third adjusting entry 00:47:13.454 --> 00:47:17.980 and the last adjusting entry is accrued expenses. 00:47:17.980 --> 00:47:23.171 That means expenses payable. 00:47:23.171 --> 00:47:29.596 So this is the case when we have an expense incurred 00:47:29.596 --> 00:47:35.908 but we have not recorded that, the most typical case is employees 00:47:35.908 --> 00:47:40.791 that work during the month. We have not paid their salaries yet 00:47:40.791 --> 00:47:45.246 because we pay the first days of the following month, 00:47:45.246 --> 00:47:49.147 so we didn't record the expense but they already worked, 00:47:49.147 --> 00:47:52.503 so there is a resource that has been consumed 00:47:52.503 --> 00:47:56.612 and therefore we need to record an expense. 00:47:56.612 --> 00:48:04.786 We need to record an expense and so we debit salaries expense, 00:48:04.786 --> 00:48:09.284 for example, but because we have not paid yet in this period, 00:48:09.284 --> 00:48:14.855 we need to record a credit in this liability which is salaries payable. 00:48:14.855 --> 00:48:20.223 So here we have our adjusting entry. 00:48:20.833 --> 00:48:28.367 This is in a very brief summary what you have learnt about adjusting entries. 00:48:28.367 --> 00:48:31.025 Any question at this point? 00:48:37.439 --> 00:48:39.089 All good? 00:48:39.089 --> 00:48:43.885 So we can now apply these two practical exercises 00:48:43.885 --> 00:48:47.621 and we will work with many adjusting entries, 00:48:47.621 --> 00:48:52.948 so you will have the opportunity, to practice now with this 00:48:55.675 --> 00:48:57.664 so I will put that... 00:49:22.822 --> 00:49:26.713 Can you see the exercise? I am not sure about the zoom, 00:49:26.786 --> 00:49:32.234 if it is ok or not, but I hope it's ok. 00:49:32.729 --> 00:49:36.765 Ok, excellent, excellent. Thank you Jade, thank you all of you. 00:49:37.105 --> 00:49:44.169 Ok, so we will apply to this exercise and we will start the exercise 00:49:44.169 --> 00:49:47.828 at the point that we left last week. 00:49:47.828 --> 00:49:50.516 Do you remember what we did last week? 00:49:50.516 --> 00:49:55.753 We prepared the normal journal entries that come from transactions 00:49:55.753 --> 00:50:00.390 and then we post the journal entries into ledger accounts, 00:50:00.390 --> 00:50:04.027 and then we prepare a trial balance. 00:50:04.027 --> 00:50:08.359 And we call that the unadjusted trial balance 00:50:08.359 --> 00:50:14.052 because it's a trial balance that is prepared before the adjusting entries. 00:50:14.052 --> 00:50:21.048 Ok, so we will start with this, the unadjusted trial balance, ok? 00:50:21.048 --> 00:50:24.151 at 30th June. 00:50:24.151 --> 00:50:29.977 And as you remember the trial balance is simply the list of all the accounts, 00:50:29.977 --> 00:50:34.291 here you can see cash, account receivable, prepaid insurance, supplies, 00:50:34.291 --> 00:50:37.366 all the accounts of the company, ok? 00:50:37.366 --> 00:50:41.263 With the ending balance at the end of the period 00:50:41.263 --> 00:50:44.760 so you can see the trial balance, the unadjusted trial balance 00:50:44.760 --> 00:50:49.603 is prepared at the end of the period is the first thing that we do 00:50:49.603 --> 00:50:54.480 at the end of the period before preparing the adjusting entries, ok? 00:50:54.480 --> 00:50:57.204 So we prepare the unadjusted trial balance 00:50:57.204 --> 00:51:01.653 and we have the ending balance for each of these accounts. 00:51:01.653 --> 00:51:06.518 The ending balance of cash, the ending balance of accounts receivable 00:51:06.518 --> 00:51:13.539 and service revenue is sitting on the fence, yes. 00:51:14.129 --> 00:51:16.255 It moves to the fence, it should be here. 00:51:16.255 --> 00:51:19.093 It should be on the column of credit of course, 00:51:19.093 --> 00:51:21.474 that is a typing thing. 00:51:21.474 --> 00:51:25.383 Service revenue should be in the credit side of course, 00:51:26.033 --> 00:51:28.554 76,600. 00:51:28.554 --> 00:51:33.495 Salaries expense, rent expense, so you have all of these. 00:51:33.948 --> 00:51:39.420 The characteristic of the trial balance is that total debit should equal total credit 00:51:39.420 --> 00:51:46.195 and you can see total debit, 201200 and the same as total credit. 00:51:46.195 --> 00:51:51.282 So this is our starting point for this exercise. 00:51:51.282 --> 00:51:52.546 What means this? 00:51:52.546 --> 00:51:56.087 All the normal journal entries are already recorded, 00:51:56.087 --> 00:51:59.611 all of them are posted to the general ledger 00:51:59.611 --> 00:52:02.959 and we prepare this unadjusted trial balance. 00:52:02.959 --> 00:52:08.458 What is next? Well, here you have the exercise. 00:52:08.458 --> 00:52:15.881 One thing before we go to the next page these are not the total, 00:52:15.881 --> 00:52:19.362 all the accounts of the company. 00:52:19.362 --> 00:52:24.130 There are accounts that they have zero balance, 00:52:24.130 --> 00:52:27.324 and of course they are not in the unadjusted trial balance 00:52:27.324 --> 00:52:30.134 but here you have them listed. 00:52:30.134 --> 00:52:32.995 The accumulated depreciation is one account, 00:52:32.995 --> 00:52:37.774 office equipment another, electricity payable, salaries payable, 00:52:37.774 --> 00:52:38.868 and so on. 00:52:38.868 --> 00:52:42.204 So there are a number of accounts that have zero balance, 00:52:42.204 --> 00:52:48.200 and therefore they are not in this unadjusted trial balance, 00:52:48.200 --> 00:52:52.332 but they are accounts. 00:52:53.200 --> 00:52:58.745 So we will go through the exercise. 00:52:59.079 --> 00:53:01.498 Here we have added data. 00:53:01.498 --> 00:53:06.184 This added data refers to the adjusting entries 00:53:06.184 --> 00:53:08.658 that we need to prepare. 00:53:08.658 --> 00:53:13.106 They are related to revenues earned 00:53:13.106 --> 00:53:16.175 or income earned and expenses incurred 00:53:16.175 --> 00:53:23.127 so we need to prepare one adjusting entry for each of this additional data 00:53:23.127 --> 00:53:26.700 and that is what is required, if you look at the question requirements, 00:53:26.700 --> 00:53:29.805 prepare the adjusting entries for the month of June 00:53:29.805 --> 00:53:32.502 so this is just for one month. 00:53:32.502 --> 00:53:35.167 Prepare the adjusted trial balance 00:53:35.167 --> 00:53:38.419 that is prepared after the adjusting entries 00:53:38.419 --> 00:53:42.033 and we will calculate the profit for the month. 00:53:42.033 --> 00:53:48.050 So we will go one by one to see how to prepare this. 00:53:48.050 --> 00:53:53.938 And I will detail all of them in this first exercise 00:53:53.938 --> 00:53:58.187 and then I will go a bit more quick in the second exercise, 00:53:58.187 --> 00:54:01.451 or in the exercise of the workshop. 00:54:01.451 --> 00:54:07.813 So the first, supplies on hand at 30th June total 7200. 00:54:08.759 --> 00:54:18.775 What this tells you, supplies on hand total 7200. 00:54:19.432 --> 00:54:25.677 Well, if this is the data we have that means somebody went to the... 00:54:25.677 --> 00:54:29.916 To the place that we have the supplies, they count them, 00:54:29.916 --> 00:54:33.127 they value them and at the end the conclusion is 00:54:33.127 --> 00:54:38.626 we have 7200 supplies on hand. That means not used. 00:54:39.457 --> 00:54:44.951 How much do we have in our unadjusted trial balance? 00:54:44.951 --> 00:54:52.406 So we need to look at here, supplies. 13,300. 00:54:52.406 --> 00:54:59.068 But it says that we have only 7200 so that means we need to make an adjustment. 00:54:59.469 --> 00:55:04.754 We need to reduce this 13,600 00:55:05.242 --> 00:55:09.677 and to record an expense, a supplies expense for the difference. 00:55:09.709 --> 00:55:18.381 So 13600 less 7200 that we have, 00:55:18.381 --> 00:55:21.672 that means we have consumed 00:55:21.672 --> 00:55:26.615 or used 6400 of supplies, 00:55:26.615 --> 00:55:28.883 and that is the adjusting entry. 00:55:28.883 --> 00:55:32.186 We need to record the expense for this 00:55:32.186 --> 00:55:37.391 so we will have a supplies expense of 6400 00:55:37.391 --> 00:55:43.392 and we will credit supplies to reduce the supplies account. 00:55:43.771 --> 00:55:50.924 So here you have the first journal entry, adjusting entry. 00:55:50.924 --> 00:55:58.922 Supplies expense debit 6400, and supplies credit 6400. 00:56:00.392 --> 00:56:06.246 When you do this and you credit supplies by 6400, 00:56:06.775 --> 00:56:11.748 if you remember the ledger accounts when we credit one of the ledger accounts 00:56:11.748 --> 00:56:18.007 that is supplies, that will decrease the balance of supplies account 00:56:18.007 --> 00:56:22.858 which is 13600, so now the new balance of supplies 00:56:22.858 --> 00:56:31.015 is 7200 which is the amount that we really have in supplies. 00:56:34.733 --> 00:56:38.433 Any question on this? 00:56:38.433 --> 00:56:42.410 So this is the first adjusting entry. 00:56:42.410 --> 00:56:44.948 Yes Natalia, yes please tell me. 00:56:45.026 --> 00:56:49.842 NATALIA: Hello Herman, yeah I see... 00:56:49.842 --> 00:56:54.040 I print out this, I guess many of us do print out 00:56:54.040 --> 00:56:58.017 this worksheet information 00:56:58.017 --> 00:57:04.225 of the sample of the questions, and we have ended one, 00:57:04.225 --> 00:57:09.888 and last lecture I was asking you to let us print full ones 00:57:09.888 --> 00:57:15.560 because it's hard to follow up because our worksheet is empty at the moment, 00:57:15.560 --> 00:57:22.671 it means we follow up on the computer but can't do notes straight on our papers. 00:57:23.036 --> 00:57:27.014 Yeah, this will be great because... 00:57:27.014 --> 00:57:33.616 HERMAN: Yeah, actually I remember that and at 10 am today, 00:57:33.616 --> 00:57:40.100 I uploaded the solution for the lecture exercise and the workshop exercise. 00:57:40.100 --> 00:57:44.721 I opened that for you and for everybody, 00:57:44.721 --> 00:57:49.525 so you can print them and you can be with the solutions 00:57:49.525 --> 00:57:53.593 and you can follow the solutions NATALIA: Ok, now yeah... 00:57:53.593 --> 00:57:57.978 You do this adjusting notes much in advance 00:57:57.978 --> 00:58:03.235 but is it, you can give us indication when you do apply the solution 00:58:03.235 --> 00:58:07.838 on a regular basis because our paper is usually a couple days before 00:58:07.838 --> 00:58:10.889 I print out, and have this, yeah. 00:58:10.889 --> 00:58:16.241 HERMAN: I will do that because I agree with what you asked me last week. 00:58:16.241 --> 00:58:19.772 I agree that it's good that you have the solution 00:58:19.772 --> 00:58:24.471 to follow the lecture and the workshop with the solution so you can take notes 00:58:24.471 --> 00:58:26.897 in the solution which will be easier. 00:58:26.897 --> 00:58:34.058 That' s why I opened today at 10 am and I put an announcement on the blackboard 00:58:34.058 --> 00:58:38.575 for all of you to know that they are ready for you to print, 00:58:38.575 --> 00:58:43.840 and I think that is what we talked because the idea 00:58:43.840 --> 00:58:48.502 is that you try to do this by yourself without the solutions, 00:58:48.502 --> 00:58:50.204 and that is the main purpose, 00:58:50.204 --> 00:58:53.535 that's why I put in the same day of the lecture and workshop. 00:58:53.535 --> 00:58:58.683 I will release these only for you to print out and to take that today, 00:58:58.683 --> 00:59:00.669 later in workshop. 00:59:00.669 --> 00:59:05.312 NATALIA: Ok, and how many it means they're empty for purpose, 00:59:05.312 --> 00:59:10.208 we have a chance to try, and field solution is gonna be 00:59:10.208 --> 00:59:14.529 in the very last day before lecture, for future use. 00:59:14.529 --> 00:59:17.976 HERMAN: Yes, I will do that in that way all the time. 00:59:17.976 --> 00:59:21.081 So I actually did the two purposes. 00:59:21.081 --> 00:59:24.012 One purpose is for you to try without solutions, 00:59:24.012 --> 00:59:26.763 just with your learning from the videos and PowerPoints, 00:59:26.763 --> 00:59:31.587 and second, to have the solutions before the lecture and workshop 00:59:31.587 --> 00:59:36.399 so you can go through them as well. 00:59:38.033 --> 00:59:44.240 Ok, good. Excellent Natalia, thank you. 00:59:44.682 --> 00:59:48.373 Now we can go to the second one. 00:59:51.862 --> 00:59:58.856 The second says an electricity bill for 1200 has not been recorded 00:59:58.856 --> 01:00:04.908 and will not be paid until next month, so what does this description mean? 01:00:04.908 --> 01:00:09.713 If the company receives an electricity bill for 1200, 01:00:09.713 --> 01:00:14.563 it means that they used, they consumed electricity for this amount. 01:00:14.563 --> 01:00:17.126 It is already consumed therefore it is an expense, 01:00:17.126 --> 01:00:18.862 but has not been recorded. 01:00:18.862 --> 01:00:21.933 So the only thing, this is a simple adjusting entry, 01:00:21.933 --> 01:00:26.339 the only thing that we need to do is to record the expense, 01:00:26.339 --> 01:00:32.746 so we will have electricity expense, 1200, but because it was not paid this month, 01:00:32.746 --> 01:00:37.570 next month will be paid, so we will credit a liability 01:00:37.570 --> 01:00:43.909 which is electricity payable, and that is what you have here. 01:00:44.062 --> 01:00:48.061 So in this adjusting entry we will record 01:00:48.061 --> 01:00:51.826 debit electricity expense 1200, 01:00:51.826 --> 01:00:57.356 credit electricity payable 1200. Yes Natalia? 01:01:01.052 --> 01:01:05.831 Stella, Stella. I need to put you as a caption here... 01:01:09.988 --> 01:01:11.212 Stella. 01:01:20.284 --> 01:01:24.684 Give me a second because I need to put the caption here of Stella 01:01:24.684 --> 01:01:30.619 but I don't find you in the list, we have a big list of students. 01:01:42.231 --> 01:01:45.610 Near the top, ok? 01:01:46.147 --> 01:01:50.947 Ah, there it is. T Ok, thank you Stella 01:01:56.544 --> 01:02:04.888 Ok, yes Jade. You have a question? 01:02:05.377 --> 01:02:06.695 JADE: I do, yes. 01:02:06.695 --> 01:02:11.808 I put there instead of electricity payable I put accounts payable. 01:02:11.808 --> 01:02:15.222 would that be okay or is that a problem? 01:02:15.222 --> 01:02:17.550 HERMAN: It is ok. 01:02:18.598 --> 01:02:23.465 If we are very strict in that 01:02:23.465 --> 01:02:27.860 which is not the case because accounts payable is reasonable to use this. 01:02:27.860 --> 01:02:33.797 When we talk about accounts payable, It's the accounts payable to suppliers, 01:02:33.797 --> 01:02:40.630 so we always link accounts payable for the amount that we owe to suppliers. 01:02:40.630 --> 01:02:45.635 That's why it's better, I would not consider it wrong 01:02:45.635 --> 01:02:50.879 but it's better to put this explicitly electricity payable because this is... 01:02:50.879 --> 01:02:58.373 These are utilities that the company received, 01:02:58.373 --> 01:03:01.824 so electricity or water or that type of thing. 01:03:01.824 --> 01:03:05.592 So I would prefer to put separated from accounts payable 01:03:05.592 --> 01:03:11.397 just because the concept of accounts payable is linked to suppliers of produce. 01:03:11.397 --> 01:03:16.256 Ok? But it's not wrong. 01:03:16.256 --> 01:03:21.713 Ok, any other question for the second... 01:03:21.713 --> 01:03:25.992 for the second adjusting entry? 01:03:29.295 --> 01:03:33.845 So we'll go through the third adjusting entry. 01:03:34.256 --> 01:03:40.375 Insurance policy, here you can see one statement that didn't say anything, 01:03:40.375 --> 01:03:43.975 and you cannot do anything unless you go to the data 01:03:43.975 --> 01:03:48.198 that is in the unadjusted trial balance. 01:03:48.198 --> 01:03:54.346 The statement says the insurance policy is for a year commencing 1st May 2019. 01:03:54.346 --> 01:03:58.207 Well, this is all what you need to prepare the adjusting entries, 01:03:58.207 --> 01:04:00.981 because you have the unadjusted trial balance. 01:04:00.981 --> 01:04:06.032 The only information here is that the insurance policy is for one year, 01:04:06.032 --> 01:04:09.528 12 months, and starts on 1st May 2019, 01:04:09.528 --> 01:04:15.493 so we will see what is the information we have in the unadjusted trial balance. 01:04:15.493 --> 01:04:21.174 First, this company started on 1st May 2019 01:04:21.174 --> 01:04:25.167 which is the same day of the insurance policy, ok? 01:04:25.167 --> 01:04:28.736 Insurance policy is added 1st May 2019. 01:04:28.736 --> 01:04:34.921 And the trial balance is at June 30. 01:04:37.121 --> 01:04:42.598 What is the prepaid insurance? 9600. 01:04:43.145 --> 01:04:51.058 9600, this is for 12 months, so how much is per month? 01:04:52.045 --> 01:04:56.902 It is 800, so this is equal, ok, 01:04:56.902 --> 01:05:03.365 800. 800 per month. 01:05:05.956 --> 01:05:11.115 800 per month. Sorry for my numbers, I'm not very good. 01:05:12.935 --> 01:05:18.374 So 800 is the insurance expense that how much we use 01:05:18.704 --> 01:05:23.365 or consume of this policy per month. 800 per month. 01:05:23.365 --> 01:05:30.079 Now how many months between 1st May until 30th June? 01:05:31.619 --> 01:05:34.219 Two months, exactly. Two months. 01:05:34.448 --> 01:05:38.607 So what will be the expense that we have to recognize 01:05:38.607 --> 01:05:42.895 or to record on the 30th of June? 01:05:42.895 --> 01:05:47.112 The expense for two months, that means 1600. 01:05:47.694 --> 01:05:51.777 That should be a debit in insurance expense, 01:05:51.777 --> 01:05:57.752 and a credit to prepaid insurance to reduce this 9600 01:05:57.752 --> 01:06:02.817 because we already consumed 1600 of insurance. 01:06:02.817 --> 01:06:10.224 So the journal entry, the adjusting entry for this will be 01:06:10.224 --> 01:06:19.778 debit insurance expense 1600, credit prepaid insurance 1600. 01:06:22.803 --> 01:06:25.500 Ok, any question on this? 01:06:30.492 --> 01:06:35.119 Ok, so we can have a look at the... Thank you Jade. 01:06:36.072 --> 01:06:42.160 We can have a look at the next one. Salaries, sorry, not salaries. 01:06:42.160 --> 01:06:44.341 That is the next one. 01:06:44.487 --> 01:06:49.282 Number four, services were performed during the period 01:06:49.282 --> 01:06:54.681 in relation to $3000 of revenue in advance. 01:06:56.689 --> 01:07:00.294 What does this description tell us? 01:07:00.470 --> 01:07:06.703 First the description is telling us that we received revenue in advance, 01:07:06.703 --> 01:07:09.744 that mean we received a payment in advance 01:07:09.744 --> 01:07:16.427 and now in this period we provide services for 3000 of that payment. 01:07:16.773 --> 01:07:22.374 We need to link this with how much we have in revenue received in advance 01:07:22.374 --> 01:07:27.691 in the unadjusted trial balance so we will have a look. 01:07:27.691 --> 01:07:35.835 The unadjusted trial balance, state this revenue received in advance, 4800. 01:07:35.835 --> 01:07:42.435 Debit because we received this amount and we didn't provide the services 01:07:42.435 --> 01:07:47.949 so we have an obligation to provide them and therefore it is a liability, ok? 01:07:47.949 --> 01:07:52.080 Now we provide services for 3000 of this 4800, 01:07:52.080 --> 01:07:59.271 so we need to record a decrease in service revenue received in advance, 01:07:59.271 --> 01:08:06.085 that means we debit 3000 in this account and we will have the current balance 01:08:06.085 --> 01:08:07.945 of all these accounts, 01:08:07.945 --> 01:08:11.343 so we debit 3000 in service revenue received in advance 01:08:11.343 --> 01:08:14.758 and we will have a credit in service 01:08:14.758 --> 01:08:19.211 because we earned already this revenue. 01:08:19.211 --> 01:08:23.166 We provided the service. Yes Jade? 01:08:24.917 --> 01:08:30.744 JADE: Is this classified as an adjustment or is it just as a mistransaction? 01:08:30.744 --> 01:08:35.627 HERMAN: It's an adjustment because the original transaction 01:08:35.627 --> 01:08:40.298 that we already recorded, it is here in the unadjusted trial balance. 