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LECTURER: Ok, hello everyone.
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Welcome again to the Accounting
and Governance class.
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Could anyone please tell me
if the volume is ok?
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Perfect. Ok, thank you.
Thank you.
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So, I hope you have had
a very good week,
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and I hope that you will do well
in your first assessable homework
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that is in the process of marking
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by another lecturer,
that is the person who will mark
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all our assessment.
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So just be a bit patient,
during this week
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we will release the results of the
first assessable homework.
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Now today we will continue
with what we started last week.
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Last week what you learnt was
how to record transactions
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using debits and credits
and preparing the journal entries
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and you know that for
each journal entry
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you need at least two entries,
one debit entry and one credit entry.
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it could be more than two,
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but normally we have one debit
and one credit
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and of course the total debit
and total credit should be the same,
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the same amount in each journal entry.
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So what we will go through
today is
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another type of entries
which is adjusting entries.
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I hope you have studied the
material that is posted
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on the course learning at Griffith,
you have watched the videos
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and looked at the PowerPoint too
and have of course understanding of this.
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But as usual I will explain everything
you need to understand well,
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how to deal with these
different types of entries
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that are the adjusting entries.
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The purpose of this session
is that you will end the session
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with a clear understanding of that,
adjusting entries and also closing entries
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which is another type of entry.
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The journal entries that you
learnt last week
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are entries that you prepare
from transactions
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that you have in the business so when
the accountant records these transactions
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the accountant receives information
that is mainly through the cash received
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and cash paid so they are
very based on the cash.
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Cash received and cash paid.
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I will answer that Jade
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They are mainly related to
cash received and cash paid
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but sometimes the accountant also receives
information of invoices
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that are sent to customers so they record
an income or revenue and purchases
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so they record the purchase as well.
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So not all are cash journal entries
but most of them I would say yes.
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The first difference with adjusting entries
is in adjusting entries,
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we do not involve cash.
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Cash is never involved
in an adjusting entry.
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So what are these adjusting entries?
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And in this I will answer what Jade asked.
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Why adjustments are not done each month
as a normal activity
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then it will not be such
a big adjustment at the end,
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and you are totally correct Jade
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But that depends...
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it depends on what is
our accounting period.
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It depends on the company.
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The normal accounting period
is one year.
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If a company does not prepare
financial statements every month
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for example, or every quarter,
well, it will happen what you said.
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The adjusting entries are
at the end of the year.
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But what's happening there
in the real world
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companies prepare the financial
statement
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every quarter or even every month
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and in that case if we define the
accounting period as one month
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that means at the end of the month
we need to prepare the adjusting entries.
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The concept of adjusting entries is that
we prepare adjusting entries
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at the end of the accounting period,
ok?
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That is the thing.
At the end of the accounting period.
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If the accounting period is one month
we prepare adjusting entries
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at the end of the month.
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If the accounting period is the whole year
we prepare the adjusting entries
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at the end of the year, ok?
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That is one concept that we need to
have in relation to adjusting entries.
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The other thing is what we are adjusting
because the name is adjusting entries?
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What we are adjusting with these entries.
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We adjust revenues or income
and expenses.
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That is what we adjust to reflect
in the financial statements,
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all the income or revenue
that has earned in the period,
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and to reflect all the expenses
that have been incurred during the period.
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That is what we show with
the adjustment entries.
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That's why we cannot do adjustment entries
in the middle of the month
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or at the beginning of the month,
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it's always at the end of the period
because at the end of the period
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we want to have in our
financial statement
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all the income earned in that period
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and all the expenses incurred
in that period.
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So this is the most
important concept
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to start with adjusting entries.
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Then as I said some expenses
and revenue menu can be recorded exactly,
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that's the things, others,
some expenses revenues cannot be recorded
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we need to adjust to have
all the expenses incurred recorded
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and the same for income or revenue.
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To align with the business
activity statement,
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the business activity statement
is a tax concept.
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In many cases the tax period is the same
as the accounting period
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in that case a year but we need
to be careful that we do not mix
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with the tax concept when we
are talking with accounting
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because there may be some differences.
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Ok, so we will start as usual today
with the lecture
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in which I will pose
four multiple choice questions.
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You will answer the questions,
and this will be a good feedback
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for you and for me about
the understanding of some basic concepts
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of this topic.
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If I see that the distribution of
your answer is not very good
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which is a good feedback
in the sense that that lets me explain
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why this answer is correct
or why it's not correct
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for your own learning.
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We will discuss that and I will use
these questions to explain
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probably some of the concepts
if they are not clear.
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So please feel free as usual to ask
any question during the lecture
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and then during the workshop.
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Last week we talked for more than
four and a half hours
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in the whole thing because
of the number of questions
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but probably today we will be less than
that because the topic is more specific
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but I am happy to answer all the questions
to explain well,
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my main purpose is for you
to understand these topics.
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That is the main purpose because then
you will be evaluated on this topic
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The second assessable homework
will be next week
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after the topic four,
module four.
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So that assessable homework two
includes this module,
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module three,
adjusting and closing entries
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and also the module four.
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That's why it's very important,
if there is anything you do not understand
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please ask, ok?
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I hope no Jade (INAUDIBLE)
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Jade I hope it will not be
four and a half hours.
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Ok, for me it's ok.
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I have enough energy I think
to beat four and a half hours.
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I feel sorry for you sometimes but
maybe you're very tired after that time
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but we will do the best we can.
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Ok, so we will start
with the questions...
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Here we have the first question, ok?
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Have a look.
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The question is when is the $1000
considered to be earned?
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So it's about the day in which this
is considered to be earned.
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Look at all the dates that you
have there and then define
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and you can vote for your answer
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When they are earned?
Take your time.
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Pima can't see properly, ok.
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Pima, you can zoom,
I will put a bit bigger.
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Maybe that can be...
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Ok, good.
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Ok, what is the answer?
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We have a distribution of answers
in the poll
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so it's good to explain a bit.
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That is the feedback I need,
so if there are
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a whole distribution
of your answers means, yeah.
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I need to explain how can we determine
when the $1000 are earned.
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Most of you actually answered correctly
but there are of course,
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there are many other different answers.
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So this question is about
when revenue is earned, ok?
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That is the question,
we are using accrual accounting.
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In accrual accounting revenue is recorded
when it is earned
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not when cash is received,
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and expenses when they are incurred
not when they are paid, ok?
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So we need to identify from the dates
when these $1000 are earned.
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The dress manufacturer received
a purchase order for 10 dresses
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for a total price of $1000,
15th November.
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On 15th November the manufacturer
received the order, nothing happened,
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so the revenue is not earned, ok?
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The 10 dresses were delivered
on 30th November.
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Delivered means that revenue is earned.
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When is revenue earned?
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When the products are delivered
to the customer.
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They are passed from the company
to the customer.
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At that point, revenue is earned.
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In the case of services,
it's when services are provided.
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When the service is provided,
service revenue is earned.
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So that is the correct answer, ok?
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There is some echo, probably
somebody has the microphone on.
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So this is the correct answer,
and the other dates,
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the customer is sent an invoice
on 5th December.
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No, the producer already delivered it,
doesn't matter that the invoice was sent
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after the delivery of the products.
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The payment, that means the check
is received 10th December.
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Again, it's not related with when we
receive the payment
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or when we bank the payment.
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So, the correct answer is that.
any questions?
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What is the answer Adash?
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I put here, can you see the blue...
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I wrote in the screen,
the blue circle.
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It doesn't save.
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30th November, that is the correct answer.
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I'm not sure if... Can you see
because I drew a blue circle in C
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Can you see that?
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Ah, it's not a line.
Double is in the white space.
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Ah, I didn't know that. Ok.
Ok, interesting.
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In my screen it's exactly in C
but probably there are differences in this
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Probably just zoom each,
probably.
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I move my zoom in and out
and the circle is in C, it doesn't move.
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Ok, we go to the next one.
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If a resource has been consumed
but an invoice has not been received
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at the end of the accounting period,
which of this is correct?
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I will update...
It doesn't move the page.
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Ok, if you cannot follow this
I can change to put...
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Yes, I will reset the board.
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Ok, so if a resource has been consumed
but an invoice has not been received
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at the end of the accounting period,
what is the situation?
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We have some different answers
but most of you are correct.
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The correct answer is B.
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Ok, B, an adjusting entry should be
recorded to recognize the expense.
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Why is this?
Because the resource has been consumed.
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When expenses are incurred is when
the resources are used or consumed.
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That means that we need to record
an expense, ok?
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So in this case the only one,
and adjusting entry should be recorded
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to recognize the expense.
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Any question on this?
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Is it clear?
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Ok, we will go to the next one,
thank you Jade.
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Number three,
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if an entity fails to adjust
the prepaid rent account
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for rent that has expired,
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what effect will this have on the
monthly financial statement?
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Here you need to think a bit more
because it's what's happening,
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the adjusting entry was not recorded,
what would be the effect on that?
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I will update the poll.
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The previous answer was B.
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It is prepaid rent failed to adjust
for the month that was paid.
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This is the prepaid rent that was recorded
as a prepaid rent
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but now in this month the rent has expired
so it was used,
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the office or the building
that we are renting was used, yeah.
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You see in my poll you still chose
number one, is it correct?
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Ah, yes, yes.
I didn't change the numbers,
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I just updated the poll solutions,
but I didn't change the number.
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This is for the question three, for each
question I update the poll,
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I do not change the number because that
takes a bit more time
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to change that number
so I just update the answers
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to lead them in zero,
you come out again for each question.
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Ok, so we have a distribution of answers
and now there is a whole distribution
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of the answers,
so I think this is important to explain.
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If an entity fails to adjust
a prepaid rent account
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that means we have a
prepaid rent account
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we pay in advance the rent
of the office,
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we'll assume that this is the rent
of the office.
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We pay in advance the rent of the office
before we use the office, we pay.
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How do we record that?
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We record that as a prepayment
which is an asset, we debit that,
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and we credit cash.
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So we debit prepayment,
we credit cash.
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That was the original entry.
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Now at the end of this period,
it says that the rent has expired
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so we used the office for this period
so that is what we need to adjust.
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We need to credit the prepaid rent
for the amount of the rent that expired
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we need to credit prepaid rent
and we need to debit the expense.
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What happens if we do not do this?
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I will write in the same paper
what this means,
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so we will...
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when we do the adjustment
we will increase, ok, the expenses,
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we increase expenses,
that is one of the entries,
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we debit rent expense
and we will decrease the prepaid rent,
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the prepayment, ok?
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I will just put prepayment,
pre.
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This is the prepaid rent
which is an asset.
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What effect will this have
on the monthly financial statement
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if we do not record this?
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If we do not do this,
what is the effect?
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What happened with the expenses?
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Expenses will be understated
because we didn't record this.
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What happens we will have in assets,
assets will be overstated.
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So to find the right answer here
you need to look at all the answers.
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What answers we had that assets
are overstated? Only D and E.
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In C, well...
Sorry, C, D and E.
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In A it doesn't say anything
about assets
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B, nothing about assets,
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so only C, D and E assets
will be overstated.
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That is one thing because of this,
because we didn't decrease the prepayment
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which is an asset.
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Assets will be all overstated.
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How will we know which one is correct?
C, D or E?
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We need to look at those expenses
will be understated,
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but we don't have this,
C, D and E talk about profits.
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Then you need to relate profit
with expenses.
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If expenses are understated,
what happens with profits?
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Profit will be overstated, ok?
Profit will be overstated.
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That's why E will be incorrect answer.
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Is that clear that, very well?
Profit increases?
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So we need to relate this,
you can see now we are using
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all the elements that you had
planned before, ok?
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Profit equals revenues plus expenses.
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These expenses are understated,
profit is overstated.
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Any question?
Ok.
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Yes, (INAUDIBLE)
I need to add one more thing.
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Profit will be overstated and that is
the answer for question D and E.
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What is the difference between D and E?
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Equity in D will be understated,
in E equity will be overstated.
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So now we need to relate
the profit with equity.
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So when profit is overstated,
equity is overstated.
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If profit is understated,
Equity is understated.
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So what is correct?
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Asset overstated, profit and equity
would be overstated.
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Ok, that answer your question Jade?
Good.
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Ok, so we will go through the last one.
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Here you have the last one
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On 1st September Carlson Limited borrowed
$10,000 from the bank for three months
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at the annual interest rate of 9%.
Annual interest rate 9%.
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Principal and interest are payable
to the bank on 1st December,
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so this is for three months long.
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If the company prepares monthly
financial statements
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the adjusting entry that the company
should make for interest on 30th September
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that means after one month would be
which of these ones?
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I will reupdate the poll.
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Ok. So how we determine this,
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we need to look at what is the interest
for one month
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because the expense incurred in this case
the interest expense,
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is the interest that...
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that is the interest for only one month.
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We are preparing the adjusting entry
at 30th of September.
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The loan started on 1st September
so it's the interest for one month.
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This will clarify the answer for if you
calculate the interest for the year.
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The annual interest rate is 9%,
for one month it will be 9% divided by 12
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that is the interest per month,
and then you multiply by $10000
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to calculate what is the interest
per month which is $75.
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So at the end of September
we need to record,
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debit interest expense $75,
and credit interest payable
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because it will not be paid until
1st December.
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So we debit interest expense $75
we credit interest payable, $75,
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the correct answer is D, ok?
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Ok at that?
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When we have a loan
we need to pay interest.
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What is that interest?
It's an expense.
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It's the expense incurred because
we borrowed money.
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And we can calculate based on
the interest rate.
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The interest rate is always given
and always is given per annum
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so what is the annual interest rate?
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In this case it is 9%,
you can see here.
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9% is the interest rate,
but this is the interest rate
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for 12 months, ok?
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So to calculate, very well Joshua,
to calculate per month
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we need to multiply the 9% by 112,
or simply divide it by 12, ok?
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And then you will have what is
the interest per month
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because between the 1st of September
and 30th September
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we need to prepare the adjusting entries,
it's one month.
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so the interest expense will be
the interest for only one month, ok?
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So very good.
Good Adash and that is $75.
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Ok, so we've finished
the multiple choice questions,
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do you have any questions about concept
because now we will apply the concept
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in exercises about adjusting entries,
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so any question about concepts that
you would like to ask at this point?
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All good?
Ok.
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So, we will go...
Excellent Ruby, thank you.
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Yes, yeah, we will go through
the practice questions now.
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And I will start briefly with a very...
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a very brief review of what
you have learnt
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about adjusting entries.
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It is only three months,
just another.
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It's only three months long because
it starts on 1st September
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and is payable on 1st December.
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The interest and the principal both.
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So you pay back the $10000 on 1st December
with all the interest of the three months.
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Ok, now we will talk a bit about
adjusting entries.
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I will explain using this diagram
that you have in your PowerPoint
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and you have seen in your videos,
I will not go into whole detail of course
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but just with this...
this is the big summary.
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The big summary of adjusting entries.
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We have two types
of adjusting entries
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or I would say four types
if we combine revenues and expenses.
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But we have the accruals
and we have the prepayments, ok?
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They are two different adjusting entries.
What means accrual?
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Accrual if we're talking about revenue
means receivable, ok?
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Accrued revenue it will be the same as
to say revenue receivable.
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Accrued expenses when you see this term,
accrued expenses,
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that means expenses payable, ok?
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So accruals means receivable or payable
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depending on whether it's revenues
or expenses.
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And then we have the prepayments.
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Prepayments means payments in advance,
ok?
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We can receive a payment in advance
and that is what we call
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unearned revenue or revenue received
in advance, ok?
-
That is the payment received
in advance,
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Or we can pay in advance and that is
what we call prepayments.
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So these adjustments,
and these are all the adjustments,
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there are no other adjustments for
timing differences.
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There are adjustments to correct errors,
we will not go there,
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we are talking about the timing difference
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that means to record revenues
when they are earned,
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expenses when they are incurred.
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All the purpose of adjusting entries
is that,
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to record the revenues
in the accounting period
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that are earned in that accounting period
and to record expenses that are incurred
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in that accounting period.