01:08:40.298 --> 01:08:43.731 What was the original transaction? 01:08:44.223 --> 01:08:49.762 When this happens, the service revenue received in advance I will write here, ok? 01:08:50.242 --> 01:08:55.973 We have debit cash because we received the payment, ok? 01:08:56.403 --> 01:08:59.197 That was in the previous period. 01:08:59.197 --> 01:09:06.058 We record cash for 4800. Sorry for the numbers. 01:09:07.047 --> 01:09:13.354 So 4800. We debit cash, and we credit, ok? 01:09:13.354 --> 01:09:19.980 This revenue received in advance, I will put it just like that. 01:09:19.980 --> 01:09:24.941 Revenue received in advance we credit 4800. 01:09:24.941 --> 01:09:29.014 This is the normal journal entry. This is the normal transaction 01:09:29.014 --> 01:09:34.895 that we recorded in the last period, and that's why when you look at this entry 01:09:34.895 --> 01:09:41.692 and we post the accounts in the ledger, this is what we have there, ok? 01:09:42.791 --> 01:09:45.524 That is the original transaction. 01:09:45.524 --> 01:09:50.075 What happens now is that we just provide services. 01:09:50.422 --> 01:09:54.523 Of course we didn't receive more money because already we were paid in advance 01:09:54.523 --> 01:10:00.411 but we provide the service so we need to decrease this 01:10:00.411 --> 01:10:05.192 obligation or liability for the 3000 already provided. 01:10:09.722 --> 01:10:15.705 Well, George, it says because the concept of revenue received in advance, 01:10:16.293 --> 01:10:20.879 the concept of that account is that we received cash in advance. 01:10:20.879 --> 01:10:24.730 That is what we received in advance, cash, the payment, 01:10:25.122 --> 01:10:29.782 so if you look at the description, 01:10:31.634 --> 01:10:34.160 services were performed during the period 01:10:34.160 --> 01:10:37.538 in relation to. In relation to what? 01:10:37.538 --> 01:10:41.419 To revenue received in advance. 01:10:41.455 --> 01:10:45.380 If you look at this description, revenue received in advance, 01:10:45.380 --> 01:10:51.242 what it means is that the company received cash in advance 01:10:51.475 --> 01:10:53.497 to provide the services. 01:10:53.527 --> 01:10:58.991 The customer paid before we provide the service to the customer. 01:10:58.991 --> 01:11:03.489 Ok, so cash was involved in the original transaction 01:11:03.489 --> 01:11:08.687 and that is the transaction that I showed you that I prepared, 01:11:08.687 --> 01:11:13.363 so how was it recorded the cash received? 01:11:13.363 --> 01:11:19.582 We debit cash and we credit revenue received in advance from 4800, 01:11:19.582 --> 01:11:22.864 that was the original transaction, it's not for this period, 01:11:22.864 --> 01:11:28.650 that was before the 30th of June and that's why we have in the balance, 01:11:28.650 --> 01:11:31.302 on 30th June we have that amount. 01:11:31.302 --> 01:11:36.777 Now in this period the adjusting entry at the end of the period, 01:11:36.777 --> 01:11:42.310 we need to include how much we provide of services. 01:11:42.310 --> 01:11:46.703 And we provide 3000 of this 4800. 01:11:46.703 --> 01:11:51.753 So because we provide services, now we can record the service revenue, 01:11:51.753 --> 01:11:56.549 it's a credit service revenue, and we decrease the obligation. 01:11:56.549 --> 01:12:03.814 To put the things in context, here we are in the month of June. 01:12:04.816 --> 01:12:10.132 So in June the unadjusted trial balance is for June. 01:12:14.395 --> 01:12:19.935 I will go through the depreciation but do not change them... 01:12:20.189 --> 01:12:24.058 I will go through them, but here... Ok. 01:12:24.724 --> 01:12:27.600 This is the unadjusted... 01:12:28.931 --> 01:12:31.246 I am clear now, excellent Ann. 01:12:31.279 --> 01:12:37.290 This is the unadjusted trial balance at 30th June. 01:12:37.290 --> 01:12:42.294 Here means that before 30th June we received the cash. 01:12:42.294 --> 01:12:47.661 Now in the adjusting entry it means that also during this period before 30th June 01:12:47.661 --> 01:12:55.708 we provide 3000 of this 4800, services provided, ok? 01:12:57.478 --> 01:13:00.754 Does this answer your question George? 01:13:06.412 --> 01:13:12.157 Ok, excellent, good. So we can go through the next one. 01:13:16.052 --> 01:13:17.896 I am here... 01:13:17.922 --> 01:13:25.193 The next one is quite simple because salaries, 6400 are owed on 30th June. 01:13:26.416 --> 01:13:29.666 What does this mean? Salaries owed means that 01:13:29.666 --> 01:13:36.855 the employees worked, so we already consumed these results. 01:13:36.855 --> 01:13:44.878 The work of our employees and therefore we should record a salaries expense. 01:13:44.878 --> 01:13:48.054 But they are owed, that means we have not paid them, 01:13:48.054 --> 01:13:55.201 and that's why we did not record this as a transaction like you learned last week. 01:13:55.201 --> 01:14:00.267 We need to prepare the adjusting entry, so we need to record the pays, 01:14:00.267 --> 01:14:06.191 salaries expense 6400 debit, and a salaries payable 01:14:06.191 --> 01:14:10.645 because it's owed at the end of the month so it will be salaries expense 01:14:10.645 --> 01:14:17.130 and salaries payable. 01:14:17.130 --> 01:14:23.400 Here you have debit salaries expense 6400 01:14:23.400 --> 01:14:27.073 credits salaries payable 6400, ok? 01:14:28.093 --> 01:14:30.748 That I think is simple. 01:14:33.508 --> 01:14:36.377 Then we have the number six. 01:14:37.116 --> 01:14:41.249 Office equipment has a five year life with no resale value, 01:14:41.249 --> 01:14:48.001 and is being depreciated at $1440 per month for 60 months. 01:14:48.001 --> 01:14:54.960 In this description they are telling you how much is the expense, ok? 01:14:55.494 --> 01:15:02.001 But if it is not, if it is only they said the office equipment has a five year life 01:15:02.001 --> 01:15:07.143 with no resale value depreciated using the straight line method, 01:15:07.143 --> 01:15:13.711 you will learn this in another lecture the depreciation for 60 months. 01:15:13.711 --> 01:15:20.232 If we do not have the amounts, you can just go to the unadjusted trial balance 01:15:20.232 --> 01:15:27.329 look at the office equipment account, 86400. 01:15:28.776 --> 01:15:31.924 If you divide this by 60, 01:15:31.924 --> 01:15:37.514 you will have exactly 1440 per month, ok? 01:15:38.284 --> 01:15:42.245 So that is the depreciation expense. 01:15:42.245 --> 01:15:45.982 Yes, a couple of work, I will not go in deep in this topic 01:15:45.982 --> 01:15:49.506 because there is a whole topic about depreciation. 01:15:49.506 --> 01:15:54.603 Yeah, I will go why credit and... 01:15:54.786 --> 01:15:59.720 Ok, you let me finish this part and I will answer the question 01:15:59.720 --> 01:16:01.974 of the previous one. 01:16:02.590 --> 01:16:07.561 So we had this depreciation, 01:16:07.561 --> 01:16:09.896 what does depreciation mean? 01:16:10.465 --> 01:16:14.421 When we purchase an equipment like this, office equipment, 01:16:14.421 --> 01:16:19.109 and we pay a big amount of money, in this case how much we paid 01:16:19.109 --> 01:16:24.770 for this office equipment, it was 86400, ok? 01:16:25.676 --> 01:16:32.761 Do you think we can put as an expense 86400 in the first month? 01:16:32.761 --> 01:16:40.169 Well, of course not because we will use this equipment during 60 months, 01:16:40.169 --> 01:16:46.789 and remember an expense is when we use 01:16:46.789 --> 01:16:48.689 or consume resources. 01:16:48.689 --> 01:16:52.744 This resource that is 86400, 01:16:52.744 --> 01:16:58.167 it will be consumed or used during 60 months 01:16:58.167 --> 01:17:04.939 so we need to calculate how much of this we use in one month, 01:17:06.029 --> 01:17:07.986 or in two months in this case. 01:17:07.986 --> 01:17:11.976 In two months because it's from 1st of May till 30th June. 01:17:11.976 --> 01:17:18.663 How much we use of this in two months, ok? Two months. 01:17:19.607 --> 01:17:23.968 So we divide this by 60, we multiply by two, 01:17:23.968 --> 01:17:28.658 and that will be 2880 01:17:28.658 --> 01:17:34.986 because per month is 1440 when you divide by 60, 01:17:34.986 --> 01:17:37.556 you multiply by two because it's two months 01:17:37.556 --> 01:17:39.467 and now we can record the expense. 01:17:39.467 --> 01:17:45.392 The name of this expense is depreciation expense, 01:17:45.594 --> 01:17:51.621 so we record debit depreciation expense. What is the other account? 01:17:52.419 --> 01:17:58.611 Well the other account will be to decrease this account, 01:17:58.611 --> 01:17:59.592 office equipment, 01:17:59.592 --> 01:18:02.778 so you can say well, we credit office equipment. 01:18:02.778 --> 01:18:07.891 That would be the case that we are doing in all of these accounts, 01:18:07.891 --> 01:18:10.634 but in the case of non-current assets 01:18:10.634 --> 01:18:16.400 we use what we call a contra asset account 01:18:16.400 --> 01:18:20.143 that means we keep separated the decrease of this account 01:18:20.143 --> 01:18:24.490 and the name of that account is accumulated depreciation. 01:18:25.402 --> 01:18:29.546 The effect is the same as you reduce directly office equipment, 01:18:29.546 --> 01:18:34.069 you credit office equipment but in non-current assets like this, 01:18:34.069 --> 01:18:37.062 this is a topic that we will explore in detail, 01:18:37.062 --> 01:18:44.802 we use another account and the name is the accumulated depreciation. 01:18:45.581 --> 01:18:50.001 It's an asset account but with a credit entry. 01:18:50.001 --> 01:18:55.554 So the adjusting entry for this 01:18:55.554 --> 01:19:02.478 will be depreciation expense debit 2880 01:19:02.478 --> 01:19:11.431 and we credit accumulated depreciation office equipment, ok, 2880. 01:19:15.624 --> 01:19:17.866 Any question on this? 01:19:25.575 --> 01:19:29.551 Ok, the last one. 01:19:36.171 --> 01:19:42.865 The last one is number seven, invoices representing 01:19:42.865 --> 01:19:44.614 Ah, Tablynn... 01:19:44.682 --> 01:19:50.666 Ah, ok. Before we go to the seven 01:19:51.237 --> 01:19:53.616 there is a question about the salaries 01:19:53.616 --> 01:19:59.381 who asked me that question about the salaries? 01:20:00.299 --> 01:20:04.507 Omar who did, in the adjusted trial, ok. 01:20:04.650 --> 01:20:09.488 I will try to answer the two questions. 01:20:09.488 --> 01:20:17.227 First, Trina has a question, why to credit 6400 in the transaction five? 01:20:17.227 --> 01:20:22.251 Why to credit? Isn't it debit when they pay 6400? 01:20:22.251 --> 01:20:29.982 Well, remember Trina that we, in any journal entry and also adjusting entry, 01:20:29.982 --> 01:20:33.312 we have a debit side and a credit side. 01:20:33.312 --> 01:20:37.625 The total debit should be always equal to total credit. 01:20:37.625 --> 01:20:43.668 So what is the debit and what is the credit in the 6400 that you have here 01:20:43.668 --> 01:20:46.402 in transaction five? 01:20:46.402 --> 01:20:52.402 Salaries of 6400 are owed at that time, 30th June. 01:20:52.817 --> 01:20:58.367 So we have an expense, and the expense is a debit entry, ok? 01:20:58.989 --> 01:21:03.264 The salaries expense it will be debit. 01:21:03.264 --> 01:21:07.425 And we have a salaries payable because they were not paid, 01:21:07.425 --> 01:21:09.960 they are owed at 30th June. 01:21:09.960 --> 01:21:15.227 So the salaries payable, the liability will be the credit entry. 01:21:15.733 --> 01:21:21.353 So your question is why credit? Well, we credit the liability account, 01:21:21.353 --> 01:21:27.640 that means salaries payable, but we debit the salaries. 01:21:27.640 --> 01:21:32.368 What happens when we pay them in the next period? 01:21:32.368 --> 01:21:40.002 When we pay the salaries we will debit the salaries payable, 01:21:40.002 --> 01:21:45.655 so we decrease this liability, and we will credit cash, ok? 01:21:45.655 --> 01:21:48.374 That is what happened in the following period, 01:21:48.374 --> 01:21:54.459 not in this one. And Tablynn... 01:21:55.168 --> 01:21:59.022 Tablynn you asked a question about the depreciation? 01:21:59.022 --> 01:22:01.581 Yes, depreciation, well, 01:22:01.581 --> 01:22:07.835 this is the concept that we will have in detail, 01:22:08.221 --> 01:22:10.907 there is a whole lecture about depreciation 01:22:10.907 --> 01:22:14.263 with different methods of depreciation but for now, 01:22:14.263 --> 01:22:20.357 we only need to think in the concept of depreciation, the general concept. 01:22:20.357 --> 01:22:25.941 When we purchase an equipment that lasts more than one accounting period 01:22:25.941 --> 01:22:31.133 we cannot record as an expense the cost of the equipment 01:22:31.133 --> 01:22:35.021 because we will use the equipment for a number of periods, 01:22:35.021 --> 01:22:38.757 so we need to divide the cost of the equipment 01:22:38.757 --> 01:22:43.046 into the number of periods. 01:22:43.046 --> 01:22:47.767 So we will have just one part of the cost in each period, 01:22:47.767 --> 01:22:53.001 and the easier way is just divide the cost by the number of periods. 01:22:53.001 --> 01:22:59.160 So in this case the total amount divided by 60 months that we will use 01:23:01.380 --> 01:23:06.521 this equipment, office equipment, means that we will have an expense 01:23:06.738 --> 01:23:13.457 of 1440 per month, and we call that, that expense, 01:23:13.457 --> 01:23:18.453 we call that depreciation expense, ok? 01:23:18.453 --> 01:23:21.248 That is the name of this account, depreciation expense. 01:23:21.248 --> 01:23:23.124 What does that mean? 01:23:23.124 --> 01:23:28.363 It means that that is the part of the equipment 01:23:28.363 --> 01:23:33.347 that has been used or consumed in one period. 01:23:34.339 --> 01:23:37.565 And that's why we record that as a debit for each month, 01:23:37.565 --> 01:23:43.149 but here we have two months, ok? Because from 1st May until 30th June 01:23:43.149 --> 01:23:46.173 which is the time for this exercise, two months, 01:23:46.173 --> 01:23:53.741 it will be two multiplied by 1440, which is 2880. 01:23:53.741 --> 01:24:01.364 So we will record depreciation expense, debit 2880. 01:24:01.745 --> 01:24:03.587 What is the other account? 01:24:03.587 --> 01:24:09.656 I mentioned that there is another account but the name is accumulated depreciation, 01:24:09.656 --> 01:24:14.757 so we will record a credit in that account. 01:24:17.197 --> 01:24:21.528 Ok, I'd asked how much would you deduct from depreciation expense 01:24:21.781 --> 01:24:26.618 in the adjusted... Excellent Tablynn, thank you. 01:24:26.618 --> 01:24:32.075 How much would you deduct in the adjusted trial balance? 01:24:32.316 --> 01:24:37.863 I will go through that Adash because we started with 01:24:37.863 --> 01:24:40.613 the unadjusted trial balance. 01:24:40.613 --> 01:24:47.206 We are doing the adjustments, and then I will explain how we will adjust these 01:24:47.206 --> 01:24:51.070 to the adjusted trial balance. 01:24:51.070 --> 01:24:57.678 How we transform the unadjusted to the adjusted trial balance. 01:24:57.678 --> 01:25:00.354 Ok, yes Trina. 01:25:02.402 --> 01:25:08.058 TRINA: Hello, with the salaries, 01:25:08.597 --> 01:25:14.476 we already had 6400, it means that expense increased, 01:25:14.476 --> 01:25:20.401 that's why expense is debit 6400, but with the liabilities, 01:25:20.401 --> 01:25:25.661 it means that we decrease the liabilities, is that right? 01:25:25.661 --> 01:25:28.280 HERMAN: Yes when (INAUDIBLE) 01:25:28.695 --> 01:25:31.900 TRINA: So if we decrease the... (CROSSTALK) 01:25:32.410 --> 01:25:37.180 Sorry, if we decrease the liabilities, it means it debits liabilities, 01:25:37.180 --> 01:25:38.972 is that right? 01:25:39.439 --> 01:25:42.075 HERMAN: Yes, when we pay that is another transaction, 01:25:42.075 --> 01:25:44.066 it's not the adjusting entry. 01:25:44.066 --> 01:25:47.960 When we pay for the liability, we will credit the liability 01:25:47.960 --> 01:25:51.625 so we decrease the liability, and we will debit cash. 01:25:51.821 --> 01:25:57.411 So we decrease cash because we are paying for that liability. 01:25:57.828 --> 01:25:59.245 But that is another (CROSSTALK) 01:25:59.245 --> 01:26:04.636 TRINA: yeah, I'm a bit confused because we decrease the liabilities, 01:26:04.636 --> 01:26:10.715 but well you put it credit 6400. 01:26:10.715 --> 01:26:14.479 HERMAN: Yeah, well, that is the point. Trina it's good that you asked 01:26:14.479 --> 01:26:21.408 because we should not confuse two different journal entries, ok? 01:26:21.408 --> 01:26:25.769 The journal entry that we're talking in number five here, 01:26:25.769 --> 01:26:28.130 is an adjusting entry. 01:26:28.130 --> 01:26:32.068 We have not paid anything in this journal entry. 01:26:32.068 --> 01:26:38.456 In this transaction, we only recognize that the employees worked 01:26:38.456 --> 01:26:44.585 during the months, how much we owe them for this work, 6400. 01:26:44.585 --> 01:26:47.340 We didn't pay anything. 01:26:47.340 --> 01:26:51.480 In the transaction here it doesn't say that we paid for that. 01:26:51.480 --> 01:26:58.037 We owe this amount at 30th June. So what do we record? 01:26:58.037 --> 01:27:03.906 We record the expense, that means debit salaries expense, 6400, 01:27:03.906 --> 01:27:08.633 and we record the liability because we owe them this amount, 01:27:08.633 --> 01:27:15.065 so we credit salaries payable, 6400 and that's all. 01:27:15.065 --> 01:27:17.444 That's all the adjusting entries. 01:27:18.436 --> 01:27:24.513 Now in another day, next month, we will pay for that. 01:27:24.808 --> 01:27:28.797 In the payment that is another journal entry, not this one, 01:27:28.797 --> 01:27:32.792 when we pay for that what will we do? 01:27:32.792 --> 01:27:36.785 We will debit the liability, so we decrease the liability. 01:27:36.785 --> 01:27:43.516 We will debit 6400, and we will pay, that means we will credit cash. 01:27:43.516 --> 01:27:46.164 When we credit cash we decrease the cash account 01:27:46.164 --> 01:27:51.339 because we are paying that amount and that is another journal entry 01:27:51.339 --> 01:27:52.965 for the next period. 01:27:54.600 --> 01:28:01.572 Does this clarify the point Trina? Good, excellent. 01:28:03.589 --> 01:28:10.686 Ok, we are in the number seven, the last one. 01:28:11.282 --> 01:28:16.599 Invoices representing $8000 of services performed during the month 01:28:16.599 --> 01:28:22.853 have not been recorded as of 30th June, so what does this mean? 01:28:24.803 --> 01:28:30.162 We have provided services because it says invoices representing 01:28:30.834 --> 01:28:35.776 $8000 of services performed during that, so we performed this service, 01:28:35.776 --> 01:28:39.105 and we provided the services for $8000 01:28:39.105 --> 01:28:42.502 but they have not been recorded so we need to record them. 01:28:42.502 --> 01:28:47.110 So we need to record an accounts receivable 01:28:47.110 --> 01:28:51.596 because it doesn't say anything there that we received the money, 01:28:51.596 --> 01:28:55.527 therefore it is an account receivable, we will debit... 01:28:55.696 --> 01:28:57.176 (CLEARS THROAT) Sorry. 01:28:57.686 --> 01:29:00.468 We will debit the account receivable for $8000, 01:29:00.468 --> 01:29:05.745 and we will credit the service revenue 01:29:05.826 --> 01:29:07.610 because we earned from that service, 01:29:07.610 --> 01:29:11.592 we already provided the service, so we will credit service revenue. 01:29:11.942 --> 01:29:13.651 So what we will have... 01:29:19.479 --> 01:29:21.431 I will do that. 01:29:23.472 --> 01:29:28.730 What we will have is the last adjusting entry. 01:29:29.245 --> 01:29:36.092 $8000 account receivable debit, and credit $8000 service revenue. 01:29:36.701 --> 01:29:41.347 So we've completed all the adjusting entries. 01:29:41.700 --> 01:29:45.801 Before we go to how we prepare the adjusted trial balance, 01:29:46.611 --> 01:29:50.884 any questions about the adjusting entries? 01:29:57.565 --> 01:30:00.077 All good? Ok. 01:30:02.876 --> 01:30:06.791 Excellent Jade, very good. That's my purpose. 