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From the normal transactions that
you learnt last week,
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we may have many cases in which revenue
was not recorded,
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expenses was not recognized as well,
and we need to adjust them
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because the main purpose
of the financial statements
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in particular the income statement
is to show the revenues
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earned in that period,
in the period of the income statement
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and to show the expenses incurred
in the same period.
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So that is the purpose
of adjusting entries,
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to reflect revenues earned and expenses
incurred in the accounting period.
-
So this is the big summary.
Now how do we deal with this?
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Well, in the case of prepayments
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in the case of prepayments
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we have different accounts that can
be considered as a prepayment.
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One is the prepaid expenses like
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prepaid insurance, prepaid rent,
-
but there are others that we can give
the same treatment of this prepayment
-
which is supplies or depreciations.
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That means the payments that
the company makes in advance
-
and therefore they are considered
as prepayments.
-
So what are the terms involved
in this prepaid expenses?
-
Well, we have an asset that has an
unadjusted balance.
-
For example, we have prepaid insurance.
That is an account of asset.
-
And we do not adjust this because we pay
for that at the beginning of the t,
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ok, 1st of January for example,
and then on the 30th June we are halfway
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of the total period provided
by the policy.
-
The policy normally,
the insurance policy covers 12 months.
-
So we are using the policy
during 12 months.
-
But what's happening in June?
-
Well, we do not have the same amount
in assets because we already consumed
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half of the policy, six months,
so half of the policy has been consumed.
-
Then we need to adjust the amount
in assets.
-
Here you had the unadJusted balance
of the asset,
-
that is the total amount of the policy,
we need to adjust that.
-
How do we adjust that?
We need to record an expense.
-
An expense for the six months use
of the policy.
-
So we will record debit expense,
that is the adjusting entry,
-
we debit the expense,
and we decrease the asset
-
that means we credit
the prepaid insurance.
-
So you can see here,
this is your adjusting entry.
-
We have a debit entry,
we have a credit entry.
-
We debit insurance expense,
we credit prepaid insurance.
-
So this is one case.
-
And the same we will use for prepaid rent,
-
for supplies, for depreciation, ok?
-
Jade did the question.
-
Oh good, excellent Jade.
That's my purpose,
-
just to explain in detail what it means,
this thing.
-
Is there anybody that might have
a question on this?
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We will go through the four
that are adjusting entries.
-
This is related to the prepaid expenses.
-
Ok, we go through the second one.
-
The second one is what we call
the un-earned revenues.
-
So revenues received in advance,
what is the concept?
-
Imagine that the company
has a building,
-
and they are renting offices
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from this building so they have a
number of clients that rent offices.
-
And they ask the tenants
to pay in advance
-
before they start using the building,
-
they have to pay for example
three months in advance.
-
So the company received the cash
for this,
-
but the tenant still is not using
the office,
-
so how will we record this first entry?
-
This is the entry that you learnt
last week,
-
this is a normal transaction.
-
The company receives cash
so we will debit cash, ok?
-
And we will have this
unearned revenue
-
or rent revenue received in advance
-
which is a liability for that amount.
-
Why is this a liability?
-
Because at this point the company
has not provided yet
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the office for the tenant to use, ok?
-
The tenant has not used the office yet,
they pay in advance.
-
So we have a liability because we have
an obligation to provide the office,
-
the tenant already paid.
-
Now, what happens after one month
-
if we are doing financial statements
every month.
-
We need to prepare an adjusting entry
because we already provided this service
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to the tenant,
we already provided the office,
-
the tenant used this resource
already one month,
-
so we need to adjust
our liability accounts.
-
So the liability account has
an adjusted balance, ok?
-
When the tenant pays in advance,
and now after one month
-
we need to reduce this for the month
the office was already used.
-
So we will debit this liability
that is part of the adjusting entry,
-
and we will credit revenue because now
we earn this revenue,
-
that is the rent revenue.
-
We earn that because
we already provided one month
-
the renting of the office to the tenant.
-
So here you have again,
the adjusting entry.
-
We have one debit entry,
-
the rent revenue received in advance,
-
a debit entry,
and we will have a credit entry
-
which is simply rent revenue.
-
Any question on this second one?
-
We will practice with many
exercises today
-
for you to have a very, very clear
understanding of the adjusting entries.
-
Ok, the last two.
-
The last two I would say they are simple
adjusting entries.
-
We have accrued revenues.
As I mentioned before,
-
accrued revenues means
revenues receivable.
-
This is the case when the company
sells products or provides services
-
but we still do not record that sale
-
and we have not received the cash yet,
-
but the service is provided
or the products are delivered
-
so we need to record revenue.
-
If we have not recorded this
in the normal journal entry
-
that you learnt last week,
we will need to record the revenue.
-
Sales revenue or service revenue,
so we credit this.
-
What will be the other accounting ball?
It will be the receivable.
-
An accounts receivable which is an asset
-
so here you have debit
the accounts receivable
-
credit service revenue
or sales revenue,
-
depending on whether we are
selling produce or providing services.
-
So that is the third adjusting entry
-
and the last adjusting entry
is accrued expenses.
-
That means expenses payable.
-
So this is the case when we have
an expense incurred
-
but we have not recorded that,
the most typical case is employees
-
that work during the month.
We have not paid their salaries yet
-
because we pay the first days
of the following month,
-
so we didn't record the expense
but they already worked,
-
so there is a resource that has
been consumed
-
and therefore we need
to record an expense.
-
We need to record an expense
and so we debit salaries expense,
-
for example, but because we have
not paid yet in this period,
-
we need to record a credit in this
liability which is salaries payable.
-
So here we have our adjusting entry.
-
This is in a very brief summary what
you have learnt about adjusting entries.
-
Any question at this point?
-
All good?
-
So we can now apply these two
practical exercises
-
and we will work with many
adjusting entries,
-
so you will have the opportunity,
to practice now with this
-
so I will put that...
-
Can you see the exercise?
I am not sure about the zoom,
-
if it is ok or not,
but I hope it's ok.
-
Ok, excellent, excellent.
Thank you Jade, thank you all of you.
-
Ok, so we will apply to this exercise
and we will start the exercise
-
at the point that we left last week.
-
Do you remember what we did last week?
-
We prepared the normal journal entries
that come from transactions
-
and then we post the journal entries
into ledger accounts,
-
and then we prepare a trial balance.
-
And we call that the unadjusted
trial balance
-
because it's a trial balance that
is prepared before the adjusting entries.
-
Ok, so we will start with this,
the unadjusted trial balance, ok?
-
at 30th June.
-
And as you remember the trial balance
is simply the list of all the accounts,
-
here you can see cash, account receivable,
prepaid insurance, supplies,
-
all the accounts of the company, ok?
-
With the ending balance at
the end of the period
-
so you can see the trial balance,
the unadjusted trial balance
-
is prepared at the end of the period
is the first thing that we do
-
at the end of the period before preparing
the adjusting entries, ok?
-
So we prepare the unadjusted trial balance
-
and we have the ending balance
for each of these accounts.
-
The ending balance of cash,
the ending balance of accounts receivable
-
and service revenue is sitting
on the fence, yes.
-
It moves to the fence,
it should be here.
-
It should be on the column of credit
of course,
-
that is a typing thing.
-
Service revenue should be
in the credit side of course,
-
76,600.
-
Salaries expense, rent expense,
so you have all of these.
-
The characteristic of the trial balance is
that total debit should equal total credit
-
and you can see total debit, 201200
and the same as total credit.
-
So this is our starting point
for this exercise.
-
What means this?
-
All the normal journal entries
are already recorded,
-
all of them are posted to
the general ledger
-
and we prepare this unadjusted
trial balance.
-
What is next?
Well, here you have the exercise.
-
One thing before we go to the next page
these are not the total,
-
all the accounts of the company.
-
There are accounts that they have
zero balance,
-
and of course they are not in the
unadjusted trial balance
-
but here you have them listed.
-
The accumulated depreciation
is one account,
-
office equipment another,
electricity payable, salaries payable,
-
and so on.