01:30:06.791 --> 01:30:10.961 How we prepare the adjusted trial balance? 01:30:11.145 --> 01:30:16.598 Before we prepare that, remember these are journal entries, 01:30:16.598 --> 01:30:20.402 so the name is adjusted journal entries, they are journal entries, 01:30:20.402 --> 01:30:26.617 so after you prepare the adjusting entries what is the next step? 01:30:26.617 --> 01:30:30.470 You need to post these entries to the ledger. 01:30:30.470 --> 01:30:33.575 The same as we did last week, exactly Joshua, 01:30:33.575 --> 01:30:38.576 we need to post them to the ledger, all of them to adjust the balance 01:30:38.576 --> 01:30:40.690 of each of these accounts. 01:30:40.690 --> 01:30:44.594 We will not do that, ok? You already learnt last week 01:30:44.594 --> 01:30:48.456 how to post transactions from the journal to the ledger, 01:30:48.456 --> 01:30:52.439 and it's a very repetitive process and it's the same in this case 01:30:52.439 --> 01:30:57.791 so we will not go again through that part we will assume that we already did that, 01:30:57.791 --> 01:31:02.886 Ok, we post all of these to the ledger accounts, 01:31:02.886 --> 01:31:06.229 so the ledger accounts are updated. 01:31:06.229 --> 01:31:12.175 But I will show you how to prepare the adjusted trial balance, 01:31:12.175 --> 01:31:14.867 using the worksheet, ok? 01:31:14.867 --> 01:31:18.020 Using a worksheet, it has the advantage that you can see 01:31:18.020 --> 01:31:22.926 what is the unadjusted trial balance, you can see the adjustments 01:31:22.926 --> 01:31:25.695 and how to prepare the adjusted trial balance, 01:31:25.695 --> 01:31:28.879 how you can explain the difference between the adjusted 01:31:28.879 --> 01:31:32.642 and the unadjusted trial balance. 01:31:34.036 --> 01:31:37.421 So here you have this worksheet. 01:31:37.421 --> 01:31:44.688 In the worksheet what we do is you copy here in this part, ok? 01:31:45.228 --> 01:31:49.960 You copy the unadjusted trial balance. 01:31:50.634 --> 01:31:54.730 Of course, total debit should be equal to total credit. 01:31:55.512 --> 01:32:02.884 You just copy that and then you go through all the adjusting entries 01:32:02.884 --> 01:32:11.664 and you put in the adjustment column, this, I will do just the first two, ok? 01:32:12.202 --> 01:32:14.104 Only the first two. 01:32:14.413 --> 01:32:17.483 So in the first one, what do we have here? 01:32:17.483 --> 01:32:22.231 We debit 6400 in the supplies expense account 01:32:22.231 --> 01:32:27.387 and we credit 6400 in the supplies account, 01:32:27.387 --> 01:32:31.731 so we look at this supplies expense account. 01:32:31.731 --> 01:32:38.266 This is the supplies expense account, we debit 6400, so we just copy there 01:32:38.266 --> 01:32:43.068 And the we go to the supplies account this is the supplies account, 01:32:43.068 --> 01:32:48.005 you debit this account, ok? 01:32:48.005 --> 01:32:50.600 You just copy here in these two columns 01:32:50.600 --> 01:32:54.667 what you have done in the adjusting entries. 01:32:54.667 --> 01:33:01.313 The second, we will do just the first two. The second, what do we have? 01:33:01.313 --> 01:33:05.477 1200 debit in electricity expense account 01:33:05.477 --> 01:33:09.898 1200 credit electricity payable account. 01:33:09.898 --> 01:33:15.515 So you copy that electricity expense account, 01:33:15.515 --> 01:33:22.005 1200 debit, you copy there and then you look for electricity payable. 01:33:22.005 --> 01:33:29.567 Electricity payable credit 1200, and you continue with all of this. 01:33:29.567 --> 01:33:33.304 The only thing that you need to be careful is that sometimes, 01:33:33.304 --> 01:33:37.632 one account appears more than one time in the adjusting entries. 01:33:38.032 --> 01:33:43.163 So if you look at the adjusting entries, there is one account 01:33:43.163 --> 01:33:47.016 that appears two times, so service revenue. 01:33:47.016 --> 01:33:52.676 You have here service revenue, credit 3000, 01:33:52.676 --> 01:33:58.260 and then you have here service revenue, 8000. 01:33:58.260 --> 01:34:03.964 So the total amount that we will add to service revenue is 11000. 01:34:03.964 --> 01:34:10.520 That's why here service revenue in the credit is 11000, 01:34:10.520 --> 01:34:14.145 so its the sum of 3000+8000. 01:34:14.145 --> 01:34:18.500 That you need to be careful because we need to add the total amounts, 01:34:18.500 --> 01:34:23.508 that increase the credit of this account. 01:34:23.508 --> 01:34:26.989 Ok, so we complete these, the adjustments. 01:34:26.989 --> 01:34:30.589 We just copy all the adjusting entries, debit or credit 01:34:30.589 --> 01:34:34.354 in the corresponding accounts. 01:34:36.323 --> 01:34:39.877 Well, it's a really (INAUDIBLE) 01:34:40.164 --> 01:34:44.483 because very few accounts you will have more than one entry. 01:34:44.483 --> 01:34:50.260 In this case we have only service revenue but you know the to not make a mistake 01:34:50.260 --> 01:34:56.507 and I did that in the next exercise, is this things. 01:34:56.507 --> 01:35:00.889 Do not make a mistake, I will give you a clue to not make a mistake. 01:35:00.889 --> 01:35:03.432 Instead I've put here the total. 01:35:03.432 --> 01:35:07.327 Every time you have an amount there just put how much, 01:35:07.327 --> 01:35:11.818 so you put here the 3000, I will put in thousands 01:35:11.818 --> 01:35:19.133 and then you simply add 8, so every time you put the number there. 01:35:19.133 --> 01:35:21.787 Then you know that it's 11000. 01:35:21.787 --> 01:35:25.832 In this way you will not skip anything. 01:35:26.057 --> 01:35:32.730 Ok, that is just a way to do to not make that mistake. 01:35:35.941 --> 01:35:39.380 How we prepare now the adjusted trial balance. 01:35:40.877 --> 01:35:45.647 The adjusted trial balance is the same as the unadjusted trial balance 01:35:45.647 --> 01:35:47.595 with all the adjustments. 01:35:47.595 --> 01:35:52.621 So you can see for the cash accounts, there are no adjustments. 01:35:52.621 --> 01:35:58.124 Ok, no adjustments, so the adjusted trial balance is the same 01:35:58.124 --> 01:36:00.828 as the unadjusted trial balance. 01:36:01.852 --> 01:36:06.517 Accounts receivable, the unadjusted is 23 and 40. 01:36:06.517 --> 01:36:12.754 The ajustment is debit 8000 so it directly increases the debit 01:36:12.754 --> 01:36:19.028 so the adjusted will be the sum of all of them. 01:36:20.252 --> 01:36:25.045 Prepaid insurance we have a debit, 9600. 01:36:25.045 --> 01:36:31.442 The adjustment is a credit of 1600, a credit decreases a debit, 01:36:31.442 --> 01:36:34.481 it's the opposite, ok? So it will be the difference 01:36:34.481 --> 01:36:37.812 and there we adjusted this 8000. 01:36:38.668 --> 01:36:42.394 The same for supplies, we have 13600, 01:36:42.394 --> 01:36:47.560 the adjustment is a credit, therefore the credit decreases debit, 01:36:47.560 --> 01:36:54.198 that will be 7200, ok? 01:36:54.916 --> 01:36:56.130 And so on. 01:36:56.130 --> 01:36:59.742 Office equipment there is no adjustment accumulated depreciation 01:36:59.742 --> 01:37:01.877 of office equipment, there is nothing here, 01:37:01.877 --> 01:37:06.690 because this is an account that was in zero but we have an adjustment 01:37:06.690 --> 01:37:13.230 2880, so the adjusted trial balance will be a credit 2880. 01:37:16.019 --> 01:37:19.681 So you can see to prepare the adjusted trial balance is simple. 01:37:19.681 --> 01:37:26.463 If we're working with the worksheet, we just add or subtract the adjustment 01:37:26.463 --> 01:37:30.460 depending on whether they are on the same side or the opposite side. 01:37:30.460 --> 01:37:33.446 If they are on the same side, a debit increases a debit, 01:37:33.446 --> 01:37:38.108 a credit increases a credit, but in the opposite side 01:37:38.108 --> 01:37:44.471 a credit will decrease a debit or a debit will decrease a credit. 01:37:47.080 --> 01:37:50.111 Any question? 01:37:53.205 --> 01:37:58.829 So once you have this worksheet... Excellent Joshua, 01:37:59.623 --> 01:38:03.052 Once you have the worksheet, the adjusted trial balance 01:38:03.052 --> 01:38:06.670 you can just copy. You have the list of... 01:38:08.516 --> 01:38:13.121 You have the list of all this, ok? The list of the accounts, 01:38:13.121 --> 01:38:18.198 you have the balance, the debit balance or the credit balance 01:38:18.198 --> 01:38:22.568 of all of these accounts, and you can just copy them 01:38:22.568 --> 01:38:29.462 to have the adjusted trial balance so if this is the adjusted trial balance 01:38:29.462 --> 01:38:33.356 the list of the accounts, what accounts have a debit balance 01:38:33.821 --> 01:38:39.629 after the adjustments, or credit balance, all of these accounts. 01:38:45.474 --> 01:38:51.490 That's the complete exercise and the adjusted trial balance. 01:38:53.044 --> 01:38:55.198 Any question? 01:38:58.065 --> 01:39:01.856 I think maybe we will use again the four hours 01:39:01.856 --> 01:39:04.697 because we still do not finish the lecture, 01:39:04.697 --> 01:39:06.715 we have the second exercise of the lecture 01:39:06.715 --> 01:39:09.502 and then we have the exercise of the workshop 01:39:09.502 --> 01:39:13.699 so definitely we are using the consultation time of the 01:39:13.699 --> 01:39:18.586 four hours to complete, but at this point, 01:39:18.586 --> 01:39:22.982 we are already one hour 40 minutes. 01:39:22.982 --> 01:39:28.288 It's good for you to have a break so you can just prepare your coffee. 01:39:32.165 --> 01:39:35.332 No Natalia, I will answer that. You prepare your coffee, 01:39:35.384 --> 01:39:41.798 you're soft drink, take a rest, and we will meet in 10 minutes. 01:39:43.365 --> 01:39:48.467 Before I go I will just answer the question to Natalia. 01:39:48.467 --> 01:39:52.585 Still accountants do this step manually? No, Natalia, no. 01:39:52.906 --> 01:39:57.033 I will talk about this when we come back after 10 minutes 01:39:57.033 --> 01:40:01.737 because I will talk about the assignment. That will answer your question. 01:40:02.322 --> 01:40:05.433 And Tablynn, can you explain profit thing? 01:40:05.433 --> 01:40:10.130 Yes I will do that in the next exercise, need more exercise, 01:40:10.130 --> 01:40:13.233 we will do four Abdul, today. 01:40:13.233 --> 01:40:17.926 If we aren't late, pm, no problem for me, 01:40:17.926 --> 01:40:23.761 but if you have the strength to still be there, 01:40:23.761 --> 01:40:25.528 we'll be good... 01:40:25.863 --> 01:40:29.816 We will... We will do many exercises today, 01:40:29.816 --> 01:40:36.635 but for now take a rest, relax. I need to grab my coffee as well, 01:40:36.920 --> 01:40:44.426 and 10 minutes, so it's 2.40. At 2.50 we continue. 01:40:44.630 --> 01:40:51.704 I will disconnect the microphone, 2.50 we continue, ok? 01:51:17.211 --> 01:51:21.526 Ok, here we are again, more relaxed 01:51:21.526 --> 01:51:26.363 and ready for another one and a half hours. 01:51:35.263 --> 01:51:39.431 Before starting with the next exercise 01:51:39.431 --> 01:51:46.355 I will just give you some information 01:51:46.743 --> 01:51:48.852 about your first assignment. 01:51:50.618 --> 01:51:56.534 The assignment that you will have is a very practical assignment 01:51:57.358 --> 01:52:05.553 and this will address one of the questions about Natalia, 01:52:06.444 --> 01:52:10.946 Natalia asked, still accountant do these steps manually? 01:52:11.116 --> 01:52:17.015 Well, accountants do not do this manually but of course the need to understand 01:52:17.015 --> 01:52:20.967 what the system does because if not, the possibility of errors 01:52:20.967 --> 01:52:22.203 could be very big. 01:52:22.203 --> 01:52:26.157 When you enter a journal entry you need to understand 01:52:26.157 --> 01:52:31.348 what continues after that, even the system is doing that 01:52:31.348 --> 01:52:35.360 but you need to know how your ledger is updated, 01:52:35.360 --> 01:52:38.779 how the trial balance is prepared, it's very important to do that. 01:52:38.779 --> 01:52:44.093 That's why you learn to do this manually even though then 01:52:44.093 --> 01:52:46.593 the system will do this for you. 01:52:46.593 --> 01:52:52.169 OK, but you need to be able to check whether the system is doing well or not. 01:52:52.673 --> 01:52:55.976 In this course you will have the opportunity to deal with 01:52:55.976 --> 01:53:01.928 one of the most commonly used Accounting software, 01:53:01.928 --> 01:53:08.796 it's a cloud accounting because everything is in the cloud 01:53:08.796 --> 01:53:12.258 and not in the computer of the organization, 01:53:12.258 --> 01:53:14.440 and that is Xero. 01:53:14.440 --> 01:53:21.238 Xero is used by many small and medium companies. 01:53:21.238 --> 01:53:25.150 Not the very big ones because they have their own systems, 01:53:25.150 --> 01:53:30.661 but many small and medium companies use Xero. 01:53:30.661 --> 01:53:37.614 Accounting Pod is an organization that facilitates 01:53:37.614 --> 01:53:42.901 the learning of this software. 01:53:42.901 --> 01:53:49.477 Griffith University has an arrangement with Accounting Pod 01:53:49.477 --> 01:53:55.364 to provide this facilitation, for learning Xero, 01:53:55.364 --> 01:54:00.616 and we have set up the assignment that you will have in this, 01:54:00.616 --> 01:54:03.745 using this software. 01:54:03.745 --> 01:54:11.669 So next Monday, 3rd August, the module, 01:54:11.669 --> 01:54:18.807 the practice module of Accounting Pod will be open for you. 01:54:18.807 --> 01:54:24.101 And it will be open practically the whole month of August, 01:54:24.101 --> 01:54:28.718 until the 27th of August, that will be closed at 5.00 pm. 01:54:28.718 --> 01:54:36.664 So what is the idea is that you do this. You follow step by step 01:54:36.664 --> 01:54:41.742 all the processes and you will learn how to use this software, 01:54:41.964 --> 01:54:46.215 so you will do what accountants do in the practice, ok? 01:54:46.416 --> 01:54:52.739 And this assessment, the assignment we have two parts, 01:54:52.739 --> 01:54:57.549 we have the practice module that it's called, 01:54:57.549 --> 01:55:01.746 that will be open next Monday, 01:55:01.746 --> 01:55:07.801 and then after it is closed, that means the 27th of August. 01:55:07.801 --> 01:55:13.792 On the 1st of September we will open the second part of this assessment 01:55:13.792 --> 01:55:17.078 which is the Xero assessment. 01:55:17.078 --> 01:55:19.548 That will be opened on the 1st of September, 01:55:19.548 --> 01:55:24.320 and it will be closed on the 23rd of September, 5.00 pm, 01:55:24.320 --> 01:55:28.147 so at that point you need to finish the second part. 01:55:28.412 --> 01:55:34.490 Your marks will be based on what you do in this task. 01:55:34.775 --> 01:55:37.295 The marks are allocated... 01:55:40.631 --> 01:55:45.098 The marks are allocated to the task that you are doing. 01:55:45.272 --> 01:55:50.559 Now, in the question by Jade, what learning modules 01:55:50.559 --> 01:55:53.163 will the practice on Xero cover? 01:55:53.163 --> 01:56:00.615 What you need to know is just the basics of the accounting cycle, 01:56:00.615 --> 01:56:07.036 so to understand what is a journal entry, what are the ledger accounts. 01:56:07.223 --> 01:56:12.528 But the training that you will do, you will see it's very... 01:56:12.528 --> 01:56:18.868 Totally different to what we are doing in the accounting period, 01:56:18.982 --> 01:56:25.792 because you will do tasks related to a software. 01:56:25.792 --> 01:56:30.393 I will explain in a bit of detail but next week, on Tuesday of next week, 01:56:30.497 --> 01:56:34.458 I will dedicate more time to explain to you in more detail 01:56:34.458 --> 01:56:39.786 what you have to do because at that point you will have this already open, ok? 01:56:40.082 --> 01:56:46.827 Now it's not there, you cannot see this software yet. 01:56:48.979 --> 01:56:54.001 There are three modules in each assessment task, 01:56:54.216 --> 01:56:57.006 the practice and the assessment. 01:56:57.006 --> 01:57:01.170 Your marks for the assignment will be the average of all these, 01:57:01.661 --> 01:57:04.593 ok, the practice and the assessment. 01:57:04.593 --> 01:57:08.830 You will have a rubric for this so you will know exactly how 01:57:08.830 --> 01:57:11.447 your marks will be allocated. 01:57:11.447 --> 01:57:15.463 The system marks you, so it's not that I will mark this. 01:57:15.463 --> 01:57:22.247 For each task completed, the system will mark you, 01:57:22.247 --> 01:57:25.412 and you will have the marks according to the task. 01:57:25.412 --> 01:57:28.723 I will give you some guidelines next week on that. 01:57:28.723 --> 01:57:38.443 But in the first part, the practice set, there are three modules, actually four, 01:57:39.068 --> 01:57:44.408 but the important models are modules two and three. 01:57:44.408 --> 01:57:50.756 The module one is just a welcome for you to have a welcome to the system, 01:57:50.756 --> 01:57:53.839 there are no marks allocated there. 01:57:53.839 --> 01:57:59.020 Module two is the basics, and there are 20 marks allocated there. 01:57:59.020 --> 01:58:07.087 There are very simple tasks that will tell you how to work in Xero. 01:58:07.087 --> 01:58:13.664 One of the tasks is for example to set up an authentication in door, 01:58:14.214 --> 01:58:22.560 so it's not related to accounting at all, but is related to working with this... 01:58:23.009 --> 01:58:25.677 with the system. 01:58:25.677 --> 01:58:31.350 My suggestion would be to always look at the question that you have 01:58:31.350 --> 01:58:36.770 for each task and the possible answer, and then look at the content. 01:58:37.861 --> 01:58:44.552 Try to not answer the question immediately but go through the content. 01:58:44.552 --> 01:58:49.498 You will learn through the content, not just answering the questions. 01:58:49.498 --> 01:58:54.519 Try not to do what is... You look at the question, possible answer, 01:58:54.519 --> 01:58:57.512 and then you try to find the answer in the content, 01:58:57.512 --> 01:58:59.935 because you will not learn a lot. 01:58:59.935 --> 01:59:05.729 The idea is that you learn how to use Xero, this system, ok? 01:59:05.921 --> 01:59:09.203 And to learn that it's good that you go through the content 01:59:09.203 --> 01:59:12.797 trying to learn what is this about? 01:59:12.797 --> 01:59:16.734 And the next module, the module three that is Xero, 01:59:16.734 --> 01:59:19.676 in that module you will work in Xero. 01:59:19.676 --> 01:59:26.410 So module two is just to prepare, you will be prepared to work with Xero 01:59:26.791 --> 01:59:31.718 but it's not yet the working withing Xero. 01:59:31.718 --> 01:59:35.515 Module three yes, you will have a number of tasks 01:59:35.515 --> 01:59:40.980 following the instructions that Accounting Pod will give you 01:59:40.980 --> 01:59:45.006 to complete this task and provide the answers. 01:59:46.697 --> 01:59:51.042 So then the module four is just to wrap up a couple of questions, 01:59:51.042 --> 01:59:53.414 but not really important. 01:59:53.414 --> 01:59:56.513 Module two and three are the most important. 01:59:56.513 --> 02:00:00.627 Now when you finish one module, then you will have access to the next one 02:00:00.627 --> 02:00:04.145 and so on, so you need to go step by step. 02:00:04.145 --> 02:00:11.998 In this sense, this is, even though you need some knowledge 02:00:11.998 --> 02:00:15.874 in accounting that you already have, you don't need more than that 02:00:15.874 --> 02:00:21.708 because it's different to learn how to work with a software in accounting 02:00:21.708 --> 02:00:27.105 than how to do accounting, that is what you are doing now. 02:00:27.510 --> 02:00:32.050 Then the assessment part is just the application of all what you have learned 02:00:32.050 --> 02:00:36.957 in the practice part, and in a different case scenario. 