-
So there are a number of accounts
that have zero balance,
-
and therefore they are not in this
unadjusted trial balance,
-
but they are accounts.
-
So we will go through the exercise.
-
Here we have added data.
-
This added data refers to
the adjusting entries
-
that we need to prepare.
-
They are related to revenues earned
-
or income earned and expenses incurred
-
so we need to prepare one adjusting entry
for each of this additional data
-
and that is what is required,
if you look at the question requirements,
-
prepare the adjusting entries
for the month of June
-
so this is just for one month.
-
Prepare the adjusted trial balance
-
that is prepared after
the adjusting entries
-
and we will calculate the profit
for the month.
-
So we will go one by one
to see how to prepare this.
-
And I will detail all of them
in this first exercise
-
and then I will go a bit more quick
in the second exercise,
-
or in the exercise of the workshop.
-
So the first, supplies on hand
at 30th June total 7200.
-
What this tells you,
supplies on hand total 7200.
-
Well, if this is the data we have
that means somebody went to the...
-
To the place that we have the supplies,
they count them,
-
they value them and at the end
the conclusion is
-
we have 7200 supplies on hand.
That means not used.
-
How much do we have in our
unadjusted trial balance?
-
So we need to look at here,
supplies. 13,300.
-
But it says that we have only 7200 so
that means we need to make an adjustment.
-
We need to reduce this 13,600
-
and to record an expense,
a supplies expense for the difference.
-
So 13600 less 7200 that we have,
-
that means we have consumed
-
or used 6400 of supplies,
-
and that is the adjusting entry.
-
We need to record the expense for this
-
so we will have a supplies expense of 6400
-
and we will credit supplies to reduce
the supplies account.
-
So here you have the first journal entry,
adjusting entry.
-
Supplies expense debit 6400,
and supplies credit 6400.
-
When you do this and you credit supplies
by 6400,
-
if you remember the ledger accounts
when we credit one of the ledger accounts
-
that is supplies, that will decrease
the balance of supplies account
-
which is 13600,
so now the new balance of supplies
-
is 7200 which is the amount that we
really have in supplies.
-
Any question on this?
-
So this is the first adjusting entry.
-
Yes Natalia, yes please tell me.
-
NATALIA: Hello Herman,
yeah I see...
-
I print out this, I guess many
of us do print out
-
this worksheet information
-
of the sample of the questions,
and we have ended one,
-
and last lecture I was asking you
to let us print full ones
-
because it's hard to follow up because
our worksheet is empty at the moment,
-
it means we follow up on the computer
but can't do notes straight on our papers.
-
Yeah, this will be great because...
-
HERMAN: Yeah, actually I remember that
and at 10 am today,
-
I uploaded the solution for the lecture
exercise and the workshop exercise.
-
I opened that for you and for everybody,
-
so you can print them and you can be
with the solutions
-
and you can follow the solutions
NATALIA: Ok, now yeah...
-
You do this adjusting notes
much in advance
-
but is it, you can give us indication
when you do apply the solution
-
on a regular basis because our paper
is usually a couple days before
-
I print out,
and have this, yeah.
-
HERMAN: I will do that because I agree
with what you asked me last week.
-
I agree that it's good that
you have the solution
-
to follow the lecture and the workshop
with the solution so you can take notes
-
in the solution which will be easier.
-
That' s why I opened today at 10 am and
I put an announcement on the blackboard
-
for all of you to know that they are ready
for you to print,
-
and I think that is what we talked
because the idea
-
is that you try to do this by yourself
without the solutions,
-
and that is the main purpose,
-
that's why I put in the same day
of the lecture and workshop.
-
I will release these only for you
to print out and to take that today,
-
later in workshop.
-
NATALIA: Ok, and how many it means
they're empty for purpose,
-
we have a chance to try,
and field solution is gonna be
-
in the very last day before lecture,
for future use.
-
HERMAN: Yes, I will do that in that way
all the time.
-
So I actually did the two purposes.
-
One purpose is for you to try
without solutions,
-
just with your learning from the videos
and PowerPoints,
-
and second, to have the solutions
before the lecture and workshop
-
so you can go through them as well.
-
Ok, good.
Excellent Natalia, thank you.
-
Now we can go to the second one.
-
The second says an electricity bill
for 1200 has not been recorded
-
and will not be paid until next month,
so what does this description mean?
-
If the company receives an electricity
bill for 1200,
-
it means that they used,
they consumed electricity for this amount.
-
It is already consumed therefore
it is an expense,
-
but has not been recorded.
-
So the only thing,
this is a simple adjusting entry,
-
the only thing that we need to do
is to record the expense,
-
so we will have electricity expense, 1200,
but because it was not paid this month,
-
next month will be paid,
so we will credit a liability
-
which is electricity payable,
and that is what you have here.
-
So in this adjusting entry
we will record
-
debit electricity expense 1200,
-
credit electricity payable 1200.
Yes Natalia?
-
Stella, Stella. I need to put you
as a caption here...
-
Stella.
-
Give me a second because I need
to put the caption here of Stella
-
but I don't find you in the list,
we have a big list of students.
-
Near the top, ok?
-
Ah, there it is. T
Ok, thank you Stella
-
Ok, yes Jade.
You have a question?
-
JADE: I do, yes.
-
I put there instead of electricity payable
I put accounts payable.
-
would that be okay or is that a problem?
-
HERMAN: It is ok.
-
If we are very strict in that
-
which is not the case because accounts
payable is reasonable to use this.
-
When we talk about accounts payable,
It's the accounts payable to suppliers,
-
so we always link accounts payable
for the amount that we owe to suppliers.
-
That's why it's better,
I would not consider it wrong
-
but it's better to put this explicitly
electricity payable because this is...
-
These are utilities that the company
received,
-
so electricity or water
or that type of thing.
-
So I would prefer to put separated
from accounts payable
-
just because the concept of accounts
payable is linked to suppliers of produce.
-
Ok? But it's not wrong.
-
Ok, any other question for the second...
-
for the second adjusting entry?
-
So we'll go through the third
adjusting entry.
-
Insurance policy, here you can see
one statement that didn't say anything,
-
and you cannot do anything unless
you go to the data
-
that is in the unadjusted trial balance.
-
The statement says the insurance policy
is for a year commencing 1st May 2019.
-
Well, this is all what you need to
prepare the adjusting entries,
-
because you have the unadjusted
trial balance.
-
The only information here is that the
insurance policy is for one year,
-
12 months, and starts on 1st May 2019,
-
so we will see what is the information
we have in the unadjusted trial balance.
-
First, this company started
on 1st May 2019
-
which is the same day
of the insurance policy, ok?
-
Insurance policy is added 1st May 2019.
-
And the trial balance is at June 30.
-
What is the prepaid insurance?
9600.
-
9600, this is for 12 months,
so how much is per month?
-
It is 800, so this is equal, ok,
-
800.
800 per month.
-
800 per month.
Sorry for my numbers, I'm not very good.
-
So 800 is the insurance expense
that how much we use
-
or consume of this policy per month.
800 per month.
-
Now how many months between
1st May until 30th June?
-
Two months, exactly.
Two months.
-
So what will be the expense
that we have to recognize
-
or to record on the 30th of June?
-
The expense for two months,
that means 1600.
-
That should be a debit
in insurance expense,
-
and a credit to prepaid insurance
to reduce this 9600
-
because we already consumed 1600
of insurance.
-
So the journal entry,
the adjusting entry for this will be
-
debit insurance expense 1600,
credit prepaid insurance 1600.
-
Ok, any question on this?
-
Ok, so we can have a look at the...
Thank you Jade.
-
We can have a look at the next one.
Salaries, sorry, not salaries.
-
That is the next one.
-
Number four, services were
performed during the period
-
in relation to $3000
of revenue in advance.
-
What does this description tell us?
-
First the description is telling us that
we received revenue in advance,
-
that mean we received a payment
in advance
-
and now in this period we provide services
for 3000 of that payment.
-
We need to link this with how much
we have in revenue received in advance
-
in the unadjusted trial balance
so we will have a look.
-
The unadjusted trial balance, state this
revenue received in advance, 4800.
-
Debit because we received this amount
and we didn't provide the services
-
so we have an obligation to provide them
and therefore it is a liability, ok?
-
Now we provide services for 3000
of this 4800,
-
so we need to record a decrease in service
revenue received in advance,
-
that means we debit 3000 in this account
and we will have the current balance
-
of all these accounts,
-
so we debit 3000 in service revenue
received in advance
-
and we will have a credit in service
-
because we earned already this revenue.
-
We provided the service.
Yes Jade?
-
JADE: Is this classified as an adjustment
or is it just as a mistransaction?
-
HERMAN: It's an adjustment because
the original transaction
-
that we already recorded, it is here
in the unadjusted trial balance.
-
What was the original transaction?
-
When this happens, the service revenue
received in advance I will write here, ok?
-
We have debit cash because
we received the payment, ok?
-
That was in the previous period.
-
We record cash for 4800.
Sorry for the numbers.
-
So 4800. We debit cash,
and we credit, ok?
-
This revenue received in advance,
I will put it just like that.
-
Revenue received in advance
we credit 4800.
-
This is the normal journal entry.
This is the normal transaction
-
that we recorded in the last period,
and that's why when you look at this entry
-
and we post the accounts in the ledger,
this is what we have there, ok?
-
That is the original transaction.
-
What happens now is that
we just provide services.
-
Of course we didn't receive more money
because already we were paid in advance
-
but we provide the service
so we need to decrease this
-
obligation or liability
for the 3000 already provided.
-
Well, George, it says because the concept
of revenue received in advance,
-
the concept of that account
is that we received cash in advance.
-
That is what we received in advance,
cash, the payment,
-
so if you look at the description,
-
services were performed
during the period
-
in relation to.
In relation to what?
-
To revenue received in advance.
-
If you look at this description,
revenue received in advance,
-
what it means is that the company
received cash in advance
-
to provide the services.
-
The customer paid before we provide
the service to the customer.
-
Ok, so cash was involved
in the original transaction
-
and that is the transaction that
I showed you that I prepared,
-
so how was it recorded the cash received?
-
We debit cash and we credit revenue
received in advance from 4800,
-
that was the original transaction,
it's not for this period,
-
that was before the 30th of June
and that's why we have in the balance,
-
on 30th June we have that amount.
-
Now in this period the adjusting entry
at the end of the period,
-
we need to include how much
we provide of services.
-
And we provide 3000 of this 4800.
-
So because we provide services,
now we can record the service revenue,
-
it's a credit service revenue,
and we decrease the obligation.
-
To put the things in context,
here we are in the month of June.
-
So in June the unadjusted trial balance
is for June.
-
I will go through the depreciation
but do not change them...
-
I will go through them,
but here... Ok.
-
This is the unadjusted...
-
I am clear now, excellent Ann.
-
This is the unadjusted trial balance
at 30th June.
-
Here means that before 30th June
we received the cash.
-
Now in the adjusting entry it means that
also during this period before 30th June
-
we provide 3000 of this 4800,
services provided, ok?
-
Does this answer your question George?
-
Ok, excellent, good.
So we can go through the next one.
-
I am here...
-
The next one is quite simple because
salaries, 6400 are owed on 30th June.
-
What does this mean?
Salaries owed means that
-
the employees worked,
so we already consumed these results.
-
The work of our employees and therefore
we should record a salaries expense.
-
But they are owed,
that means we have not paid them,
-
and that's why we did not record this as a
transaction like you learned last week.
-
We need to prepare the adjusting entry,
so we need to record the pays,
-
salaries expense 6400 debit,
and a salaries payable
-
because it's owed at the end of the month
so it will be salaries expense
-
and salaries payable.
-
Here you have debit salaries
expense 6400
-
credits salaries payable 6400, ok?
-
That I think is simple.
-
Then we have the number six.
-
Office equipment has a five year life
with no resale value,
-
and is being depreciated at
$1440 per month for 60 months.
-
In this description they are telling you
how much is the expense, ok?
-
But if it is not, if it is only they said
the office equipment has a five year life
-
with no resale value depreciated using
the straight line method,
-
you will learn this in another lecture
the depreciation for 60 months.
-
If we do not have the amounts, you can
just go to the unadjusted trial balance
-
look at the office equipment account,
86400.
-
If you divide this by 60,
-
you will have exactly 1440 per month, ok?
-
So that is the depreciation expense.
-
Yes, a couple of work, I will not go in
deep in this topic
-
because there is a whole topic
about depreciation.
-
Yeah, I will go why credit and...
-
Ok, you let me finish this part
and I will answer the question
-
of the previous one.
-
So we had this depreciation,
-
what does depreciation mean?
-
When we purchase an equipment like this,
office equipment,
-
and we pay a big amount of money,
in this case how much we paid
-
for this office equipment,
it was 86400, ok?
-
Do you think we can put as an expense
86400 in the first month?
-
Well, of course not because we will use
this equipment during 60 months,
-
and remember an expense
is when we use
-
or consume resources.
-
This resource that is 86400,
-
it will be consumed or used
during 60 months
-
so we need to calculate how much of this
we use in one month,
-
or in two months in this case.
-
In two months because it's from
1st of May till 30th June.
-
How much we use of this in two months,
ok? Two months.
-
So we divide this by 60,
we multiply by two,
-
and that will be 2880
-
because per month is 1440
when you divide by 60,
-
you multiply by two because
it's two months
-
and now we can record the expense.
-
The name of this expense
is depreciation expense,
-
so we record debit depreciation expense.
What is the other account?
-
Well the other account will be to decrease
this account,
-
office equipment,
-
so you can say well,
we credit office equipment.
-
That would be the case that we are doing
in all of these accounts,
-
but in the case of non-current assets
-
we use what we call a contra asset account
-
that means we keep separated
the decrease of this account
-
and the name of that account
is accumulated depreciation.
-
The effect is the same as you reduce
directly office equipment,
-
you credit office equipment
but in non-current assets like this,
-
this is a topic that we will explore
in detail,
-
we use another account and the name is
the accumulated depreciation.
-
It's an asset account
but with a credit entry.
-
So the adjusting entry for this
-
will be depreciation expense
debit 2880
-
and we credit accumulated depreciation
office equipment, ok, 2880.
-
Any question on this?
-
Ok, the last one.
-
The last one is number seven,
invoices representing
-
Ah, Tablynn...
-
Ah, ok. Before we go to the seven
-
there is a question about the salaries
-
who asked me that question
about the salaries?
-
Omar who did, in the adjusted trial, ok.
-
I will try to answer the two questions.
-
First, Trina has a question, why
to credit 6400 in the transaction five?
-
Why to credit?
Isn't it debit when they pay 6400?
-
Well, remember Trina that we, in any
journal entry and also adjusting entry,
-
we have a debit side and a credit side.
-
The total debit should be always equal
to total credit.
-
So what is the debit and what is
the credit in the 6400 that you have here
-
in transaction five?
-
Salaries of 6400 are owed at that time,
30th June.
-
So we have an expense,
and the expense is a debit entry, ok?
-
The salaries expense it will be debit.
-
And we have a salaries payable because
they were not paid,
-
they are owed at 30th June.
-
So the salaries payable, the liability
will be the credit entry.
-
So your question is why credit?
Well, we credit the liability account,
-
that means salaries payable,
but we debit the salaries.
-
What happens when we pay them in
the next period?
-
When we pay the salaries we will
debit the salaries payable,
-
so we decrease this liability,
and we will credit cash, ok?
-
That is what happened in
the following period,
-
not in this one.
And Tablynn...
-
Tablynn you asked a question
about the depreciation?
-
Yes, depreciation, well,
-
this is the concept that
we will have in detail,
-
there is a whole lecture about
depreciation
-
with different methods of depreciation
but for now,
-
we only need to think in the concept
of depreciation, the general concept.
-
When we purchase an equipment
that lasts more than one accounting period
-
we cannot record as an expense
the cost of the equipment
-
because we will use the equipment
for a number of periods,
-
so we need to divide the cost of
the equipment
-
into the number of periods.