02:00:37.606 --> 02:00:42.497 So that is in general what you will from next week, 02:00:42.497 --> 02:00:46.241 there is time, don't wait till the last two days. 02:00:46.241 --> 02:00:51.670 For example, it opens 2nd August, it will be closed 27th of August, 02:00:51.670 --> 02:00:56.283 do not wait until the 25th of August for all the task, 02:00:56.283 --> 02:01:00.044 because you need time for that. 02:01:00.362 --> 02:01:02.739 You need time to reflect on what you're learning, 02:01:02.739 --> 02:01:08.523 you need time to properly do the task and go just a little bit 02:01:09.070 --> 02:01:13.057 during the time this will be open. 02:01:13.721 --> 02:01:18.571 It will not take a long time, ok? it will not take a very long time, 02:01:18.571 --> 02:01:22.895 probably you can do this in three or four days, if you dedicate full time, 02:01:22.895 --> 02:01:27.210 but that is not the best way to learn. 02:01:28.286 --> 02:01:32.503 Yes, you will have marks Cecilia in the practice part 02:01:32.503 --> 02:01:38.555 and actually the total marks that you will have is the average 02:01:40.011 --> 02:01:44.712 weighted average of the practice part and the assessment part. 02:01:44.996 --> 02:01:48.164 I also considered to give marks for the practice part 02:01:48.164 --> 02:01:51.907 because in the practice part, it will be easier for you, 02:01:51.907 --> 02:01:56.250 but the intention is that you learn how to use the software 02:01:56.250 --> 02:01:59.908 and how to use this software is in the practice part. 02:02:00.171 --> 02:02:03.429 In the assessment part you will apply all of this, 02:02:03.429 --> 02:02:07.200 so there are marks allocated in the practice part as well, yeah. 02:02:09.286 --> 02:02:13.039 So this is just some information that I want to give you in advance 02:02:13.189 --> 02:02:21.231 and next week with this open, I will show you the screens 02:02:21.541 --> 02:02:25.946 and I can share screens for you to do this. 02:02:27.289 --> 02:02:32.369 Cecilia, is there any way we can practice using the system without getting marks? 02:02:32.369 --> 02:02:36.443 Yes, because you don't need to submit 02:02:36.443 --> 02:02:40.232 but now you will see it's very straightforward, 02:02:40.232 --> 02:02:43.378 the system will tell you exactly what to do, 02:02:43.378 --> 02:02:46.746 so if you do well, you don't need to do it again, 02:02:46.746 --> 02:02:48.351 but try to do well. 02:02:48.351 --> 02:02:54.207 Now there is some not in the practice part but in the assessment part 02:02:54.207 --> 02:03:02.708 there is feedback that you can receive and also you can ask questions. 02:03:02.708 --> 02:03:09.575 Now the specific question of the software please do not ask me that way 02:03:09.575 --> 02:03:13.279 but to the system, there is a box that you will see next week, 02:03:13.279 --> 02:03:16.276 that says 'leave us a message'. 02:03:16.276 --> 02:03:21.554 You leave all the questions there and they will answer you immediately. 02:03:21.554 --> 02:03:24.224 If you have a problem with this, of course you contact me 02:03:24.224 --> 02:03:32.544 and I will deal with them, but they answer quite quick all your questions. 02:03:33.729 --> 02:03:39.201 Ok, now I have another message, 02:03:39.201 --> 02:03:42.912 and this is another caption. 02:03:43.802 --> 02:03:48.725 Who sent me a message about captioning? They'll need the captioning. 02:03:51.548 --> 02:03:59.770 Cassandra is that you? Ok, I've added you. 02:04:05.927 --> 02:04:11.299 Ok, so now we can continue with the next exercise. 02:04:15.665 --> 02:04:21.160 And we are still in the lecture so definitely will end a bit late 02:04:23.605 --> 02:04:29.787 but I prefer to clarify anything you need it's important for you. 02:04:36.168 --> 02:04:37.695 Ok, so... 02:04:42.501 --> 02:04:50.439 I guess we don't need to put this... Ok. 02:04:52.114 --> 02:04:58.631 Here you have the next question. This is... 02:04:59.307 --> 02:05:01.813 I do not know if you can see well in your screen 02:05:01.813 --> 02:05:05.149 because this uses the whole one in my screen. 02:05:05.149 --> 02:05:07.801 Can you see we're on this table? 02:05:10.998 --> 02:05:14.582 Yes, ok, excellent. Excellent, thank you. 02:05:17.008 --> 02:05:26.095 So this exercise starts as well from the unadjusted trial balance, 02:05:26.367 --> 02:05:28.425 the same as this one. 02:05:28.425 --> 02:05:34.427 And they open for business on 1st of April 2019 02:05:34.427 --> 02:05:40.630 and the trial balance is on 30th of June, so how many months do we have? 02:05:40.630 --> 02:05:46.611 This is important because we will need this to calculate the adjusting entries, 02:05:46.611 --> 02:05:50.478 how many months since we started? Three months. 02:05:50.478 --> 02:05:55.017 So remember that from 1st of April until the date, 02:05:55.047 --> 02:05:57.193 very good Natalia, three months, 02:05:57.193 --> 02:06:02.715 until the date of these financial statements, three months, 02:06:02.715 --> 02:06:04.616 that is what we will consider. 02:06:04.616 --> 02:06:08.028 So what we have here in this, this is the worksheet. 02:06:08.028 --> 02:06:11.487 You can see we add more columns. 02:06:11.487 --> 02:06:18.813 What we have at the beginning is the unadjusted trial balance, 02:06:18.813 --> 02:06:22.795 that I am showing you there, unadjusted trial balance. 02:06:22.795 --> 02:06:27.424 Then we put in the adjustments, all the adjusting entries, 02:06:27.424 --> 02:06:32.753 we will do that in this exercise as well, and from this we prepare what is called 02:06:32.753 --> 02:06:36.016 the adjusted trial balance. 02:06:36.709 --> 02:06:43.597 But now we will add the last part for today which is the closing entries 02:06:43.597 --> 02:06:48.113 so you can see we have now three types of entries. 02:06:48.113 --> 02:06:54.675 Just the general entries, or journal entries that come from transactions 02:06:54.675 --> 02:06:56.746 that we did last week. 02:06:56.746 --> 02:07:02.215 We have the adjusting entries that we prepared in the first part, 02:07:02.215 --> 02:07:07.174 and we have the closing entries and we will see what are the closing entries. 02:07:07.174 --> 02:07:11.363 After the closing entries we prepare another trial balance 02:07:11.363 --> 02:07:14.813 which is the post-closing trial balance. 02:07:14.813 --> 02:07:20.127 And with this we complete, almost complete the accounting cycle. 02:07:20.127 --> 02:07:24.964 After this we only need to prepare the financial statements. 02:07:25.824 --> 02:07:32.085 So we have the list of accounts, here you have all the list of accounts 02:07:32.085 --> 02:07:38.407 that we will use in this and we have the ending balance of each of these accounts 02:07:39.723 --> 02:07:43.750 in the unadjusted trial balance, that means before adjustment, 02:07:43.750 --> 02:07:50.062 these are the balances of all of these accounts, ok? 02:07:53.970 --> 02:07:59.356 Here we continue with different types of accounts, 02:07:59.356 --> 02:08:01.895 we will go in detail with all of them. 02:08:01.895 --> 02:08:04.925 And of course, the unadjusted trial balance 02:08:04.925 --> 02:08:09.212 the total debits should be equal to total credit. 02:08:09.212 --> 02:08:15.373 That's in all the trial balances, total debit equals total credit. 02:08:17.243 --> 02:08:20.388 So here we have the additional data. 02:08:20.388 --> 02:08:24.007 The additional data as you already know is the data that we need 02:08:24.007 --> 02:08:30.804 to prepare the adjusting entries, so we will go through these six entries, 02:08:30.804 --> 02:08:38.448 six additional data to prepare the adjusting entries. 02:08:38.734 --> 02:08:43.433 We will journalize the adjusting entries so we will record them, 02:08:43.433 --> 02:08:48.044 what is the debit, what is the credit of each of this adjusting entries. 02:08:48.044 --> 02:08:50.845 And then with this adjusting entries, 02:08:50.845 --> 02:08:55.755 we will complete the adjusted trial balance in the worksheet. 02:08:58.104 --> 02:09:01.417 Then from the adjusted trial balance in the worksheet, 02:09:01.417 --> 02:09:05.102 we will prepare the closing entries. 02:09:05.812 --> 02:09:08.404 And using the information of the closing entries, 02:09:08.404 --> 02:09:12.752 we will prepare the post-closing entries trial balance. 02:09:12.752 --> 02:09:15.168 So this is a very complete exercise, 02:09:15.168 --> 02:09:17.773 the starting with the unadjusted trial balance 02:09:17.773 --> 02:09:23.282 until the post-closing entries trial balance. 02:09:23.282 --> 02:09:28.156 So we will start with the adjusting entries. 02:09:28.156 --> 02:09:34.507 The first one, insurance expires at a rate of $900 per month 02:09:34.507 --> 02:09:41.240 and is an annual premium commencing 1st April 2019. 02:09:41.240 --> 02:09:49.780 So what might this description be telling us? 02:09:49.780 --> 02:09:55.299 It says that three months, so it's already calculated the total policy divided by 12, 02:09:55.299 --> 02:10:00.026 it should be 900 per month, that is the insurance expense per month 02:10:00.026 --> 02:10:05.252 when this started on 1st of April, at the beginning of this period 02:10:05.252 --> 02:10:08.626 and we have already three months if you remember. 02:10:08.626 --> 02:10:15.307 So in three months by $900 is 2700. 02:10:15.307 --> 02:10:21.297 We need to record the debit, the insurance expense clearly, 02:10:21.297 --> 02:10:24.631 then prepaid insurance. 02:10:24.631 --> 02:10:33.450 So we look at our journal entries, insurance expense, and prepaid insurance. 02:10:33.450 --> 02:10:37.704 Here you have debit 2700 insurance expense, 02:10:37.704 --> 02:10:43.950 credit 2700 prepaid insurance, and that is the first one, ok? 02:10:47.268 --> 02:10:52.238 I will go a bit quicker in this but please stop me at any time 02:10:52.238 --> 02:10:55.612 and ask me if there is something that you would like to clarify. 02:10:55.612 --> 02:10:59.840 Of course I will explain well but because we've gone through this already 02:10:59.840 --> 02:11:01.690 they are similar. 02:11:01.690 --> 02:11:09.354 If it is clear just.. Just (INAUDIBLE). 02:11:10.527 --> 02:11:16.104 Ok, sorry. What was the question? 02:11:17.691 --> 02:11:22.555 Here is it prepaid insurance? Yes it is prepaid insurance. 02:11:22.985 --> 02:11:29.857 Ok, ok. So to answer that question we need to look at from where comes this. 02:11:30.189 --> 02:11:35.770 Insurance expires at the rate of $900 per month. 02:11:35.770 --> 02:11:42.404 From where does this come? This comes from a prepaid insurance 02:11:42.404 --> 02:11:47.235 so that means the company paid in advance it's a prepayment, 02:11:47.235 --> 02:11:53.209 the insurance for the next 12 months on 1st April. 02:11:53.209 --> 02:12:00.448 1st April the company paid the whole year, that means 12 months insurance. 02:12:00.448 --> 02:12:01.739 What amount? 02:12:01.739 --> 02:12:08.380 To know that you need to look at the account prepaid insurance, 02:12:08.380 --> 02:12:14.580 here you have, ok, prepaid insurance debit 10800. 02:12:14.580 --> 02:12:18.502 If you divide this by 12 it's 900. 02:12:18.502 --> 02:12:22.732 That means every month you need to record an insurance expense 02:12:22.732 --> 02:12:27.740 because you will consume this policy in 12 months. 02:12:27.740 --> 02:12:33.903 So every month you need to record an insurance expense of 900 every month 02:12:33.903 --> 02:12:46.620 and we have three months so it will be the total of 2700 as insurance expense 02:12:46.620 --> 02:12:55.341 and we decrease the prepaid insurance, very good, excellent. 02:12:55.759 --> 02:13:02.813 Ok, the second one, an inventory of supplies shows 7200 02:13:02.813 --> 02:13:08.215 of unused supplies on 30th June. 02:13:08.215 --> 02:13:14.715 So we still have 7200 supplies in the inventory. 02:13:14.715 --> 02:13:18.916 How much do we have in the unadjusted trial balance? 02:13:20.983 --> 02:13:30.028 Supplies, 11400, and we have 7200 at the end of June 02:13:30.028 --> 02:13:32.189 so we have use the difference. 02:13:32.189 --> 02:13:39.664 What is the difference between 11400 and 7200? It's 4200. 02:13:39.664 --> 02:13:47.660 So we have a supplies expense debit 4200 and we credit this account supplies 02:13:47.660 --> 02:13:51.868 to reduce 4200 from here. 02:13:51.868 --> 02:14:03.349 So the journal entry, the adjusting entry, it will be supplies expense 4200 debit 02:14:04.019 --> 02:14:09.728 and we credit supplies 4200. With this we decrease the supplies account 02:14:09.728 --> 02:14:16.123 and now we will have the balance that we calculate here. 02:14:16.123 --> 02:14:20.122 That we count, we count the items, we value the items 02:14:20.122 --> 02:14:24.128 and what we have at the end of June is 7200, ok? 02:14:24.128 --> 02:14:32.878 So that is the second adjustment. The third one. 02:14:33.513 --> 02:14:40.396 The depreciation for the year ended 30 is 5400 on the building 02:14:40.396 --> 02:14:43.231 and 4500 on furniture. 02:14:43.231 --> 02:14:46.099 Here you have two items. 02:14:46.099 --> 02:14:50.582 The two of them are what we call the non-current assets, 02:14:50.582 --> 02:14:57.784 so they're assets that last for more than one accounting period. 02:14:57.784 --> 02:15:06.104 We have buildings and furniture and this description is telling us 02:15:06.104 --> 02:15:12.599 that depreciation expense for the year 30th June 2019, 02:15:12.599 --> 02:15:15.236 that is the ending... 02:15:16.723 --> 02:15:20.344 That is the date of the unadjusted trial balance. 02:15:20.344 --> 02:15:27.204 The deprecieation expense is 5400 on the building, 4500 on furniture. 02:15:28.593 --> 02:15:32.163 No we need to think in the accounts. 02:15:32.163 --> 02:15:37.437 Depreciation expense is one account so it doesn't matter how many items 02:15:37.437 --> 02:15:39.285 we are depreciating 02:15:39.285 --> 02:15:44.714 we need to add them and we will have the depreciation expense, 02:15:44.714 --> 02:15:46.460 the total depreciation expense. 02:15:46.460 --> 02:15:52.680 If you add these two amounts, 5400 and 4500 it will be 9900 02:15:52.680 --> 02:15:58.603 so we will have a debit of depreciation expense, 9900. 02:15:58.603 --> 02:16:00.714 What is the other account? 02:16:00.714 --> 02:16:03.896 The other account is accumulated depreciation 02:16:03.896 --> 02:16:11.137 but we have one accumulated depreciation account for each item 02:16:11.137 --> 02:16:12.764 of the non-current asset. 02:16:12.764 --> 02:16:15.602 How many items do we have here? Two. 02:16:15.602 --> 02:16:18.710 So we have building, we have furniture. 02:16:18.710 --> 02:16:23.872 So two different accounts, one account will be accumulated depreciation, 02:16:23.872 --> 02:16:29.559 building, the other account will be accumulated depreciation furniture 02:16:29.559 --> 02:16:33.894 We need to distinguish them and to record them separately. 02:16:33.894 --> 02:16:39.262 So we will have a depreciation expense 9900, one account, 02:16:39.262 --> 02:16:45.086 and then we will have accumulated depreciation of building, 5400. 02:16:45.086 --> 02:16:48.987 Accumulated depreciation of furniture, 4500. 02:16:48.987 --> 02:16:53.463 and the journal entry, the adjusting entry will be this one. 02:16:53.463 --> 02:16:59.334 Here you can see 9900 depreciation expense, one account. 02:16:59.334 --> 02:17:01.699 All the depreciation expense together. 02:17:01.699 --> 02:17:04.083 But then we have two different accounts, 02:17:04.083 --> 02:17:09.072 so accumulated depreciation of the building, 5400, 02:17:09.072 --> 02:17:12.421 accumulated depreciation of furniture, 4500. 02:17:12.421 --> 02:17:16.740 The sum of course is 9900 so... 02:17:20.609 --> 02:17:24.831 it would be okay Jade that if you separated depreciation expense 02:17:24.962 --> 02:17:29.983 but we need to think that depreciation expense is just one account. 02:17:29.983 --> 02:17:34.974 It will not cause any problem because at the end we will have two. 02:17:34.974 --> 02:17:39.130 It's like we separate these in two adjusting entries. 02:17:39.130 --> 02:17:42.009 It is possible, it's ok, it's not wrong, 02:17:42.009 --> 02:17:46.457 but because we have one depreciation expense, 02:17:46.457 --> 02:17:48.945 we record them together. 02:17:48.945 --> 02:17:54.069 Now this is a journal entry for adjusting entries in which you have three entries. 02:17:54.069 --> 02:17:58.162 Ok, I mentioned to you that most of the you have two entries, 02:17:58.162 --> 02:18:00.234 one debit, one credit, there could be more. 02:18:00.234 --> 02:18:01.205 this is the case. 02:18:01.205 --> 02:18:05.623 In this case you have one debit and you have two credits. 02:18:05.623 --> 02:18:10.226 The important thing is any journal entry or adjusting entry, 02:18:10.226 --> 02:18:16.038 the total debit should be equal to total credits which is the case here. 02:18:16.038 --> 02:18:21.518 Ok, next one. 02:18:22.521 --> 02:18:25.591 The mortgage interest rate is 6%. 02:18:25.591 --> 02:18:28.625 The mortgage was taken out on 1st April. 02:18:28.625 --> 02:18:33.548 This is the only data that is given in the additional data for adjusting entries, 02:18:33.548 --> 02:18:39.310 so we need to look at the data in the unadjusted trial balance to calculate this 02:18:39.310 --> 02:18:43.192 so here we know 6% is the interest rate. 02:18:43.192 --> 02:18:51.090 Always when it's given like this, it's annual interest rate, ok? 02:18:51.090 --> 02:18:54.511 Annual interest rate. Always this is the annual, 02:18:54.511 --> 02:19:00.879 that is the normal period for the interest rate of a mortgage. 02:19:00.879 --> 02:19:06.347 So we will need to see what is the total of the mortgage 02:19:06.347 --> 02:19:08.463 so we go to our... 02:19:13.512 --> 02:19:15.962 And here you have mortgage payable. 02:19:15.962 --> 02:19:21.900 This is the unadjusted trial balance, mortgage payable 210000. 02:19:21.900 --> 02:19:23.739 210000. 02:19:23.962 --> 02:19:30.657 If you multiply 210000 by 6% how much is that? 02:19:32.024 --> 02:19:36.082 12600, very well Jade, 12600. 02:19:36.082 --> 02:19:40.166 That is the interest for the year, ok? 02:19:40.166 --> 02:19:46.137 But we need the interest for three months so we divide this by 12 02:19:46.137 --> 02:19:48.295 and we will have the interest per month. 02:19:48.295 --> 02:19:50.870 We multiply by 3, ok, 02:19:50.870 --> 02:19:56.643 and that is the interest for the three months 02:19:56.836 --> 02:20:00.947 and for the three months we will multiply that by three, Jade, 02:20:00.947 --> 02:20:06.822 monthly it will be 3150, ok? 02:20:07.828 --> 02:20:15.664 So 3150 is the interest expense that we need to record here. 02:20:16.463 --> 02:20:18.763 Good Jade. 02:20:19.951 --> 02:20:24.517 Ok, so interest expense 3150. 02:20:25.995 --> 02:20:30.581 Interest expense for the three months and we have an interest payable 02:20:30.581 --> 02:20:32.446 because we have not paid that. 02:20:32.446 --> 02:20:38.521 So interest payable, 3150. This is the adjusting entry. 02:20:42.361 --> 02:20:44.408 Next one. 02:20:44.955 --> 02:20:50.967 9000 of rent revenue paid in advance pertains to June. 02:20:50.967 --> 02:20:55.934 The remainder pertains to July, so what does this mean? 02:20:55.934 --> 02:21:01.670 The tenant paid in advance 02:21:03.720 --> 02:21:06.068 for the rent until July, 02:21:06.485 --> 02:21:14.913 but until June the tenant already used $9000 of this payment 02:21:14.913 --> 02:21:20.832 because they used the office or the rent. 02:21:24.079 --> 02:21:29.569 George, the previous one, sorry, you're talking about the mortgage? 02:21:29.569 --> 02:21:32.352 The mortgage interest? 02:21:35.587 --> 02:21:38.017 It's that one? Ok. 02:21:39.424 --> 02:21:46.560 Ok, yeah, I will go through that George as soon as I finish this that I started 02:21:46.560 --> 02:21:50.708 so here we have the revenue received in advance. 02:21:51.788 --> 02:21:57.852 9000, that pertains to June, that means the tenant already used this. 02:21:58.040 --> 02:22:03.333 We have provided this credit to the tenant until June for 9000. 02:22:03.333 --> 02:22:09.793 So we need to record this income because this is revenue 02:22:09.793 --> 02:22:17.321 and we will credit rent revenue for 9000 and we will debit 02:22:17.321 --> 02:22:22.479 the rent revenue received in advance which is a liability 02:22:22.479 --> 02:22:25.349 when the tenant pays in advance the amount. 