-
So we will have just one part of the cost
in each period,
-
and the easier way is just divide the cost
by the number of periods.
-
So in this case the total amount
divided by 60 months that we will use
-
this equipment, office equipment,
means that we will have an expense
-
of 1440 per month, and we call that,
that expense,
-
we call that depreciation expense, ok?
-
That is the name of this account,
depreciation expense.
-
What does that mean?
-
It means that that is
the part of the equipment
-
that has been used
or consumed in one period.
-
And that's why we record that
as a debit for each month,
-
but here we have two months, ok?
Because from 1st May until 30th June
-
which is the time for this exercise,
two months,
-
it will be two multiplied by 1440,
which is 2880.
-
So we will record depreciation expense,
debit 2880.
-
What is the other account?
-
I mentioned that there is another account
but the name is accumulated depreciation,
-
so we will record a credit
in that account.
-
Ok, I'd asked how much would you deduct
from depreciation expense
-
in the adjusted...
Excellent Tablynn, thank you.
-
How much would you deduct in the
adjusted trial balance?
-
I will go through that Adash
because we started with
-
the unadjusted trial balance.
-
We are doing the adjustments, and then
I will explain how we will adjust these
-
to the adjusted trial balance.
-
How we transform the unadjusted to the
adjusted trial balance.
-
Ok, yes Trina.
-
TRINA: Hello, with the salaries,
-
we already had 6400,
it means that expense increased,
-
that's why expense is debit 6400,
but with the liabilities,
-
it means that we decrease
the liabilities, is that right?
-
HERMAN: Yes when (INAUDIBLE)
-
TRINA: So if we decrease the...
(CROSSTALK)
-
Sorry, if we decrease the liabilities,
it means it debits liabilities,
-
is that right?
-
HERMAN: Yes, when we pay that is
another transaction,
-
it's not the adjusting entry.
-
When we pay for the liability,
we will credit the liability
-
so we decrease the liability,
and we will debit cash.
-
So we decrease cash because we are paying
for that liability.
-
But that is another (CROSSTALK)
-
TRINA: yeah, I'm a bit confused because
we decrease the liabilities,
-
but well you put it credit 6400.
-
HERMAN: Yeah, well, that is the point.
Trina it's good that you asked
-
because we should not confuse two
different journal entries, ok?
-
The journal entry that we're talking
in number five here,
-
is an adjusting entry.
-
We have not paid anything
in this journal entry.
-
In this transaction, we only recognize
that the employees worked
-
during the months,
how much we owe them for this work, 6400.
-
We didn't pay anything.
-
In the transaction here it doesn't say
that we paid for that.
-
We owe this amount at 30th June.
So what do we record?
-
We record the expense,
that means debit salaries expense, 6400,
-
and we record the liability because
we owe them this amount,
-
so we credit salaries payable, 6400
and that's all.
-
That's all the adjusting entries.
-
Now in another day, next month,
we will pay for that.
-
In the payment that is another
journal entry, not this one,
-
when we pay for that what will we do?
-
We will debit the liability,
so we decrease the liability.
-
We will debit 6400, and we will pay,
that means we will credit cash.
-
When we credit cash we decrease
the cash account
-
because we are paying that amount
and that is another journal entry
-
for the next period.
-
Does this clarify the point Trina?
Good, excellent.
-
Ok, we are in the number seven,
the last one.
-
Invoices representing $8000 of services
performed during the month
-
have not been recorded as of 30th June,
so what does this mean?
-
We have provided services because
it says invoices representing
-
$8000 of services performed during that,
so we performed this service,
-
and we provided the services
for $8000
-
but they have not been recorded
so we need to record them.
-
So we need to record
an accounts receivable
-
because it doesn't say anything there
that we received the money,
-
therefore it is an account receivable,
we will debit...
-
(CLEARS THROAT)
Sorry.
-
We will debit the account receivable
for $8000,
-
and we will credit the service revenue
-
because we earned from that service,
-
we already provided the service,
so we will credit service revenue.
-
So what we will have...
-
I will do that.
-
What we will have is the
last adjusting entry.
-
$8000 account receivable debit,
and credit $8000 service revenue.
-
So we've completed
all the adjusting entries.
-
Before we go to how we prepare the
adjusted trial balance,
-
any questions about the adjusting entries?
-
All good? Ok.
-
Excellent Jade, very good.
That's my purpose.
-
How we prepare the adjusted trial balance?
-
Before we prepare that,
remember these are journal entries,
-
so the name is adjusted journal entries,
they are journal entries,
-
so after you prepare the adjusting entries
what is the next step?
-
You need to post these entries
to the ledger.
-
The same as we did last week,
exactly Joshua,
-
we need to post them to the ledger,
all of them to adjust the balance
-
of each of these accounts.
-
We will not do that, ok?
You already learnt last week
-
how to post transactions from the journal
to the ledger,
-
and it's a very repetitive process
and it's the same in this case
-
so we will not go again through that part
we will assume that we already did that,
-
Ok, we post all of these
to the ledger accounts,
-
so the ledger accounts are updated.
-
But I will show you how to prepare
the adjusted trial balance,
-
using the worksheet, ok?
-
Using a worksheet, it has the advantage
that you can see
-
what is the unadjusted trial balance,
you can see the adjustments
-
and how to prepare the
adjusted trial balance,
-
how you can explain the difference
between the adjusted
-
and the unadjusted trial balance.
-
So here you have this worksheet.
-
In the worksheet what we do
is you copy here in this part, ok?
-
You copy the unadjusted trial balance.
-
Of course, total debit should
be equal to total credit.
-
You just copy that and then you go
through all the adjusting entries
-
and you put in the adjustment column,
this, I will do just the first two, ok?
-
Only the first two.
-
So in the first one,
what do we have here?
-
We debit 6400 in the supplies
expense account
-
and we credit 6400
in the supplies account,
-
so we look at this supplies
expense account.
-
This is the supplies expense account,
we debit 6400, so we just copy there
-
And the we go to the supplies account
this is the supplies account,
-
you debit this account, ok?
-
You just copy here in these two columns
-
what you have done
in the adjusting entries.
-
The second, we will do just the first two.
The second, what do we have?
-
1200 debit in electricity expense account
-
1200 credit electricity payable account.
-
So you copy that electricity
expense account,
-
1200 debit, you copy there
and then you look for electricity payable.
-
Electricity payable credit 1200,
and you continue with all of this.
-
The only thing that you need to be careful
is that sometimes,
-
one account appears more than one time
in the adjusting entries.
-
So if you look at the adjusting entries,
there is one account
-
that appears two times,
so service revenue.
-
You have here service revenue,
credit 3000,
-
and then you have here service revenue,
8000.
-
So the total amount that we will add
to service revenue is 11000.
-
That's why here service revenue
in the credit is 11000,
-
so its the sum of 3000+8000.
-
That you need to be careful because
we need to add the total amounts,
-
that increase the credit
of this account.
-
Ok, so we complete these,
the adjustments.
-
We just copy all the adjusting entries,
debit or credit
-
in the corresponding accounts.
-
Well, it's a really (INAUDIBLE)
-
because very few accounts
you will have more than one entry.
-
In this case we have only service revenue
but you know the to not make a mistake
-
and I did that in the next exercise,
is this things.
-
Do not make a mistake, I will give you
a clue to not make a mistake.
-
Instead I've put here the total.
-
Every time you have an amount there
just put how much,
-
so you put here the 3000,
I will put in thousands
-
and then you simply add 8,
so every time you put the number there.
-
Then you know that it's 11000.
-
In this way you will not skip anything.
-
Ok, that is just a way to do
to not make that mistake.
-
How we prepare now the
adjusted trial balance.
-
The adjusted trial balance is the same
as the unadjusted trial balance
-
with all the adjustments.
-
So you can see for the cash accounts,
there are no adjustments.
-
Ok, no adjustments, so the adjusted
trial balance is the same
-
as the unadjusted trial balance.
-
Accounts receivable, the unadjusted
is 23 and 40.
-
The ajustment is debit 8000
so it directly increases the debit
-
so the adjusted will be the sum
of all of them.
-
Prepaid insurance we have a debit,
9600.