02:22:25.349 --> 02:22:27.368 So this will be... 02:22:31.725 --> 02:22:36.281 Debit rent revenue received in advance we decrease the liability 02:22:36.281 --> 02:22:40.801 because the tenant already used this building until 30th June 02:22:40.801 --> 02:22:45.955 and we record now the rent revenue, ok? 02:22:45.955 --> 02:22:51.298 So that is the number five. I will go with the interest, 02:22:51.298 --> 02:22:57.681 the interest of the number four. I will go again with this. 02:22:57.681 --> 02:23:00.874 The mortgage interest rate is 6%. 02:23:00.874 --> 02:23:04.184 Please remember, always the interest is per year, 02:23:04.184 --> 02:23:08.292 so we need to know how much is the interest per month. 02:23:08.292 --> 02:23:10.306 How do we calculate that? 02:23:10.306 --> 02:23:13.572 Well, 6% of what? 02:23:13.572 --> 02:23:15.665 That is the thing that we need to calculate. 02:23:15.665 --> 02:23:20.036 6% of the total mortgage interest... Sorry. 02:23:20.036 --> 02:23:25.441 6% of the total mortgage that we have for this loan that we have 02:23:25.441 --> 02:23:31.952 so here you have, this is our trial balance. 02:23:31.952 --> 02:23:34.698 Remember this is our unadjusted trial balance. 02:23:34.698 --> 02:23:39.789 If we go down through the accounts we will have this mortgage payable. 02:23:40.789 --> 02:23:44.725 Credit because it's a loan, it's a loan payable, it's a liability. 02:23:45.144 --> 02:23:50.122 This is the total amount we borrow, 210000. 02:23:50.502 --> 02:23:54.641 How much is the interest per year? 6% of this. 02:23:55.173 --> 02:24:02.550 If you calculate your 6% of 210000, then that is 12600, 02:24:03.140 --> 02:24:05.541 but that is per year. 02:24:06.005 --> 02:24:11.209 How many months is the period of time here from 1st April to 30th June? 02:24:11.209 --> 02:24:12.616 It's three months. 02:24:13.022 --> 02:24:18.651 So 210000 divided by 12, sorry. 02:24:18.707 --> 02:24:23.860 210000 multiplied by 6% is 12600. 02:24:23.860 --> 02:24:28.067 12600 divided by 12, that will be per month 02:24:28.067 --> 02:24:32.065 and then we multiply by three, that will be three months. 02:24:32.065 --> 02:24:37.279 The amount is 3150. 02:24:37.279 --> 02:24:47.094 So we record that interest expense, 3150 because it's an interest already accrued 02:24:47.699 --> 02:24:52.033 in this specific time, until 30th June, three months. 02:24:52.033 --> 02:24:55.841 And the interest payable because we had not paid that 02:24:55.841 --> 02:24:59.097 is the same amount, 3150. 02:24:59.097 --> 02:25:04.988 We have this liability for the interest payable 02:25:04.988 --> 02:25:09.650 and we have the interest expense, that clarified the point George? 02:25:16.272 --> 02:25:18.488 Ok, excellent. 02:25:19.661 --> 02:25:27.342 Now the last adjusting entry is salaries. 02:25:27.378 --> 02:25:28.767 This is a simple one. 02:25:28.767 --> 02:25:38.454 Salaries of 1800 are unpaid at 30th June. So what does this mean? 02:25:39.073 --> 02:25:44.373 That means that the employees already work for this amount, 02:25:44.373 --> 02:25:48.613 1800 but the company didn't pay them. 02:25:48.613 --> 02:25:53.594 So we owe that salary, so we will record the expense, 02:25:53.594 --> 02:25:58.140 salaries expense 1800, and we have to record the liability 02:25:58.140 --> 02:26:02.460 because we owe the salaries, that means salaries payable, 02:26:02.460 --> 02:26:04.422 that is the liability. 02:26:04.422 --> 02:26:12.817 So debit salaries expense, 1800 credit salaries payable, ok? 02:26:16.896 --> 02:26:23.825 1800. So there you have the last adjusting entry. 02:26:23.825 --> 02:26:27.285 So we've finished the adjusting entries, 02:26:27.285 --> 02:26:30.570 and now we can put all of these adjusting entries 02:26:30.570 --> 02:26:34.602 to the spreadsheet. 02:26:39.515 --> 02:26:47.047 So if we put them to the spreadsheet, 02:26:47.778 --> 02:26:51.048 you have here all the adjustments. 02:26:53.311 --> 02:26:58.399 There is a number that you can see in this column after adjustment, 02:26:58.399 --> 02:27:03.231 this is just a column that can help you to know 02:27:03.231 --> 02:27:07.546 which are the transactions that the... 02:27:07.546 --> 02:27:11.268 the adjustment that we are recording in the adjustment. 02:27:11.268 --> 02:27:13.868 I will look at that, I will go through the first one 02:27:13.868 --> 02:27:18.330 just for you to have the reference because we did this already. 02:27:18.330 --> 02:27:22.293 We don't need to go through all of them. 02:27:22.293 --> 02:27:27.303 In the first, this is the number one, the first adjusting entry. 02:27:27.303 --> 02:27:38.127 We record debit 2700 insurance expense, credit 2700 prepaid insurance. 02:27:39.976 --> 02:27:44.913 So prepaid insurance is a credit... there you have the number one 02:27:44.913 --> 02:27:47.227 for you to have as a reference. 02:27:47.227 --> 02:27:51.939 This is the adjusting one. Credit 2700 02:27:52.241 --> 02:27:55.953 and we have a debit in insurance expense, 02:28:00.253 --> 02:28:02.554 insurance expense a debit, 2700 02:28:02.303 --> 02:28:08.296 and here you can see the number one again as a reference. 02:28:08.296 --> 02:28:12.366 So all of them have a reference to what transaction it is. 02:28:12.366 --> 02:28:17.364 So we can complete this table 02:28:21.102 --> 02:28:23.540 just copying all the adjustments, 02:28:23.540 --> 02:28:26.409 the debit and the credit in the corresponding account 02:28:26.409 --> 02:28:28.763 and we will complete the adjustment. 02:28:28.763 --> 02:28:31.654 Then we can prepare the adjusted trial balance 02:28:31.654 --> 02:28:35.595 the same as I explained in the previous exercise. 02:28:35.595 --> 02:28:39.555 Cash for example, 15000 debit, there are no adjustments, 02:28:39.555 --> 02:28:44.564 so the adjusted trial balance is 15000 debit cash. 02:28:44.564 --> 02:28:50.514 Prepaid insurance we have it there 10800 in the unadjusted balance, 02:28:50.514 --> 02:28:53.109 the adjustment is credit, 02:28:53.109 --> 02:28:56.632 so credit decreases the debit we need to strike this, 02:28:56.632 --> 02:29:01.263 so the adjusted trial balance is debit 8100. 02:29:02.060 --> 02:29:06.957 And we continue with all the adjustments until we have really 02:29:06.957 --> 02:29:11.095 the adjusted trial balance. 02:29:11.706 --> 02:29:17.416 So we can copy all the amounts here, in the adjusted trial balance 02:29:17.416 --> 02:29:20.933 and this is our adjusted trial balance. 02:29:20.933 --> 02:29:24.741 So in the first exercise we finished in this part, 02:29:24.741 --> 02:29:27.398 but now we will continue with the second part 02:29:27.398 --> 02:29:31.869 which is the closing entries. 02:29:34.142 --> 02:29:37.978 What are closing entries, what are the closing entries? 02:29:38.304 --> 02:29:44.471 So now I will explain a bit conceptually what are closing entries 02:29:44.471 --> 02:29:49.131 and then we will apply them in this exercise. 02:29:50.543 --> 02:29:56.965 I mentioned last week that there are permanent accounts 02:29:56.965 --> 02:29:59.087 from all the accounts of the company. 02:29:59.087 --> 02:30:04.647 There are permanent accounts and there are temporary accounts. 02:30:04.647 --> 02:30:07.772 What is the difference between the permanent accounts 02:30:07.772 --> 02:30:10.401 and the temporary accounts? 02:30:10.401 --> 02:30:16.278 The permanent accounts are accounts that the ending balance of any period 02:30:16.278 --> 02:30:20.406 is the beginning balance of the following period. 02:30:20.406 --> 02:30:26.192 So we carry forward the balance of the accounts to the following period 02:30:26.192 --> 02:30:31.891 and we continue for all the life of the company with this. 02:30:31.891 --> 02:30:36.903 Ending balance becomes the opening balance of the following period. 02:30:36.903 --> 02:30:40.881 If you remember when we balanced the accounts last week 02:30:42.361 --> 02:30:47.864 we ended each of the ledger accounts with what is the opening balance 02:30:48.058 --> 02:30:52.785 for the following period which was ending balance for the current period. 02:30:53.216 --> 02:30:59.719 So these are the permanent accounts. But we have also temporary accounts. 02:31:00.581 --> 02:31:02.983 What are temporary accounts? 02:31:02.983 --> 02:31:08.335 Temporary accounts are accounts that must be closed 02:31:08.335 --> 02:31:10.924 at the end of the accounting period. 02:31:12.419 --> 02:31:15.058 Why do we have to close them? 02:31:15.058 --> 02:31:18.936 Because we want to start the following period 02:31:18.936 --> 02:31:25.246 with zero balance in each of these accounts, zero balance. 02:31:25.246 --> 02:31:28.166 So we need to keep these accounts with zero balance. 02:31:28.166 --> 02:31:29.757 How can we do this? 02:31:31.019 --> 02:31:35.570 Well, we need to transfer the balance of these accounts 02:31:35.570 --> 02:31:37.902 to a permanent account. 02:31:39.350 --> 02:31:42.459 Then we can leave the account in zero balance. 02:31:42.459 --> 02:31:49.115 This is very important for, very good Joshua, to retain earnings. 02:31:49.115 --> 02:31:53.787 This is very important particularly for all the accounts of the income statement 02:31:53.787 --> 02:31:58.082 because we want to start each accounting period 02:31:58.082 --> 02:32:02.118 with zero balances in the income statement accounts, 02:32:02.118 --> 02:32:05.661 that means all the revenues and expenses account 02:32:05.661 --> 02:32:08.400 should be zero, why? 02:32:08.400 --> 02:32:12.810 Because we want to menasure the profit for the period. 02:32:12.810 --> 02:32:18.784 If we do not start from a zero balance we will not have the profit of the period 02:32:18.784 --> 02:32:24.554 we will have a mix of profit of the periods and the current period, ok? 02:32:24.554 --> 02:32:31.867 So to know the profit of the period we have to start with zero balance 02:32:31.867 --> 02:32:33.782 in all of these accounts. 02:32:33.782 --> 02:32:39.168 So what are the temporary accounts? All the income statement accounts. 02:32:39.168 --> 02:32:45.892 That means all the revenues accounts or any other income 02:32:45.892 --> 02:32:49.631 and all the expenses accounts. 02:32:50.235 --> 02:32:54.164 All of them are temporary accounts. 02:32:54.164 --> 02:32:58.705 In addition there is one account that we add retained earnings 02:32:58.705 --> 02:33:02.717 or the equity account which is dividends. 02:33:02.717 --> 02:33:08.605 Dividends is also very good Tamara, dividends is also a temporary account 02:33:08.605 --> 02:33:13.283 and we need to close dividends at the end of the accounting period. 02:33:13.283 --> 02:33:15.732 So how do we close them? 02:33:15.732 --> 02:33:19.955 Well, to know that, we can start from here, 02:33:19.955 --> 02:33:23.175 the adjusted trial balance. 02:33:23.175 --> 02:33:27.739 Now what type of account do we have here? And we always put these in this order. 02:33:27.739 --> 02:33:34.431 First we have the asset account, so you have cash here, ok? 02:33:35.015 --> 02:33:39.037 Prepaid insurance, supplies, land, building, 02:33:39.037 --> 02:33:43.202 accumulated depreciation is an asset account even though it's a credit, 02:33:43.202 --> 02:33:47.644 but I already explained that and we will go in more detail with this account 02:33:47.644 --> 02:33:51.331 in another topic. That is an asset account, 02:33:51.331 --> 02:33:54.240 same to accumulated depreciation of credit. 02:33:54.240 --> 02:33:58.673 All of these are asset accounts. 02:33:59.094 --> 02:34:03.713 After the asset account we record the liabilities account. 02:34:03.713 --> 02:34:09.212 So here you have accounts payable, rent revenue received in advance, 02:34:09.212 --> 02:34:14.627 salaries payable, interest payable, mortgage payable, ok? 02:34:14.627 --> 02:34:18.942 All of these are liabilities accounts. 02:34:19.709 --> 02:34:23.038 After the liabilities accounts we have the equity accounts, 02:34:23.038 --> 02:34:26.246 so we have check capital and rent revenue. 02:34:26.246 --> 02:34:31.378 These two are the equity accounts, sorry, only check capital, 02:34:31.378 --> 02:34:33.131 and retained earnings. 02:34:33.131 --> 02:34:37.821 Check capital and retained earnings, that's what I mean. 02:34:37.821 --> 02:34:41.114 Check capital and retained earnings are equity accounts. 02:34:41.114 --> 02:34:44.914 In this case in this company we don't have retained earnings. 02:34:44.914 --> 02:34:49.849 Why don't we have retained earnings? Because this company just started, ok? 02:34:49.849 --> 02:34:53.896 It started on 1st April, so this is the first period, 02:34:53.896 --> 02:34:56.157 30th June 2017. 02:34:56.157 --> 02:35:01.085 And because it's the first period we don't have yet retained earnings account. 02:35:01.085 --> 02:35:06.731 So check capital and retained earnings are equity accounts. 02:35:10.410 --> 02:35:13.221 Then we have the income statement accounts. 02:35:13.221 --> 02:35:16.776 The first account that we have all the revenues. 02:35:16.776 --> 02:35:21.506 Rent revenue in this case, it may be service revenue, 02:35:21.506 --> 02:35:26.031 it may be sales revenue, fees revenue, interest revenues, 02:35:26.031 --> 02:35:29.237 all the revenues accounts, they will be in this part. 02:35:29.754 --> 02:35:32.012 And then all the expenses accounts, 02:35:32.012 --> 02:35:36.229 so we have advertisement expense, depreciation expense, 02:35:36.229 --> 02:35:40.024 electricity expense, insurance, interest, salaries, supplies expenses, 02:35:40.024 --> 02:35:41.956 all the expense accounts. 02:35:43.137 --> 02:35:45.910 So this is the adjusted trial balance. 02:35:45.910 --> 02:35:48.607 What are the accounts that we need to close? 02:35:48.607 --> 02:35:54.198 In this case we don not have dividends, we have revenue, rent revenue, 02:35:54.198 --> 02:35:57.546 and we have all of these expenses. 02:35:57.546 --> 02:36:00.119 These are the accounts that we need to bring. 02:36:00.119 --> 02:36:01.517 How will we close this? 02:36:01.517 --> 02:36:06.200 There are two steps to close the accounts. 02:36:06.200 --> 02:36:13.282 The first step we will close all the expenses and then the revenues 02:36:13.282 --> 02:36:18.636 to another temporary account that we will create 02:36:18.636 --> 02:36:23.632 that the name is the income summary account. 02:36:24.044 --> 02:36:29.030 Income summary account is the name of another temporary account 02:36:29.030 --> 02:36:33.126 and the purpose is to close all the expenses 02:36:33.126 --> 02:36:35.677 and the revenues to this account. 02:36:35.677 --> 02:36:42.182 So how do we close the expense? here you have advertisement expenses, 02:36:42.182 --> 02:36:47.312 (INAUDIBLE) 3000, depreciation expense the balance 02:36:47.312 --> 02:36:53.371 is debit 9900 so we have a number of expenses. 02:36:53.371 --> 02:37:02.768 We add all of them and we will debit the income summary accounts for the sum 02:37:02.768 --> 02:37:06.562 and we will credit each of them one by one 02:37:06.562 --> 02:37:11.262 we cannot credit the total of them, 02:37:11.262 --> 02:37:18.025 we need to close each account one by one so we need to credit advertisement expense 02:37:18.025 --> 02:37:23.536 credit 3000, depreciation expense credit 9900. 02:37:23.536 --> 02:37:27.122 Electricity expense we credit 6000 and so on 02:37:27.122 --> 02:37:31.481 because if you credit advertisement expense by 3000, 02:37:31.481 --> 02:37:37.118 what is the balance of advertising expense after that? Zero. 02:37:37.918 --> 02:37:45.262 If you credit depreciation expense by 9900 what is the balance after that? Zero. 02:37:45.981 --> 02:37:51.262 We're leaving each account at zero that's why we need to do one by one. 02:37:51.262 --> 02:37:56.695 But for the sum of all of this credit we will have one debit which is 02:37:56.695 --> 02:38:02.490 the income summary account, or profit and loss summary account. 02:38:02.490 --> 02:38:04.389 It could be any of these. 02:38:06.092 --> 02:38:08.355 With revenue we do the same. 02:38:08.355 --> 02:38:13.165 So to close these revenue accounts, what we should do? 02:38:13.585 --> 02:38:17.034 We need to debit by 64200. 02:38:17.034 --> 02:38:23.862 We debit rent revenue by 64200, what is the balance after this? Zero. 02:38:23.862 --> 02:38:27.514 And what we credit? Income summary account again. 02:38:27.514 --> 02:38:35.768 So income summary account will be the same account that we use for expenses 02:38:35.768 --> 02:38:39.687 but in this case we credit the income summary account. 02:38:39.687 --> 02:38:44.331 So you can see what we have done at this point is to transfer 02:38:44.331 --> 02:38:49.014 the amount of all the expenses and revenues to this temporary account 02:38:49.014 --> 02:38:53.018 which is income summary account. 02:38:58.573 --> 02:39:02.331 Here you have the closing entries. 02:39:02.854 --> 02:39:09.051 We credit all of the expense accounts, remember the normal balance is a debit 02:39:09.051 --> 02:39:13.387 so to close them we credit. This is a journal entry. 02:39:13.387 --> 02:39:18.500 You can see this is a journal entry in which we debit income summary, 02:39:18.500 --> 02:39:20.730 the sum of all the expenses. 02:39:20.730 --> 02:39:24.518 We debit income summary and we credit each of these accounts. 02:39:24.518 --> 02:39:27.404 How many entries has this journal entry? 02:39:27.404 --> 02:39:33.171 You can see it has eight entries. 02:39:33.171 --> 02:39:37.774 We have one debit, and seven credits. 02:39:38.145 --> 02:39:43.571 So this is one journal entry, with this journal entry we close 02:39:43.571 --> 02:39:45.988 all the expense accounts. 02:39:45.988 --> 02:39:49.662 That means these are closing entries. 02:39:49.662 --> 02:39:54.658 We transfer the expenses to the income summary accounts. 02:39:54.658 --> 02:39:57.924 For debt revenue, the same. 02:39:57.924 --> 02:40:03.176 In this case we need to debit the revenue account 02:40:03.176 --> 02:40:05.816 because the balance is credit so when we credit, 02:40:05.816 --> 02:40:10.585 we leave this account in zero, and we debit the rent revenue 02:40:10.585 --> 02:40:14.096 and we credit the income summary account. 02:40:15.184 --> 02:40:19.806 This is another journal entry, a closing entry. 02:40:20.562 --> 02:40:22.599 What is next? 02:40:22.980 --> 02:40:26.360 Then we need to close the income summary account. 02:40:26.360 --> 02:40:30.020 What is the balance of the income summary account? 02:40:30.020 --> 02:40:33.466 The income summary account is the difference 02:40:33.603 --> 02:40:35.234 between the credit and the debit . 02:40:35.444 --> 02:40:36.798 what is higher? 02:40:36.829 --> 02:40:43.275 Well, we have 64200 credit and 48750 debit. 02:40:43.734 --> 02:40:49.338 so that difference is 15450 credit, ok? 02:40:49.515 --> 02:40:52.563 That is the balance of the income summary account at this point. 02:40:52.563 --> 02:40:57.821 To close that, we need to debit, it is the third closing entry. 02:40:57.821 --> 02:41:02.810 We debit 15450 from the income summary account 02:41:02.810 --> 02:41:06.980 and we credit retained earnings. This is a permanent account. 02:41:06.980 --> 02:41:11.078 So we transfer this balance to the retained earnings account. 02:41:11.382 --> 02:41:14.575 Now the income summary account is closed. 02:41:14.575 --> 02:41:17.966 You can verify this if you were at all debit, 02:41:17.966 --> 02:41:24.859 48750 + 15450 will be equal to 64200. 02:41:25.068 --> 02:41:30.612 Income summary account is closed the ending balance in this case is zero 02:41:30.612 --> 02:41:33.639 and all the balance is transferred to retained profit. 02:41:33.639 --> 02:41:39.819 You can see what we have done is to transfer the profit 02:41:39.819 --> 02:41:43.652 of the accounting period through the journal entries 02:41:43.652 --> 02:41:45.704 that are the closing entries. 02:41:45.704 --> 02:41:49.572 We transfer the profit to the retained earnings 02:41:49.572 --> 02:41:54.957 an that is what we do every period at the end of each period we do this. 02:41:54.957 --> 02:41:57.178 So what is retained earnings? 02:41:57.178 --> 02:42:03.122 It's the accumulation of all profits and all losses since the company started 02:42:03.122 --> 02:42:06.590 because we do this at the end of this period. 02:42:07.039 --> 02:42:11.746 So we are accumulating the profits in this written profit account. 02:42:11.746 --> 02:42:13.451 What about dividends? 02:42:13.451 --> 02:42:16.707 Dividends is another temporary account we will see another exercise 02:42:16.707 --> 02:42:21.035 in which dividends is included in the workshop exercise 02:42:21.035 --> 02:42:24.544 in which dividends is also closed to retained earnings, 02:42:24.544 --> 02:42:27.901 so retained earnings are decreased by dividends. 02:42:29.632 --> 02:42:34.249 Now, one last word in relation to closing entries. 02:42:34.249 --> 02:42:38.047 Closing entries you can see is very simple. 02:42:38.047 --> 02:42:43.299 It's just to close each of the expense and revenues accounts 02:42:43.299 --> 02:42:44.590 and also dividends, 02:42:44.590 --> 02:42:49.874 and leaving the accounts with zero balance. 02:42:50.119 --> 02:42:58.517 The normal mistake that the students do in this part even is simple 02:42:59.031 --> 02:43:03.835 is the confusion between the debit or the credit to close the account. 02:43:03.835 --> 02:43:10.941 So because students know that expenses are debit, 02:43:10.941 --> 02:43:15.260 they close all expense accounts with the debit here. 02:43:15.655 --> 02:43:19.834 Put the debit and put the income summary account as the credit. 02:43:20.424 --> 02:43:23.236 But that, what is the effect of that? 02:43:23.883 --> 02:43:27.746 With that, the effect that will be will be that you double 02:43:27.746 --> 02:43:30.360 the balance of each account. 02:43:30.360 --> 02:43:35.447 If you debit advertisement expenses by 3000 and you have a balance of 3000 02:43:35.447 --> 02:43:41.093 what is the ending balance of the advertisement expenses? 6000. 02:43:41.093 --> 02:43:46.987 Ok, you double the balance on the account you are not closing the account. 02:43:46.987 --> 02:43:49.883 To close the account should be the opposite side, 02:43:49.883 --> 02:43:56.304 it should be you credit 3000 because the account has a balance of debit, 3000. 02:43:56.446 --> 02:44:01.204 So be careful with that, I have seen so many times the same mistake. 02:44:02.594 --> 02:44:10.808 Remember that taking out on these so do not make this type of mistake. 02:44:12.291 --> 02:44:15.008 Any question about closing entries? 02:44:24.224 --> 02:44:28.331 The whole point Natalia, or the last part? 02:44:31.343 --> 02:44:35.297 The last part? Excellent, yes. 02:44:35.892 --> 02:44:38.764 Ok, excellent. 02:44:40.177 --> 02:44:43.568 For one second I thought it was the whole point. 02:44:44.123 --> 02:44:45.962 Excellent. Thank you Natalia. 02:44:47.572 --> 02:44:51.097 A common mistake, what is the common mistake? 02:44:51.280 --> 02:44:55.812 Here we are closing the account to ... 02:44:56.272 --> 02:45:01.353 Remember two things, to close has a meaning. 02:45:01.353 --> 02:45:03.608 What is the meaning to close? 02:45:03.608 --> 02:45:10.103 To close means leave with zero balance that is the meaning, ok. 02:45:10.103 --> 02:45:13.247 Close means leave this account with zero balance. 02:45:13.247 --> 02:45:19.333 So if we close advertisement expense it means leave this with zero balance 02:45:19.333 --> 02:45:20.717 at the end of the period. 02:45:20.717 --> 02:45:26.987 After closing entries we want advertising expense equals zero balance 02:45:26.987 --> 02:45:30.341 so that means we transfer the balance to another account. 02:45:30.341 --> 02:45:35.177 We're transferring here to income summary in this first step. 02:45:35.532 --> 02:45:41.705 So what about if we have instead of, I will write over here, 02:45:42.426 --> 02:45:51.942 instead of credit 3000, we put 3000 here, we debit. 02:45:53.047 --> 02:45:56.680 And we do the same with all the other accounts. 02:45:57.557 --> 02:46:03.951 That means that this, the income summary will not be a debit of 48000 02:46:03.951 --> 02:46:10.388 but will be a credit of 48750, ok? 02:46:10.388 --> 02:46:13.653 So what will be the effect of this? 02:46:14.004 --> 02:46:19.920 And we put here the 9900, the 6000, the 2000... 02:46:19.920 --> 02:46:22.264 All of them in debit. 02:46:22.264 --> 02:46:26.957 What is the balance of all of these accounts if you do that? 02:46:27.586 --> 02:46:32.427 What is the balance after closing entries if you debit this account? 02:46:32.427 --> 02:46:35.770 What will be the balance of advertisement expense? 02:46:37.400 --> 02:46:46.661 It will be 6000 because the balance before closing entries is debit 3000. 02:46:47.559 --> 02:46:53.622 If you debit in the closing entry by 3000 the debit increases the debit 02:46:53.622 --> 02:46:57.878 so a debit of 3000 will be added to the debit of 3000, 02:46:57.878 --> 02:47:01.370 that means now the balance is 6000. 02:47:01.370 --> 02:47:07.553 You're not closing the account, you double the balance of the account. 02:47:07.999 --> 02:47:14.458 So that's why you need to be very careful that the closing entry 02:47:14.458 --> 02:47:20.198 should be the opposite side of the accounts that we are closing. 02:47:21.828 --> 02:47:27.752 All the expense accounts, they have a debit balance. 02:47:27.752 --> 02:47:30.361 What is the opposite side? Credit. 02:47:30.361 --> 02:47:33.918 So we need to credit all the expense accounts. 02:47:34.565 --> 02:47:38.980 The revenues accounts, what is the normal balance? Credit. 02:47:38.980 --> 02:47:43.899 To close we need to debit, the opposite side. 02:47:45.120 --> 02:47:50.799 That is the important thing so be careful with that, 02:47:50.799 --> 02:47:54.664 so do not make a mistake on this. 02:47:57.858 --> 02:48:09.346 Ok, Yes, Zijing, only need to close the temporary account. 02:48:09.534 --> 02:48:13.660 The permanent account we will carry forward the balance. 02:48:13.660 --> 02:48:16.382 The ending balance at the end of the period 02:48:16.382 --> 02:48:19.049 will be the beginning balance of the next period. 02:48:19.049 --> 02:48:20.827 We do not start with a zero balance. 02:48:20.827 --> 02:48:24.602 We start with the ending balance of the previous period 02:48:24.842 --> 02:48:29.631 so we only close temporary accounts. What are the temporary accounts? 02:48:29.977 --> 02:48:34.460 All the income statement accounts plus dividends, ok? 02:48:38.109 --> 02:48:43.936 So we finish with this and here you have all the closing entries 02:48:45.046 --> 02:48:52.563 and that's the last part of this exercise I think, yes. 02:48:57.746 --> 02:49:02.439 Yes, that was the last question to prepare the closing entries. 02:49:03.493 --> 02:49:06.700 So we finish, just we finish the lecture, 02:49:06.700 --> 02:49:12.151 and it is time to (INAUDIBLE) 02:49:13.503 --> 02:49:18.790 We need still to go through the workshop. 02:49:19.648 --> 02:49:25.170 Yes I did here profit and loss, there are different names for this, 02:49:25.170 --> 02:49:29.772 and over time the name has changed in the accounting standards, 02:49:29.772 --> 02:49:37.307 but when we talk about income statements it's the same as profit and loss statement 02:49:37.307 --> 02:49:43.091 it's the same. And we talk, there is another name, 02:49:43.413 --> 02:49:45.949 it's not very used now, but you can see in some books 02:49:45.949 --> 02:49:50.280 that there's the statement of financial performance. 02:49:50.280 --> 02:49:53.634 That is also called the income statement. 02:49:53.634 --> 02:49:58.676 And the balance sheet has another name, it's the statement of financial position. 02:49:58.676 --> 02:50:04.138 But for the names that we're using is normally income statement 02:50:04.138 --> 02:50:07.716 or statement of profit or loss. 02:50:08.024 --> 02:50:10.864 And then we have, 02:50:12.003 --> 02:50:15.263 retained profit will always credit, right? 02:50:15.263 --> 02:50:17.664 Good question Ezekiel. 02:50:18.965 --> 02:50:27.074 Retained profit normally should be and has to be in the credit side 02:50:27.074 --> 02:50:33.748 except if the company has a lot of loss and then retained profit 02:50:33.748 --> 02:50:36.861 will go to the other side, we'll have a debit balance. 02:50:36.861 --> 02:50:40.532 That is a company that has accumulated losses, 02:50:40.532 --> 02:50:43.697 and they don't have profit. it's not the normal situation 02:50:43.697 --> 02:50:50.332 and it will be very bad for the company. Normally it should be on the credit side. 02:50:51.907 --> 02:50:56.203 It is possible the debit side, but not usual, and not good. 02:51:01.204 --> 02:51:05.238 Ok, so now we can go through the workshop. 02:51:05.238 --> 02:51:10.041 So we need to plan a bit at this point because 3.50. 02:51:11.702 --> 02:51:19.184 The normal time from 1.00-4.00 is the workshop and the lecture, 02:51:19.801 --> 02:51:22.279 and then 4.00-5.00 I have the consultation 02:51:22.279 --> 02:51:25.899 but what I am doing is just to answer all the questions 02:51:27.229 --> 02:51:33.422 while I am explaining the exercise, so I go through the questions immediately. 02:51:35.665 --> 02:51:40.192 That I think is better because we don't need to go back 02:51:40.426 --> 02:51:45.099 but we solve anything that you have, any question you have immediately. 02:51:45.099 --> 02:51:48.756 But because we have not gone through the workshop, 02:51:49.746 --> 02:51:53.503 I will use the consultation time for the workshop. 02:51:53.752 --> 02:51:58.503 Now I understand if any of you cannot stay for the workshop, 02:51:58.503 --> 02:52:02.091 for the consultation which is 4.00-5.00, 02:52:04.282 --> 02:52:07.268 it's ok, so feel free to go, no problem. 02:52:08.358 --> 02:52:13.229 Remember the lecture and the workshop will be recorded 02:52:13.229 --> 02:52:17.176 and will be uploaded on the ECOS 360 tab, 02:52:17.176 --> 02:52:21.589 so you will have the complete record, yes and there's no problem. 02:52:21.589 --> 02:52:26.692 You will have the complete record of the lecture and the workshop. 02:52:27.107 --> 02:52:31.082 So I will explain this as part of the consultation, 02:52:31.082 --> 02:52:34.448 the exercise of the workshop, ok? 02:52:35.833 --> 02:52:41.976 And then if you have more questions yes, please feel free to ask 02:52:41.976 --> 02:52:43.783 any question you may have. 02:52:45.209 --> 02:52:49.051 Ok, so we go through the second one. 02:53:06.737 --> 02:53:12.841 The workshop, the scheme that we have used is similar to the lecture, 02:53:12.841 --> 02:53:17.823 we start with four multiple choice questions to revise some concepts 02:53:18.162 --> 02:53:21.125 and then we go through the exercise. 02:53:21.125 --> 02:53:27.841 And in the exercise we will do the same, we will practice with adjusting entries, 02:53:27.841 --> 02:53:34.903 we will practice with closing entries and that is the topic for today, 02:53:35.237 --> 02:53:38.911 so a lot of practice in this. 02:53:40.626 --> 02:53:43.452 So we will start with this. 02:53:43.452 --> 02:53:50.038 I will have a look at the first question which is similar to the first question 02:53:50.038 --> 02:53:51.552 of the lecture. 02:53:51.825 --> 02:53:55.015 Ok, have a look at this, I will update the poll. 02:54:42.545 --> 02:54:47.686 Ok, so furniture factory employees work overtime to finish an order 02:54:47.686 --> 02:54:50.677 that was sold on 28th February. 02:54:50.677 --> 02:54:54.030 The office sent a statement to the customer in early March 02:54:54.030 --> 02:54:58.783 and the payment is received by mid March. 02:54:59.108 --> 02:55:05.807 The overtime expenses should be expressed in which period? 02:55:30.862 --> 02:55:40.776 Ok, good practically most of you have the right answer, 02:55:42.842 --> 02:55:46.145 in February. Why in February? 02:55:46.145 --> 02:55:50.620 Because they said that when it's sold this order? 02:55:50.620 --> 02:55:53.446 On 28th February, so it's February, 02:55:53.446 --> 02:55:59.168 the month is February and the employees work during February. 02:55:59.168 --> 02:56:05.306 So the resource, that means the work of the employees 02:56:05.306 --> 02:56:10.598 was used on February, that means the right answer is that one, 02:56:10.598 --> 02:56:12.137 February, A. 02:56:12.589 --> 02:56:15.882 A is the right answer, ok? 02:56:17.875 --> 02:56:24.720 Number two, have a look, I will update the poll. 02:56:38.649 --> 02:56:45.060 The company purchased office supplies costing $4000 and debit office supplies 02:56:45.060 --> 02:56:48.446 for the full amount. At the end of the accounting period, 02:56:48.446 --> 02:56:54.005 a critical count of supplies reveal 1600 is still on hand. 02:56:54.005 --> 02:56:55.828 What is the appropriate journal entry? 02:56:55.828 --> 02:56:59.356 We have done already two weeks aside for this, 02:56:59.356 --> 02:57:06.689 so if you understood well, please apply the same as we have done 02:57:07.676 --> 02:57:10.308 in the first two exercises. 02:58:29.625 --> 02:58:33.968 Ok, most of you correct, what is the... 02:58:35.529 --> 02:58:41.378 The right answer is C. Ok, why? 02:58:42.214 --> 02:58:47.924 if the company purchases office supplies costing 4000, debit all these supplies, 02:58:47.924 --> 02:58:50.340 so what is the balance of these accounts? 02:58:50.340 --> 02:58:56.931 The unadjusted balance is office supplies or simply supplies, debit $4000, 02:58:56.931 --> 02:59:01.897 that is the unadjusted balance but at the end of the accounting period 02:59:01.897 --> 02:59:06.435 the physical count revealed 1600. 02:59:06.435 --> 02:59:10.356 So that is what we have in the supplies account. 02:59:10.356 --> 02:59:13.754 The rest were consumed, what's due, 02:59:13.754 --> 02:59:17.428 so we need to record a debit supplies expense 02:59:17.428 --> 02:59:20.591 by the difference, 2400, 02:59:20.591 --> 02:59:24.378 that is the difference between 4000 and 1600. 02:59:24.378 --> 02:59:28.593 And we credit office supplies so we reduced the balance of office supplies 02:59:28.593 --> 02:59:36.935 by 2400 and now what is the balance after adjustment? 1600, ok? 02:59:37.328 --> 02:59:41.979 This is the normal way that you will see always what happened 02:59:41.979 --> 02:59:45.247 with the supplies account, but there is another way 02:59:45.247 --> 02:59:48.502 that I will explain, I will explain it now. 02:59:50.089 --> 02:59:57.430 What about if this company purchased office supplies that cost 4000 dollars, 02:59:57.430 --> 03:00:04.926 but debit the supplies expense, the office supplies expense. 03:00:04.926 --> 03:00:07.475 So we debit, ok? 03:00:07.475 --> 03:00:10.205 And that is the journal entry that they record 03:00:10.205 --> 03:00:13.083 because they thought that they would consume all of this 03:00:13.083 --> 03:00:15.333 in this accounting period. 03:00:15.333 --> 03:00:20.801 So they debit supplies 4000. 03:00:25.061 --> 03:00:29.750 They debit supplies 4000, and then credit. 03:00:30.296 --> 03:00:39.334 If they paid cash, 4000. That is the original entry, ok? 03:00:40.527 --> 03:00:43.580 Supplies expense. 03:00:46.568 --> 03:00:52.172 So they debit an expense account. Why do they do this? 03:00:52.172 --> 03:00:58.204 Because they think that they will consume all of these supplies in the month. 03:00:59.223 --> 03:01:07.845 But at the end of the month they realize that they still have 1600 on hand. 03:01:07.845 --> 03:01:13.954 What will be the adjusting entry in this case? 03:01:16.882 --> 03:01:19.152 Think a bit. 03:01:20.580 --> 03:01:23.855 And think what would be the adjusting entry in this case 03:01:23.855 --> 03:01:28.839 because we need to adjust this, the expense was not 4000. 03:01:29.075 --> 03:01:32.902 It was less than 4000 because we still have 1600. 03:01:32.902 --> 03:01:35.145 We need to adjust that. 03:01:35.145 --> 03:01:41.211 What will be the adjusting entry in this case if we record everything? 03:01:41.211 --> 03:01:46.588 Debit office supplies, and credit supplies expenses, very good. 03:01:47.297 --> 03:01:51.684 For what amount? For 1600. 03:01:51.684 --> 03:01:59.512 So we will debit office supplies 1600 03:02:01.945 --> 03:02:06.517 so now we have this, ok? 03:02:09.357 --> 03:02:14.735 1600 debit, now we have the balance, and we need to credit the expense 03:02:14.735 --> 03:02:17.247 because the expense was not 4000. 03:02:17.247 --> 03:02:25.513 The expense was the difference, so we will credit the expense by 1600. 03:02:25.513 --> 03:02:30.719 This is a different way to look at the supplies expenses account. 03:02:30.719 --> 03:02:37.142 It is possible, it's not frequent but it is possible that this is what may happen. 03:02:47.185 --> 03:02:51.700 A full reversal if it is... if it is given. 03:02:51.864 --> 03:02:57.459 It's not a reversal actually, it depends on how the data is presented. 03:02:57.459 --> 03:03:01.348 For example if the data is presented as I did in this exercise 03:03:01.348 --> 03:03:06.873 or all the previous ones, you only need to adjust as we have done 03:03:06.873 --> 03:03:12.315 but if the data is presented in this way that all the expenses, 03:03:12.315 --> 03:03:17.064 all the supplies purchased are recorded as an expense, 03:03:17.064 --> 03:03:22.855 then the other adjustment should be reversed. 03:03:22.855 --> 03:03:27.853 What will give you the clue is how we record the purchase of this. 03:03:27.853 --> 03:03:33.274 We record as supplies, or we record as supplies expense. 03:03:33.274 --> 03:03:35.317 That will make the difference. 03:03:38.507 --> 03:03:44.830 Ok, it's good to clarify this, because I have seen an exercise 03:03:44.830 --> 03:03:48.820 in which they use the other way. 03:03:49.651 --> 03:03:59.030 We have two possibilities and I will put this in here. 03:04:03.135 --> 03:04:14.175 First, all purchases are recorded as supplies. 03:04:16.784 --> 03:04:22.345 Ok, all purchases are recorded as supplies. 03:04:23.563 --> 03:04:25.697 Now this you want.... 03:04:30.948 --> 03:04:33.662 All purchases are recorded as supplies. 03:04:33.689 --> 03:04:38.353 What we should do when all purchases are recorded as supplies, 03:04:38.353 --> 03:04:42.972 we do what you have learnt in the two previous exercises 03:04:42.972 --> 03:04:45.152 in the lecture and in this... 03:04:45.152 --> 03:04:50.932 in this multiple choice question. 03:04:50.932 --> 03:04:56.773 We adjust the ending balance of supplies, ok? 03:04:58.016 --> 03:05:06.427 But what about all purchases are recorded as expenses? 03:05:11.670 --> 03:05:15.104 That is the other situation, all purchases are recorded as supplies 03:05:15.104 --> 03:05:19.068 first situation we have worked with that, the second situation, 03:05:19.068 --> 03:05:25.998 all purchases are recorded as expenses and we purchased $4000 of supplies 03:05:25.998 --> 03:05:32.293 and because we think that we will use all of them in this accounting period 03:05:32.293 --> 03:05:38.570 we record the 4000 as supplies expense when we purchase them. 03:05:38.858 --> 03:05:46.057 At the end of the month we have 1600 on hand, 03:05:46.057 --> 03:05:51.228 so we didn't spend all of them. We still have supplies 03:05:51.228 --> 03:05:54.913 and we need to prepare an adjusting entry to reflect this. 03:05:55.768 --> 03:06:03.930 So how we will reflect in this case, we will record in this case a debit supplies 03:06:06.972 --> 03:06:12.926 1600, ok? We record 1600 supplies 03:06:14.315 --> 03:06:23.479 and we credit supplies expense, 1600. 03:06:27.845 --> 03:06:32.837 That will be the adjusting entry. What do we do with this adjusting entry? 03:06:32.837 --> 03:06:36.384 We put in supplies which is an asset account, 03:06:36.384 --> 03:06:42.071 we put the amount that we have on hand at the end of the period, 1600. 03:06:42.071 --> 03:06:48.732 And we reduce the supplies expense by 1600 03:06:48.732 --> 03:06:52.102 because we didn't consume all of them, ok? 03:06:52.102 --> 03:06:57.001 This is the situation when purchases are recorded as expenses. 