-
The adjustment is a credit of 1600,
a credit decreases a debit,
-
it's the opposite, ok?
So it will be the difference
-
and there we adjusted this 8000.
-
The same for supplies,
we have 13600,
-
the adjustment is a credit,
therefore the credit decreases debit,
-
that will be 7200, ok?
-
And so on.
-
Office equipment there is no adjustment
accumulated depreciation
-
of office equipment,
there is nothing here,
-
because this is an account that was
in zero but we have an adjustment
-
2880, so the adjusted trial balance
will be a credit 2880.
-
So you can see to prepare the adjusted
trial balance is simple.
-
If we're working with the worksheet,
we just add or subtract the adjustment
-
depending on whether they are
on the same side or the opposite side.
-
If they are on the same side,
a debit increases a debit,
-
a credit increases a credit,
but in the opposite side
-
a credit will decrease a debit
or a debit will decrease a credit.
-
Any question?
-
So once you have this worksheet...
Excellent Joshua,
-
Once you have the worksheet,
the adjusted trial balance
-
you can just copy.
You have the list of...
-
You have the list of all this, ok?
The list of the accounts,
-
you have the balance,
the debit balance or the credit balance
-
of all of these accounts,
and you can just copy them
-
to have the adjusted trial balance
so if this is the adjusted trial balance
-
the list of the accounts,
what accounts have a debit balance
-
after the adjustments,
or credit balance, all of these accounts.
-
That's the complete exercise and
the adjusted trial balance.
-
Any question?
-
I think maybe we will use again
the four hours
-
because we still do not finish
the lecture,
-
we have the second exercise
of the lecture
-
and then we have the exercise
of the workshop
-
so definitely we are using
the consultation time of the
-
four hours to complete,
but at this point,
-
we are already one hour 40 minutes.
-
It's good for you to have a break
so you can just prepare your coffee.
-
No Natalia, I will answer that.
You prepare your coffee,
-
you're soft drink, take a rest,
and we will meet in 10 minutes.
-
Before I go I will just answer
the question to Natalia.
-
Still accountants do this step manually?
No, Natalia, no.
-
I will talk about this when we come back
after 10 minutes
-
because I will talk about the assignment.
That will answer your question.
-
And Tablynn, can you explain profit thing?
-
Yes I will do that in the next exercise,
need more exercise,
-
we will do four Abdul, today.
-
If we aren't late, pm,
no problem for me,
-
but if you have the strength
to still be there,
-
we'll be good...
-
We will...
We will do many exercises today,
-
but for now take a rest, relax.
I need to grab my coffee as well,
-
and 10 minutes, so it's 2.40.
At 2.50 we continue.
-
I will disconnect the microphone,
2.50 we continue, ok?
-
Ok, here we are again, more relaxed
-
and ready for another one
and a half hours.
-
Before starting with the next exercise
-
I will just give you some information
-
about your first assignment.
-
The assignment that you will have
is a very practical assignment
-
and this will address one of the questions
about Natalia,
-
Natalia asked, still accountant do
these steps manually?
-
Well, accountants do not do this manually
but of course the need to understand
-
what the system does because if not,
the possibility of errors
-
could be very big.
-
When you enter a journal entry
you need to understand
-
what continues after that,
even the system is doing that
-
but you need to know how your ledger
is updated,
-
how the trial balance is prepared,
it's very important to do that.
-
That's why you learn to do this manually
even though then
-
the system will do this for you.
-
OK, but you need to be able to check
whether the system is doing well or not.
-
In this course you will have
the opportunity to deal with
-
one of the most commonly used
Accounting software,
-
it's a cloud accounting because
everything is in the cloud
-
and not in the computer of
the organization,
-
and that is Xero.
-
Xero is used by many small
and medium companies.
-
Not the very big ones because they
have their own systems,
-
but many small and medium companies
use Xero.
-
Accounting Pod is an organization
that facilitates
-
the learning of this software.
-
Griffith University has an arrangement
with Accounting Pod
-
to provide this facilitation,
for learning Xero,
-
and we have set up the assignment
that you will have in this,
-
using this software.
-
So next Monday, 3rd August,
the module,
-
the practice module of Accounting Pod
will be open for you.
-
And it will be open practically
the whole month of August,
-
until the 27th of August,
that will be closed at 5.00 pm.
-
So what is the idea is that you do this.
You follow step by step
-
all the processes and you will learn
how to use this software,
-
so you will do what accountants do
in the practice, ok?
-
And this assessment, the assignment
we have two parts,
-
we have the practice module
that it's called,
-
that will be open next Monday,
-
and then after it is closed,
that means the 27th of August.
-
On the 1st of September we will open
the second part of this assessment
-
which is the Xero assessment.
-
That will be opened on the
1st of September,
-
and it will be closed on the 23rd
of September, 5.00 pm,
-
so at that point you need to finish
the second part.
-
Your marks will be based on what you do
in this task.
-
The marks are allocated...
-
The marks are allocated to the task
that you are doing.
-
Now, in the question by Jade,
what learning modules
-
will the practice on Xero cover?
-
What you need to know is just the basics
of the accounting cycle,
-
so to understand what is a journal entry,
what are the ledger accounts.
-
But the training that you will do,
you will see it's very...
-
Totally different to what we are doing
in the accounting period,
-
because you will do tasks related
to a software.
-
I will explain in a bit of detail
but next week, on Tuesday of next week,
-
I will dedicate more time to explain
to you in more detail
-
what you have to do because at that point
you will have this already open, ok?
-
Now it's not there,
you cannot see this software yet.
-
There are three modules in each
assessment task,
-
the practice and the assessment.
-
Your marks for the assignment
will be the average of all these,
-
ok, the practice and the assessment.
-
You will have a rubric for this
so you will know exactly how
-
your marks will be allocated.
-
The system marks you, so it's not that
I will mark this.
-
For each task completed,
the system will mark you,
-
and you will have the marks
according to the task.
-
I will give you some guidelines
next week on that.
-
But in the first part, the practice set,
there are three modules, actually four,
-
but the important models
are modules two and three.
-
The module one is just a welcome for you
to have a welcome to the system,
-
there are no marks allocated there.
-
Module two is the basics,
and there are 20 marks allocated there.
-
There are very simple tasks that will
tell you how to work in Xero.
-
One of the tasks is for example to set up
an authentication in door,
-
so it's not related to accounting at all,
but is related to working with this...
-
with the system.
-
My suggestion would be to always
look at the question that you have
-
for each task and the possible answer,
and then look at the content.
-
Try to not answer the question immediately
but go through the content.
-
You will learn through the content,
not just answering the questions.
-
Try not to do what is...
You look at the question, possible answer,
-
and then you try to find the answer
in the content,
-
because you will not learn a lot.
-
The idea is that you learn how
to use Xero, this system, ok?
-
And to learn that it's good that you
go through the content
-
trying to learn what is this about?
-
And the next module,
the module three that is Xero,
-
in that module you will work in Xero.
-
So module two is just to prepare,
you will be prepared to work with Xero
-
but it's not yet the working withing Xero.
-
Module three yes,
you will have a number of tasks
-
following the instructions that
Accounting Pod will give you
-
to complete this task
and provide the answers.
-
So then the module four is just to wrap up
a couple of questions,
-
but not really important.
-
Module two and three are
the most important.
-
Now when you finish one module,
then you will have access to the next one
-
and so on,
so you need to go step by step.
-
In this sense, this is,
even though you need some knowledge
-
in accounting that you already have,
you don't need more than that
-
because it's different to learn how to
work with a software in accounting
-
than how to do accounting,
that is what you are doing now.
-
Then the assessment part is just the
application of all what you have learned
-
in the practice part,
and in a different case scenario.
-
So that is in general what you will
from next week,
-
there is time,
don't wait till the last two days.
-
For example, it opens 2nd August,
it will be closed 27th of August,
-
do not wait until the 25th of August
for all the task,
-
because you need time for that.
-
You need time to reflect on what
you're learning,
-
you need time to properly do the task
and go just a little bit
-
during the time this will be open.