03:06:57.424 --> 03:07:00.479 It's another situation, it's not the most common situation 03:07:00.479 --> 03:07:05.748 but it's good that you know that adjustment is to reflect 03:07:05.748 --> 03:07:10.191 what we have at the end of the period, ok? 03:07:11.180 --> 03:07:13.653 It's clear now? 03:07:18.783 --> 03:07:20.855 What are the questions? 03:07:23.677 --> 03:07:29.099 Ok, Tablynn, Tablynn please clarify the point. 03:07:31.953 --> 03:07:38.133 We go to the next one, number 3. 03:07:41.308 --> 03:07:45.218 I will update the poll, thank you Tablynn. 03:07:49.468 --> 03:07:56.250 Ok, this company purchased a computer for 3000 on 1st December. 03:07:56.250 --> 03:08:00.881 It is estimated the annual depreciation of the computer is $600, 03:08:00.881 --> 03:08:02.911 the annual depreciation. 03:08:02.911 --> 03:08:07.207 A financial statement had to be prepared on 31st December. 03:08:07.207 --> 03:08:09.905 The company should make the following adjustment. 03:08:09.905 --> 03:08:14.742 So it's not very difficult, what is the adjusting entry in this case? 03:08:15.010 --> 03:08:19.080 Have a look at the alternatives and choose one of them. 03:09:37.830 --> 03:09:42.252 Ok, are you ready? 03:09:43.630 --> 03:09:49.342 We have most of you answered correctly but we have a distribution 03:09:49.342 --> 03:09:52.191 in the answer as well. 03:09:52.517 --> 03:09:58.892 The correct answer is B. 03:10:02.060 --> 03:10:05.641 What is the, I would not say tricky, 03:10:05.641 --> 03:10:09.121 but what is the thing that you need to be careful of 03:10:09.121 --> 03:10:10.839 with the data provided? 03:10:10.839 --> 03:10:18.957 It is important and this is a good practice for you for the final exam 03:10:18.957 --> 03:10:22.804 because in the final exam you will have multiple choice questions 03:10:22.804 --> 03:10:24.676 and you will have exercises. 03:10:24.676 --> 03:10:27.674 And the multiple choice questions what is essential? 03:10:27.674 --> 03:10:35.197 In the multiple question it is to read carefully everything in the question 03:10:35.197 --> 03:10:40.249 before you choose one of the answers because here I can see 03:10:40.249 --> 03:10:44.968 why there are some errors. 03:10:44.968 --> 03:10:50.108 It says this is the amount of the computer, $3000. 03:10:50.108 --> 03:10:58.612 It is estimated annual depreciation is $600, annual depreciation. 03:10:58.949 --> 03:11:02.513 Financial statements are to be prepared on 31st December. 03:11:02.513 --> 03:11:06.776 What is the period of time for this accounting period? 03:11:06.776 --> 03:11:12.100 It's from the 1st of December to the 31st of December, 03:11:12.100 --> 03:11:14.798 that's one month. 03:11:14.798 --> 03:11:21.657 So were talking about an accounting period of one month, exactly Joshua. 03:11:21.657 --> 03:11:27.468 One month, and here we have the depreciation of a whole year, 03:11:27.468 --> 03:11:30.536 so to calculate the depreciation for one month 03:11:30.536 --> 03:11:32.917 you need to divide this by 12. 03:11:32.917 --> 03:11:36.036 If you divide by 12 it's 50 03:11:36.036 --> 03:11:45.626 so that immediately leaves out A and E and also the answer, 03:11:45.984 --> 03:11:49.429 so we're not only between B and C, ok? 03:11:49.429 --> 03:11:53.927 Now to record the depreciation expense debit always, 03:11:53.927 --> 03:11:57.399 always debit depreciation expense always it's a debit, 03:11:57.399 --> 03:11:59.901 and credit the accumulated depreciation. 03:11:59.901 --> 03:12:03.634 That's why this is the right answer, ok? 03:12:04.033 --> 03:12:08.870 So this is a good opportunity I can use to explain to you how to avoid 03:12:08.870 --> 03:12:13.751 some common errors when you do this in an exam, 03:12:13.751 --> 03:12:16.664 and only, maybe you know the answer, 03:12:16.664 --> 03:12:21.233 but because you didn't read very carefully the data 03:12:21.233 --> 03:12:22.926 then you can make a mistake. 03:12:22.926 --> 03:12:29.180 So be careful with these types of things when you answer these questions. 03:12:29.739 --> 03:12:34.591 Ok, now the last multiple choice question, 03:12:38.785 --> 03:12:41.587 is this one, I will update the poll. 03:12:55.523 --> 03:13:00.475 An entity failed to adjust the revenue received in advance account 03:13:00.475 --> 03:13:02.927 for rent that has been earned. 03:13:02.927 --> 03:13:07.592 What effect will this have on the financial statements? 03:13:14.239 --> 03:13:15.595 (COUGHS) 03:14:33.660 --> 03:14:39.396 Ok, most of you again are correct, 03:14:40.438 --> 03:14:43.173 but there are different answers as well. 03:14:43.252 --> 03:14:50.668 But the right answer is E, ok? That is the right answer. 03:14:50.668 --> 03:14:54.914 I will explain how to solve this type of questions, 03:14:54.914 --> 03:15:00.066 because there are many similar questions, but the question is, 03:15:00.396 --> 03:15:02.901 what is the effect on the financial statement 03:15:02.901 --> 03:15:07.521 if an adjustment entry is not prepared? 03:15:07.521 --> 03:15:10.012 Ok, so how we answer this type of question? 03:15:10.012 --> 03:15:14.359 The best way is to go step by step. 03:15:14.605 --> 03:15:20.361 It says the entity failed to adjust revenue received in advance account 03:15:20.361 --> 03:15:22.965 for rent that has bee earned. 03:15:23.358 --> 03:15:26.979 So what happens when we have a revenue received in advance? 03:15:26.979 --> 03:15:29.957 Yes, it is a liability. 03:15:30.573 --> 03:15:34.182 Revenue received in advance is a liability account, 03:15:34.182 --> 03:15:41.037 and what happens when we earn the rent and we do not adjust this liability? 03:15:41.037 --> 03:15:45.273 The adjustment means a decrease of the liability. 03:15:45.273 --> 03:15:49.325 If we do not decrease the liability, revenue received in advance, 03:15:50.875 --> 03:15:54.320 these liabilities will be overstated. 03:15:54.477 --> 03:15:59.112 How many of the answers, and that is the way that you can see 03:15:59.112 --> 03:16:02.600 when you are answering this type of question in an exam, 03:16:02.600 --> 03:16:08.893 how many of the answers have that, that the liabilities will be overstated? 03:16:08.893 --> 03:16:12.567 Well, we have D and E only, only two, 03:16:12.759 --> 03:16:15.507 so you can discard already three. 03:16:15.691 --> 03:16:19.013 So you are going step by step answering the question, 03:16:19.013 --> 03:16:26.212 and even you don't know the second part but now your choice is only between two 03:16:26.538 --> 03:16:29.776 so a better probability to have the correct answer. 03:16:29.858 --> 03:16:34.337 These are just some tricks that you can apply when you answer 03:16:34.337 --> 03:16:37.505 these types of questions, ok? 03:16:37.505 --> 03:16:41.679 So first, liabilities will be overstated and what else? 03:16:42.017 --> 03:16:43.995 The difference is in revenue. 03:16:43.995 --> 03:16:47.149 What happens in revenue if we do not record this? 03:16:47.707 --> 03:16:53.509 If we do not record this it means we do not record revenue already earned, 03:16:54.254 --> 03:17:01.860 so the revenue account will be understated because we miss to record this revenue. 03:17:02.596 --> 03:17:05.629 So this will be the second part, understated, 03:17:05.763 --> 03:17:09.804 and that's why the right answer is E. 03:17:12.001 --> 03:17:14.902 Any questions? Any conceptual questions? 03:17:14.902 --> 03:17:20.214 Because with these four questions we finished up the conceptual part. 03:17:20.337 --> 03:17:26.221 Excellent Jade, we finished all the conceptual part about adjusting entries 03:17:26.476 --> 03:17:31.130 but now we will apply them again in a couple of exercises. 03:17:33.696 --> 03:17:41.906 So we go through the first exercise which is this. 03:17:43.739 --> 03:17:50.255 This company began operations 1st February 2019 03:17:50.255 --> 03:17:52.778 and the trial balance is at 30th June. 03:17:52.778 --> 03:17:57.959 So how many months is this accounting period? 03:17:57.959 --> 03:18:03.826 The accounting period is five months, very good. 03:18:03.826 --> 03:18:08.692 We need to keep that in mind, five months is the accounting period 03:18:08.692 --> 03:18:13.846 to calculate the revenues, expenses or anything that we will need. 03:18:13.846 --> 03:18:16.529 What we have here is the trial balance again, 03:18:16.529 --> 03:18:18.991 the unadjusted trial balance. 03:18:18.991 --> 03:18:24.686 We have all the debit accounts, all the credit accounts. 03:18:24.686 --> 03:18:28.588 They are not all the accounts because there are other accounts here, 03:18:28.588 --> 03:18:34.281 you can see other accounts that have zero balance at this moment 03:18:34.281 --> 03:18:38.349 but they are accounts of the company that we will use. 03:18:38.349 --> 03:18:44.310 And then we have the transactions, not transactions, sorry. 03:18:45.059 --> 03:18:49.662 Not transactions, the data for the adjustments. 03:18:51.466 --> 03:18:55.641 The first again we have supplies, so these are similar, 03:18:55.641 --> 03:18:56.970 so I will go a bit quick, 03:18:56.970 --> 03:19:02.454 but please stop me if there's anything that you don't follow well. 03:19:02.454 --> 03:19:06.106 So supplies on hand, 490, 03:19:06.106 --> 03:19:10.930 how much we have in the unadjusted trial balance? 03:19:10.930 --> 03:19:18.795 supplies, 2350, so 2350 less 490 03:19:19.416 --> 03:19:24.266 that will be 1860. 03:19:27.558 --> 03:19:34.234 Less 490 that will be 1860, 03:19:34.234 --> 03:19:37.004 so we record supplies expense and supplies. 03:19:37.004 --> 03:19:41.431 We'll record expense for the supplies consumed 03:19:41.431 --> 03:19:45.492 and we decrease the balance of the supplies accounts. 03:19:47.854 --> 03:19:52.633 Ok, second, electricity bill 110 has not been recorded, 03:19:52.633 --> 03:19:55.285 and will not be paid until next month. 03:19:55.285 --> 03:19:59.623 Quite similar to what we have done, we need to record the expense, 03:19:59.623 --> 03:20:03.192 electricity expense debit 110, 03:20:03.192 --> 03:20:08.131 and electricity payable credit 110. 03:20:08.399 --> 03:20:15.357 So here you have electricity expense 110, electricity payable 110. 03:20:19.394 --> 03:20:24.175 The insurance policy is for the year commencing 1st February 2019. 03:20:24.175 --> 03:20:27.577 This is the day that the company started for the year, 03:20:27.577 --> 03:20:30.873 so we need to see here how much is... 03:20:30.873 --> 03:20:36.378 prepaid insurance in total for a year is 2520, 03:20:36.378 --> 03:20:43.117 so if we divide this by 12 and we have five months in this period 03:20:43.117 --> 03:20:49.985 we will need to multiply by 5, so dividing this by 12, multiplied by five 03:20:49.985 --> 03:20:55.885 the insurance expense will be 1050 03:20:56.969 --> 03:21:03.596 so we have insurance expense debit 1050 03:21:03.596 --> 03:21:06.948 credit prepaid insurance will decrease the amount that we have 03:21:06.948 --> 03:21:11.644 in prepaid insurance, 1050. 03:21:15.421 --> 03:21:19.679 Services were performed during the period in relation to 800 of revenue 03:21:19.835 --> 03:21:22.206 received in advance. 03:21:22.206 --> 03:21:26.852 So we have a revenue received in advance and we need to decrease that 800 03:21:26.852 --> 03:21:29.515 to record the service revenue. 03:21:29.515 --> 03:21:33.454 We will debit revenue received in advance by 800, 03:21:33.454 --> 03:21:38.026 we will credit service revenue by the same amount. 03:21:40.740 --> 03:21:45.302 So we debit the service revenue received in advance, 800 03:21:45.302 --> 03:21:48.757 and we credit service revenue. 03:21:52.823 --> 03:21:54.413 Next one. 03:21:56.283 --> 03:21:59.875 Ok, yes. Yeah, that's good. 03:22:00.230 --> 03:22:03.128 Services were perfomed during the period 03:22:03.128 --> 03:22:06.369 in relation to 800 of revenue received in advance 03:22:06.369 --> 03:22:08.045 What does that mean? 03:22:08.591 --> 03:22:13.486 That means that previously we have received cash 03:22:13.486 --> 03:22:20.333 for services that we have not provided, we received in advance, 03:22:20.333 --> 03:22:23.355 so we record this as a liability. 03:22:23.355 --> 03:22:28.200 The liability, the name of the account is service revenue received in advance 03:22:28.200 --> 03:22:33.466 and we can confirm this in the trial balance. 03:22:35.394 --> 03:22:40.511 The liability here you can see service revenue received in advance. 03:22:40.511 --> 03:22:47.501 We have received cash for 1500 for services we have not provided, ok? 03:22:47.501 --> 03:22:53.632 Now in this data it says services were performed during the period 03:22:53.632 --> 03:23:01.222 for 800 of this 1500 that we received cash we provide service for 800, 03:23:01.222 --> 03:23:05.918 so we will have this revenue credit and we need to decrease 03:23:05.918 --> 03:23:11.152 the liability that we have by the same amount, by 800. 03:23:11.282 --> 03:23:19.459 Ok, so the journal entry will be service revenue received in advance we credit 03:23:19.459 --> 03:23:22.810 so we decrease that 1500 that we have 03:23:22.810 --> 03:23:27.115 we decrease for the services already performed. 03:23:27.471 --> 03:23:30.663 And we record the service revenue credit. 03:23:32.173 --> 03:23:34.846 Now it's better George? 03:23:42.605 --> 03:23:45.335 Shouldn't we be deducting? 03:23:45.335 --> 03:23:47.930 (INAUDIBLE) 03:23:49.855 --> 03:23:58.227 Actually we are deducting 800 from the 1500 we have with this 03:23:58.393 --> 03:24:04.168 in the debit entry because we debit. 03:24:05.096 --> 03:24:09.418 We are reducing the balance of service revenue received in advance 03:24:09.418 --> 03:24:13.004 that has a credit balance of 1500. 03:24:14.291 --> 03:24:21.815 We debit 800 because we performed services for 800, 03:24:21.815 --> 03:24:24.284 so we deduct that. 03:24:24.284 --> 03:24:30.762 With the debit entry we are reducing an account that has a credit balance. 03:24:34.388 --> 03:24:36.921 Excellent, very good. 03:24:38.042 --> 03:24:39.740 You're welcome. 03:24:39.740 --> 03:24:45.805 Ok, so the next one, salaries. 03:24:46.794 --> 03:24:50.433 Salaries of 770 are owed at 30th June, 03:24:50.433 --> 03:24:52.180 we have done something similar. 03:24:52.180 --> 03:24:57.898 So what are the accounts to record the expense, salaries expense 770 03:24:57.898 --> 03:25:00.457 and because we have not paid these salaries, 03:25:00.457 --> 03:25:05.502 they will be liability salaries payable, 770. 03:25:07.657 --> 03:25:12.377 Here you have salaries expense 770 debit, 03:25:12.377 --> 03:25:16.697 salaries payable liability 770. 03:25:19.889 --> 03:25:25.846 The next one, office equipment has a five year life with no resale value 03:25:25.846 --> 03:25:31.431 and is being depreciated at $375 per month for 60 months. 03:25:32.143 --> 03:25:36.419 Ok, this is the amount per month, depreciation expense per month. 03:25:36.419 --> 03:25:40.041 But how many months do we have? Five months. 03:25:40.041 --> 03:25:45.949 So we need to multiply 375 by five, that is 1875 03:25:45.949 --> 03:25:52.151 so we record depreciation expense here is the adjusting entry, 03:25:52.151 --> 03:25:58.102 depreciation expense 1875 debit 03:25:58.102 --> 03:26:05.121 and we credit the accumulated depreciation office equipment 1875. 03:26:08.336 --> 03:26:10.381 And the last. 03:26:10.837 --> 03:26:15.950 Invoices representing 1500 of services performed during the month 03:26:15.950 --> 03:26:18.020 have not been recorded. 03:26:18.020 --> 03:26:25.800 So we provide services, we send the invoice but we have not recorded 03:26:25.800 --> 03:26:30.589 so we need to record, simply record that we have not received cash 03:26:30.589 --> 03:26:36.363 so we record a debit to accounts receivable 03:26:36.363 --> 03:26:40.217 and a credit to service revenue. 03:26:43.733 --> 03:26:48.247 And here you have 1500 debit account receivable, 03:26:48.247 --> 03:26:50.689 credit service revenue. 03:26:52.603 --> 03:26:59.516 So we went a bit more faster through the adjusting entry 03:26:59.516 --> 03:27:02.416 because you have seen they're very similar, 03:27:02.416 --> 03:27:09.372 so if you become accustomed with this you will do well in any adjusting entries 03:27:09.557 --> 03:27:12.282 that you may face in any exercise. 03:27:12.282 --> 03:27:17.460 They're similar once you become accustomed to how to record adjusting entries, 03:27:17.460 --> 03:27:22.267 it will be easier for you to do this. 03:27:25.599 --> 03:27:32.170 Invoices... sorry, what was the question reading? 03:27:32.348 --> 03:27:35.731 Invoices we did combine them. 03:27:37.311 --> 03:27:42.187 You mean in the last transaction the number seven? 03:27:42.755 --> 03:27:50.201 The number seven when it says invoices representing 1500 of services, 03:27:50.201 --> 03:27:55.505 yes, it could be one, it could be two, it could be more than one, 03:27:55.505 --> 03:27:58.006 but here we put all together 03:27:58.006 --> 03:28:01.726 because all of them are for the same period 03:28:01.726 --> 03:28:07.714 so we can add them and in total it's 1500. 03:28:07.954 --> 03:28:13.060 We do not record invoice by invoice unless they're from different dates 03:28:13.060 --> 03:28:16.051 and we're preparing 03:28:17.173 --> 03:28:21.080 each day by day as we did last week, that is day by day, 03:28:21.080 --> 03:28:25.772 in that case we need to record each time but we're preparing adjusting entries. 03:28:25.772 --> 03:28:29.330 Adjusting entries is for the whole month 03:28:29.330 --> 03:28:33.424 so we need to include all the invoices of the month, ok? 03:28:33.424 --> 03:28:36.702 Because the one point in time that we're doing this 03:28:36.702 --> 03:28:39.649 is the last day of the accounting period 03:28:39.649 --> 03:28:42.773 so we add all the invoices for the month. 03:28:47.051 --> 03:28:52.769 Just because we have only one service revenue account, 03:28:53.163 --> 03:28:58.331 we have one service revenue account and therefore we add them. 03:28:59.333 --> 03:29:06.605 If you remember the ledger last week, we have one service revenue account 03:29:06.605 --> 03:29:08.245 or sales revenue account. 03:29:08.245 --> 03:29:11.814 Now if we have two different accounts for example 03:29:11.814 --> 03:29:16.141 we have invoices for services that we provided 03:29:16.141 --> 03:29:21.453 and we have invoices for products that we delivered 03:29:21.453 --> 03:29:27.698 and we have one service account and we have one sales revenue account, 03:29:27.698 --> 03:29:30.713 two different accounts, one for services one for products, 03:29:30.713 --> 03:29:37.464 in that case we need to add all the services invoices 03:29:37.464 --> 03:29:40.219 and to put them in the service revenue account 03:29:40.219 --> 03:29:44.015 and all the sales of products and we put them in the other account 03:29:44.015 --> 03:29:46.477 in that case we need to keep them separated. 03:29:46.477 --> 03:29:49.267 But if it is only one account that we are using 03:29:49.267 --> 03:29:52.236 this is the adjusting entry, we add all of them. 03:29:55.513 --> 03:30:01.851 Ok, accounts receivable debit and services performed credit 03:30:01.851 --> 03:30:04.708 for the seventh transaction. 03:30:06.411 --> 03:30:07.762 Ok, well yes. 03:30:07.762 --> 03:30:12.312 The seventh transaction we have a number of invoices 03:30:12.312 --> 03:30:14.661 but the total is 1500. 03:30:14.661 --> 03:30:16.151 Services performed. 03:30:18.013 --> 03:30:21.228 Invoices for services performed means service revenue, 03:30:21.228 --> 03:30:25.929 we've earned this revenue because we provided the services 03:30:26.275 --> 03:30:31.747 so we have a credit in the account of service revenue, 1500. 03:30:31.747 --> 03:30:35.371 But we have not received the cash for this. 03:30:35.371 --> 03:30:39.521 It doesn't say here that we buy services for cash 03:30:39.521 --> 03:30:42.230 so therefore it is an account receivable. 03:30:42.494 --> 03:30:46.371 We need to debit the accounts receivable 03:30:50.522 --> 03:31:00.832 Ok, so once we have this, all the adjusting entries recorded 03:31:01.915 --> 03:31:05.775 we can go to our worksheet 03:31:06.026 --> 03:31:09.275 and here in the worksheet, the same as we have done, 03:31:09.275 --> 03:31:11.651 we have the unadjusted trial balance. 03:31:11.651 --> 03:31:19.615 We copy all the adjtustments here and we prepare the adjusted trial balance. 03:31:20.393 --> 03:31:23.312 Ok, I will not repeat this part because it's very simple. 03:31:23.312 --> 03:31:29.302 You know for example if you have account receivable 03:31:29.302 --> 03:31:35.943 this is the unadjusted trial balance 3150, ok, in here. 03:31:37.327 --> 03:31:41.108 Debit and in the adjustment you have another debit. 03:31:41.108 --> 03:31:45.557 You need to add the two of them to have the adjusted trial balance. 03:31:45.999 --> 03:31:49.872 If you have the prepaid insurance debit and the adjustment is a credit, 03:31:49.872 --> 03:31:54.715 you need to subtract this and to calculate the adjusted trial balance. 03:31:55.230 --> 03:31:59.604 So it's exactly the same as we have done before. 03:31:59.604 --> 03:32:05.205 The important thing, all of them, the unadjusted trial balance, 03:32:05.205 --> 03:32:07.892 total debit equals total credit. 03:32:07.892 --> 03:32:11.904 The adjustment, this is the sum of all the adjusting entries, 03:32:11.904 --> 03:32:14.647 total debit again equals total credit. 03:32:15.283 --> 03:32:21.001 The adjusted trial balance again, total debit again equals total credit. 03:32:22.175 --> 03:32:27.131 So always in the trial balance, total debit equals total credit. 03:32:27.339 --> 03:32:32.222 The same as any journal entry. Total debit equals total credit. 03:32:37.105 --> 03:32:41.871 So from that worksheet we can prepare what is the adjusted trial balance 03:32:41.871 --> 03:32:44.847 at 30th June after all the adjustments 03:32:44.847 --> 03:32:47.547 and here you have the adjustment trial balance. 03:32:47.547 --> 03:32:51.585 It's just a copy of what we have in the worksheet. 03:32:55.581 --> 03:33:02.565 The last problem for today is this one. 03:33:03.552 --> 03:33:08.001 Here we will start with the adjusted trial balance. 03:33:08.611 --> 03:33:11.785 If you remember the previous problem, we had started the problem 03:33:11.785 --> 03:33:18.173 with the unadjusted trial balance and we prepared all the adjustments 03:33:18.173 --> 03:33:21.401 and at the end we end with the adjusted trial balance. 03:33:21.401 --> 03:33:26.065 In this problem we will start with the adjusted trial balance. 03:33:26.065 --> 03:33:31.494 So here you have the trial balance after all adjustments. 03:33:31.494 --> 03:33:36.156 All adjustments we have the trial balance. 03:33:37.945 --> 03:33:42.507 In this exercise which is a different exercise of course from the previous one 03:33:43.688 --> 03:33:47.316 you can see trial balance have the same structure. 03:33:47.716 --> 03:33:53.219 We have first all the asset accounts, cash, accounts receivable, 03:33:53.219 --> 03:33:58.058 office supplies, equipment, accumulated depreciation equipment 03:33:58.058 --> 03:34:01.855 which is an asset account but is credit balance, ok? 03:34:01.855 --> 03:34:06.794 Then we have the liabilities, accounts payable, salaries payable, 03:34:06.794 --> 03:34:09.966 interest payable, rent revenue received in advance 03:34:09.966 --> 03:34:14.568 bank loans, all of these are liabilities accounts. 03:34:15.749 --> 03:34:19.569 Then we have check capital and retained earnings. 03:34:19.569 --> 03:34:22.262 These are equity accounts. 03:34:23.103 --> 03:34:27.411 Here we have one temporary account, part of equity dividends. 03:34:29.060 --> 03:34:30.847 Why is dividends on the debit side? 03:34:30.847 --> 03:34:33.493 Because dividends decrease retained earning, ok? 03:34:33.667 --> 03:34:36.770 But this is a temporary account that we need to close 03:34:36.770 --> 03:34:39.617 to retained earnings account, 03:34:39.855 --> 03:34:42.677 and then we have the income statements account. 03:34:42.677 --> 03:34:48.263 Revenues, we have two revenues accounts, sales revenue and rent revenue, 03:34:48.263 --> 03:34:51.707 and we have all of these expenses accounts. 03:34:53.339 --> 03:34:57.464 And the total of course should be equal. Total debit equals total credit. 03:34:57.464 --> 03:35:04.713 So the question or the exercise, start with the adjusted trial balance. 03:35:10.197 --> 03:35:13.058 What is required in this question? 03:35:13.058 --> 03:35:19.940 Prepare the closing entries and prepare a post closing entries trial balance, 03:35:20.604 --> 03:35:21.773 just that. 03:35:21.967 --> 03:35:26.361 Prepare closing entries and prepare post closing entries trial balance 03:35:26.361 --> 03:35:30.215 starting with the adjusted trial balance. 03:35:31.177 --> 03:35:34.036 So we will return to the adjusted trial balance. 03:35:35.246 --> 03:35:38.002 How will we prepare the closing entries? 03:35:38.497 --> 03:35:40.498 We will start with the expenses. 03:35:40.864 --> 03:35:43.589 Here you have all the expense accounts. 03:35:43.838 --> 03:35:49.949 How do we close these expenses? All the expenses accounts? 03:35:50.775 --> 03:35:54.794 Well, the balance of these accounts is debit, 03:35:54.794 --> 03:35:58.160 so to close them, to leave them with zero balance 03:35:58.160 --> 03:36:03.006 we need to credit for the same amount. 03:36:03.006 --> 03:36:06.265 That is the part that I mentioned before, don't make a mistake. 03:36:06.347 --> 03:36:10.180 To close these we need to credit, not to debit. 03:36:10.180 --> 03:36:15.579 If you debit you will double the balance of these accounts. 03:36:16.147 --> 03:36:19.619 So we need to credit by the same amounts. 03:36:19.619 --> 03:36:24.448 It's very simple, the journal entry. 03:36:24.448 --> 03:36:28.828 The income summary debit and expenses credit, exactly George. 03:36:28.828 --> 03:36:30.888 That is the point. 03:36:31.075 --> 03:36:38.788 So the journal entry will be credit salaries expense 11340, 03:36:38.788 --> 03:36:44.268 credit rent expense 6000, credit depreciation expense, 03:36:44.268 --> 03:36:47.191 equipment 1750. 03:36:47.191 --> 03:36:52.506 Credit supplies expense 900, credit electricity expense 750. 03:36:52.506 --> 03:36:54.723 Credit interest expense 500. 03:36:54.723 --> 03:37:00.057 So you can see, you have to go one by one closing each of these accounts 03:37:00.057 --> 03:37:05.102 with a credit entry of the same amount that we have in the balance. 03:37:05.982 --> 03:37:10.993 Then you add all of these and you will record a debit entry 03:37:10.993 --> 03:37:14.006 in the income summary account for the sum of all of that. 03:37:14.006 --> 03:37:18.275 In this case if you add this it's 20990 03:37:18.275 --> 03:37:26.303 so you record your first closing entry which is this one. 03:37:26.303 --> 03:37:31.231 Profit and loss summary or income summary accounts, 20990, 03:37:31.231 --> 03:37:35.593 and the credit in all the expense accounts, ok? 03:37:35.750 --> 03:37:39.062 Salaries expense, rent expense, depreciation expense. 03:37:39.062 --> 03:37:44.660 After this, the balance of all of this expense accounts will be zero, ok? 03:37:45.002 --> 03:37:50.456 Because we have the same amount debits and credits so the balance is zero. 03:37:51.934 --> 03:37:57.562 Then we close the revenues accounts and we have two. 03:37:57.938 --> 03:38:03.393 So we have sales revenue, and we have rent revenue. 03:38:03.393 --> 03:38:08.917 Credit balance, so to close this, we need to debit for the same amount. 03:38:08.917 --> 03:38:12.681 We need to debit sales revenue, 18600. 03:38:12.681 --> 03:38:17.608 We need to debit rent revenue 12000, one by one again. 03:38:17.608 --> 03:38:20.582 And then we will credit the income summary account 03:38:20.582 --> 03:38:21.790 for the total. 03:38:21.790 --> 03:38:26.851 How much is the total? 30600, the sum of these two, 03:38:26.851 --> 03:38:32.556 and we have the second closing entry which is this. 03:38:34.249 --> 03:38:39.567 Here we have debit, the sales revenue, the rent revenue, now the balance is zero 03:38:39.567 --> 03:38:45.164 and we credit the profit and loss summary or income summary account, 03:38:45.164 --> 03:38:48.167 you can put the name profit and loss summary 03:38:48.167 --> 03:38:50.881 or income summary accounts, correct. 03:38:50.881 --> 03:38:53.996 You credit by that amount. 03:38:55.703 --> 03:38:59.876 So we closed all the expenses and revenue accounts. 03:38:59.876 --> 03:39:02.619 But we have opened this temporary account 03:39:02.619 --> 03:39:05.663 that is the profit and loss summary account. 03:39:05.663 --> 03:39:11.218 We need to close that because it's also a temporary account. 03:39:11.218 --> 03:39:16.027 What is the balance of this account after all of these closing entries? 03:39:16.537 --> 03:39:21.932 The balance is the difference between 30600 credit 03:39:22.307 --> 03:39:25.760 and 20990 debit, 03:39:25.760 --> 03:39:28.999 so the difference will be a credit because this is higher, 03:39:28.999 --> 03:39:39.057 will be a credit of 9610. That is the next closing entry. 03:39:40.039 --> 03:39:43.687 Because it will be a credit balance we need to debit this account 03:39:43.861 --> 03:39:46.571 by 9610. 03:39:47.163 --> 03:39:50.236 Now this account is zero, ok? 03:39:50.369 --> 03:39:53.088 The profit and loss summary account, the balance is zero, 03:39:53.088 --> 03:39:56.420 we've closed that with this debit entry? 03:39:56.420 --> 03:39:57.820 What is the credit entry? 03:39:57.820 --> 03:40:01.473 Retained earnings account which is a permanent account. 03:40:05.830 --> 03:40:08.548 So we close all the income statement accounts 03:40:08.548 --> 03:40:12.031 and the profit and loss summary accounts and we only need to close now 03:40:12.531 --> 03:40:20.358 one additional account that we have in the adjusted trial balance. 03:40:20.688 --> 03:40:22.130 Yes Josh? 03:40:22.394 --> 03:40:27.962 JOSHUA: Could you explain the second last, the (INAUDIBLE) 03:40:29.567 --> 03:40:33.853 HERMAN: Sorry, I couldn't hear very well, can you repeat please? 03:40:33.853 --> 03:40:37.020 JOSHUA: Yeah, could you explain the second last transaction 03:40:37.020 --> 03:40:39.531 which was about the retained earnings? 03:40:39.531 --> 03:40:42.623 The income summary to retained earnings. 03:40:42.623 --> 03:40:44.219 HERMAN: Yes, sure, sure. 03:40:46.749 --> 03:40:54.794 Here you have the... How many closing entries do we have? 03:40:55.943 --> 03:41:01.295 The first closing entry we close all the expenses as I said here. 03:41:01.711 --> 03:41:06.083 All the expenses are closed to profit and loss summary account. 03:41:06.083 --> 03:41:09.302 The second entry we close the revenues. 03:41:09.302 --> 03:41:14.086 So all the revenues are closed to profit and loss summary account. 03:41:14.300 --> 03:41:20.157 Now we need to close the profit and loss summary account. 03:41:20.157 --> 03:41:24.911 How much is the balance of profit and loss summary accounts 03:41:24.911 --> 03:41:28.416 after the first two closing entries? 03:41:29.880 --> 03:41:36.155 In the first closing entry we have a debit of 20990. 03:41:37.185 --> 03:41:42.206 In the second closing entry we have a credit of 30600. 03:41:42.594 --> 03:41:44.575 It's the same account, ok? 03:41:44.575 --> 03:41:50.250 So we have a credit of 30600, we have a debit of 20900, 03:41:50.250 --> 03:41:52.316 what is the balance? 03:41:52.316 --> 03:41:56.873 The balance will be a credit because this is higher, ok? 03:41:56.873 --> 03:41:59.794 We have more credit than debit. 03:42:00.160 --> 03:42:04.408 We subtract this from the credit that we have, 03:42:04.408 --> 03:42:09.731 and the difference will be a credit of 9610. 03:42:10.889 --> 03:42:14.573 That is after the second closing entry. 03:42:14.870 --> 03:42:20.382 We have a debit balance in this temporary account 9610. 03:42:20.382 --> 03:42:23.627 Now we want to close that. How do we close it? 03:42:23.627 --> 03:42:27.323 Because we have a debit balance, we need to credit, 03:42:27.323 --> 03:42:32.657 so we credit by that amount 9610 03:42:32.657 --> 03:42:38.011 and with that the balance of the profit and loss summary account is zero now. 03:42:38.233 --> 03:42:43.432 But in this third closing entry, the other entry is retained earnings. 03:42:44.067 --> 03:42:49.894 So in retained earnings, we credit retained earnings by this amount. 03:42:50.707 --> 03:42:54.551 You can see that this is the way that you transfer the profits 03:42:54.551 --> 03:43:00.510 to retained earnings because the profit is revenues less expenses. 03:43:00.510 --> 03:43:04.191 That difference is included in the profit and loss summary account. 03:43:04.191 --> 03:43:06.692 We've closed the revenue, we've closed expenses 03:43:06.692 --> 03:43:11.893 to profit and loss summary account so we have a profit of 9610 03:43:11.893 --> 03:43:15.254 and we close that to retained earnings. 03:43:19.627 --> 03:43:23.835 And we have one more account. 03:43:24.705 --> 03:43:28.114 That is dividends. Here you can see dividends. 03:43:28.114 --> 03:43:31.754 They will balance 600. 03:43:31.754 --> 03:43:35.716 Dividends we know is a temporary account that decrease retained earnings, 03:43:35.716 --> 03:43:39.610 dividends are paid from retained earnings. 03:43:39.610 --> 03:43:42.617 We need to close this. How do we close this? 03:43:42.617 --> 03:43:45.660 We close to retained earnings account. 03:43:45.820 --> 03:43:50.767 So to close this which has a debit balance we need to credit this account 03:43:50.767 --> 03:43:54.147 and we will debit retained earnings. 03:43:54.147 --> 03:43:56.883 You can see we've done a debit to retained earnings, 03:43:56.883 --> 03:43:59.608 decreased retained earnings. 03:43:59.608 --> 03:44:04.389 So that last closing entry 03:44:06.507 --> 03:44:10.678 in which we debit the retained earnings account. 03:44:10.678 --> 03:44:14.835 600 and we credit dividends by 600. 03:44:15.117 --> 03:44:19.192 What is the balance of dividends after this closing entry? Zero 03:44:20.114 --> 03:44:24.994 And retained earnings are decreased by this amount. 03:44:25.546 --> 03:44:33.359 If you think about what we've learnt in the first or the second module, 03:44:34.982 --> 03:44:37.592 how the retained earnings account changed 03:44:37.592 --> 03:44:41.488 from the beginning of the period until the end of the period, 03:44:41.841 --> 03:44:45.515 well we start with the beginning balance of the retained earnings. 03:44:46.595 --> 03:44:50.777 We add the profits, we subtract the dividends 03:44:51.374 --> 03:44:54.512 and then we have the ending balance of retained earnings. 03:44:54.512 --> 03:44:59.216 Now you can see how we do this through journal entries, 03:44:59.216 --> 03:45:02.149 actually closing entries. 03:45:02.149 --> 03:45:05.483 It is exactly the same thing. 03:45:06.445 --> 03:45:10.465 So now we have the closing entries. 03:45:12.214 --> 03:45:17.370 We can prepare the post closing entries trial balance. 03:45:19.271 --> 03:45:23.597 To prepare the post closing entries trial balance is very simple 03:45:23.597 --> 03:45:27.169 and I will show you exactly how to do this 03:45:27.169 --> 03:45:29.572 from the adjusted trial balance. 03:45:29.572 --> 03:45:33.040 This is the adjusted trial balance, we start with this. 03:45:33.040 --> 03:45:36.124 What do we have in the adjusted trial balance? 03:45:36.124 --> 03:45:40.405 Asset accounts, liabilities accounts, equity accounts 03:45:40.405 --> 03:45:44.962 and then we have the revenues, expenses and dividends accounts 03:45:44.962 --> 03:45:47.018 that are all temporary. 03:45:47.018 --> 03:45:50.930 The post closing entry trial balance, the main difference 03:45:50.930 --> 03:45:56.946 with the adjusted trial balance is that in the post closing entry trial balance 03:45:56.946 --> 03:46:00.488 you only have permanent accounts. 03:46:01.105 --> 03:46:04.580 Is there any change between the adjusted trial balance 03:46:04.580 --> 03:46:09.345 and the post closing entry trial balance in the asset accounts? No. 03:46:09.721 --> 03:46:12.334 Because we didn't close any of them. 03:46:12.334 --> 03:46:17.793 In the liabilities accounts? No. Because we didn't close any of them. 03:46:18.795 --> 03:46:22.678 What about equity? Well, in share capital no, 03:46:22.678 --> 03:46:25.050 but retained earnings yes. 03:46:25.050 --> 03:46:29.269 That is the only account that will be different 03:46:29.269 --> 03:46:33.895 in the post closing entry trial balance, compared with the adjusted trial balance. 03:46:33.895 --> 03:46:36.250 Of course the post closing entry trial balance, 03:46:36.250 --> 03:46:41.949 they do not have any income statement accounts or dividend accounts. 03:46:42.544 --> 03:46:48.231 We can see easily how we calculate that going from the retained earnings 03:46:48.231 --> 03:46:51.494 that you have here, ok? 03:46:51.787 --> 03:46:54.515 Look at here, 1500. 03:46:54.515 --> 03:46:58.777 What is that 1500 that we have... 03:47:00.467 --> 03:47:03.959 That we have in the adjusted trial balance? Retained earnings. 03:47:04.159 --> 03:47:11.675 This retained earnings balance is the beginning balance of retained earnings 03:47:11.675 --> 03:47:13.163 not the ending balance. 03:47:13.163 --> 03:47:17.367 This is not the balance at 30th June. 03:47:18.661 --> 03:47:21.904 This is the beginning balance of retained earnings. 03:47:21.904 --> 03:47:24.288 Why is it the beginning balance? 03:47:24.288 --> 03:47:29.468 Because in this statement which is the adjusted trial balance 03:47:29.468 --> 03:47:33.182 you have all revenues, you have all the expenses, 03:47:33.182 --> 03:47:38.608 you have the dividends, so all the accounts that affect 03:47:38.934 --> 03:47:42.107 the ending balance of retained earnings are here, 03:47:42.107 --> 03:47:46.389 and because they are here, this is the beginning balance. 03:47:46.389 --> 03:47:52.326 How we transform this to the ending balance of retained earnings? 03:47:52.326 --> 03:47:56.833 First we need to add the profit. What is the profit? 03:47:56.833 --> 03:48:02.487 We calculate the profit through the profit and loss summary account. 03:48:02.487 --> 03:48:06.634 This is the profit 9610 03:48:06.634 --> 03:48:13.889 so we will need to add 1500 plus 9610 03:48:13.889 --> 03:48:19.573 and we need to deduct the dividends 600. 03:48:19.935 --> 03:48:24.428 That's why in the post closing entries trial balance, 03:48:24.428 --> 03:48:28.825 all the accounts are the same as the adjusting trial balance 03:48:28.825 --> 03:48:34.932 after adjustment but retained earnings is 10510. 03:48:35.230 --> 03:48:37.009 How do we calculate this? 03:48:37.009 --> 03:48:39.683 This is the ending balance of retained earnings. 03:48:39.683 --> 03:48:41.727 Here you have the explanation. 03:48:41.727 --> 03:48:47.445 Beginning balance 1500 that we have in the adjusted trial balance 03:48:47.445 --> 03:48:51.768 plus the profit 9610 03:48:51.768 --> 03:48:56.237 which is the result of the profit and loss summary account 03:48:56.237 --> 03:48:59.109 less the dividends, 600. 03:48:59.362 --> 03:49:02.298 If you calculate this you get, 03:49:02.298 --> 03:49:07.199 you will get the ending balance of retained earnings 03:49:09.456 --> 03:49:12.195 And this will be the total. 03:49:12.195 --> 03:49:15.391 Total debit, total credit, that should be the same 03:49:17.670 --> 03:49:20.236 Any question? 03:49:24.822 --> 03:49:27.957 All good? Excellent. 03:49:28.876 --> 03:49:30.985 Excellent, we've finished. 03:49:30.985 --> 03:49:35.246 At least we finished earlier than last week. 03:49:35.246 --> 03:49:41.836 Last week was a marathon that we did 03:49:41.836 --> 03:49:45.742 but today we finished earlier than last week. 03:49:45.742 --> 03:49:50.127 But if you have any last questions of course I will be happy to answer you. 03:49:50.918 --> 03:49:54.954 Anything that you would like to ask or discuss? 03:49:56.174 --> 03:50:00.052 Yeah last week was a lot, yes. 03:50:01.964 --> 03:50:04.621 Okay, thank you very much. 03:50:04.815 --> 03:50:08.700 Have a great evening and a great week. 03:50:09.079 --> 03:50:11.266 Ok, see you next week. 03:50:11.266 --> 03:50:16.740 Bye, thank you all of you. Thank you.