-
It will not take a long time, ok?
it will not take a very long time,
-
probably you can do this in three
or four days, if you dedicate full time,
-
but that is not the best way to learn.
-
Yes, you will have marks Cecilia
in the practice part
-
and actually the total marks
that you will have is the average
-
weighted average of the practice part
and the assessment part.
-
I also considered to give marks
for the practice part
-
because in the practice part,
it will be easier for you,
-
but the intention is that you learn
how to use the software
-
and how to use this software
is in the practice part.
-
In the assessment part
you will apply all of this,
-
so there are marks allocated
in the practice part as well, yeah.
-
So this is just some information that
I want to give you in advance
-
and next week with this open,
I will show you the screens
-
and I can share screens
for you to do this.
-
Cecilia, is there any way we can practice
using the system without getting marks?
-
Yes, because you don't need to submit
-
but now you will see
it's very straightforward,
-
the system will tell you
exactly what to do,
-
so if you do well, you don't need
to do it again,
-
but try to do well.
-
Now there is some not in the practice part
but in the assessment part
-
there is feedback that you can receive
and also you can ask questions.
-
Now the specific question of the software
please do not ask me that way
-
but to the system, there is a box
that you will see next week,
-
that says 'leave us a message'.
-
You leave all the questions there
and they will answer you immediately.
-
If you have a problem with this,
of course you contact me
-
and I will deal with them, but they
answer quite quick all your questions.
-
Ok, now I have another message,
-
and this is another caption.
-
Who sent me a message about captioning?
They'll need the captioning.
-
Cassandra is that you?
Ok, I've added you.
-
Ok, so now we can continue
with the next exercise.
-
And we are still in the lecture
so definitely will end a bit late
-
but I prefer to clarify anything you need
it's important for you.
-
Ok, so...
-
I guess we don't need to put this...
Ok.
-
Here you have the next question.
This is...
-
I do not know if you can see well
in your screen
-
because this uses the whole one
in my screen.
-
Can you see we're on this table?
-
Yes, ok, excellent.
Excellent, thank you.
-
So this exercise starts as well
from the unadjusted trial balance,
-
the same as this one.
-
And they open for business
on 1st of April 2019
-
and the trial balance is on 30th of June,
so how many months do we have?
-
This is important because we will need
this to calculate the adjusting entries,
-
how many months since we started?
Three months.
-
So remember that from 1st of April
until the date,
-
very good Natalia, three months,
-
until the date of these financial
statements, three months,
-
that is what we will consider.
-
So what we have here in this,
this is the worksheet.
-
You can see we add more columns.
-
What we have at the beginning is the
unadjusted trial balance,
-
that I am showing you there,
unadjusted trial balance.
-
Then we put in the adjustments,
all the adjusting entries,
-
we will do that in this exercise as well,
and from this we prepare what is called
-
the adjusted trial balance.
-
But now we will add the last part
for today which is the closing entries
-
so you can see we have now
three types of entries.
-
Just the general entries, or journal
entries that come from transactions
-
that we did last week.
-
We have the adjusting entries
that we prepared in the first part,
-
and we have the closing entries and we
will see what are the closing entries.
-
After the closing entries we prepare
another trial balance
-
which is the post-closing trial balance.
-
And with this we complete,
almost complete the accounting cycle.
-
After this we only need to prepare
the financial statements.
-
So we have the list of accounts,
here you have all the list of accounts
-
that we will use in this and we have the
ending balance of each of these accounts
-
in the unadjusted trial balance,
that means before adjustment,
-
these are the balances
of all of these accounts, ok?
-
Here we continue with different
types of accounts,
-
we will go in detail with all of them.
-
And of course,
the unadjusted trial balance
-
the total debits should be equal
to total credit.
-
That's in all the trial balances,
total debit equals total credit.
-
So here we have the additional data.
-
The additional data as you already know
is the data that we need
-
to prepare the adjusting entries,
so we will go through these six entries,
-
six additional data to prepare
the adjusting entries.
-
We will journalize the adjusting entries
so we will record them,
-
what is the debit, what is the credit
of each of this adjusting entries.
-
And then with this adjusting entries,
-
we will complete the adjusted trial
balance in the worksheet.
-
Then from the adjusted trial balance
in the worksheet,
-
we will prepare the closing entries.
-
And using the information
of the closing entries,
-
we will prepare the post-closing entries
trial balance.
-
So this is a very complete exercise,
-
the starting with the unadjusted
trial balance
-
until the post-closing entries
trial balance.
-
So we will start with
the adjusting entries.
-
The first one, insurance expires
at a rate of $900 per month
-
and is an annual premium commencing
1st April 2019.
-
So what might this description
be telling us?
-
It says that three months, so it's already
calculated the total policy divided by 12,
-
it should be 900 per month,
that is the insurance expense per month
-
when this started on 1st of April,
at the beginning of this period
-
and we have already three months
if you remember.
-
So in three months by $900
is 2700.
-
We need to record the debit,
the insurance expense clearly,
-
then prepaid insurance.
-
So we look at our journal entries,
insurance expense, and prepaid insurance.
-
Here you have debit 2700
insurance expense,
-
credit 2700 prepaid insurance,
and that is the first one, ok?
-
I will go a bit quicker in this
but please stop me at any time
-
and ask me if there is something that
you would like to clarify.
-
Of course I will explain well but because
we've gone through this already
-
they are similar.
-
If it is clear just..
Just (INAUDIBLE).
-
Ok, sorry.
What was the question?
-
Here is it prepaid insurance?
Yes it is prepaid insurance.
-
Ok, ok. So to answer that question we
need to look at from where comes this.
-
Insurance expires at the rate of $900
per month.
-
From where does this come?
This comes from a prepaid insurance
-
so that means the company paid in advance
it's a prepayment,
-
the insurance for the next 12 months
on 1st April.
-
1st April the company paid the whole year,
that means 12 months insurance.
-
What amount?
-
To know that you need to look
at the account prepaid insurance,
-
here you have, ok,
prepaid insurance debit 10800.
-
If you divide this by 12 it's 900.
-
That means every month you need
to record an insurance expense
-
because you will consume this policy
in 12 months.
-
So every month you need to record
an insurance expense of 900 every month
-
and we have three months so it will be
the total of 2700 as insurance expense
-
and we decrease the prepaid insurance,
very good, excellent.
-
Ok, the second one,
an inventory of supplies shows 7200
-
of unused supplies on 30th June.
-
So we still have 7200 supplies
in the inventory.
-
How much do we have in the
unadjusted trial balance?
-
Supplies, 11400,
and we have 7200 at the end of June
-
so we have use the difference.
-
What is the difference between 11400
and 7200? It's 4200.
-
So we have a supplies expense debit 4200
and we credit this account supplies
-
to reduce 4200 from here.
-
So the journal entry, the adjusting entry,
it will be supplies expense 4200 debit
-
and we credit supplies 4200.
With this we decrease the supplies account
-
and now we will have the balance
that we calculate here.
-
That we count, we count the items,
we value the items
-
and what we have
at the end of June is 7200, ok?
-
So that is the second adjustment.
The third one.
-
The depreciation for the year
ended 30 is 5400 on the building
-
and 4500 on furniture.
-
Here you have two items.
-
The two of them are what we call
the non-current assets,
-
so they're assets that last for more than
one accounting period.
-
We have buildings and furniture
and this description is telling us
-
that depreciation expense
for the year 30th June 2019,
-
that is the ending...
-
That is the date of the unadjusted
trial balance.
-
The deprecieation expense is 5400
on the building, 4500 on furniture.
-
No we need to think in the accounts.
-
Depreciation expense is one account
so it doesn't matter how many items
-
we are depreciating
-
we need to add them and we will have
the depreciation expense,
-
the total depreciation expense.
-
If you add these two amounts,
5400 and 4500 it will be 9900
-
so we will have a debit of depreciation
expense, 9900.
-
What is the other account?
-
The other account is accumulated
depreciation
-
but we have one accumulated depreciation
account for each item
-
of the non-current asset.
-
How many items do we have here?
Two.
-
So we have building,
we have furniture.
-
So two different accounts, one account
will be accumulated depreciation,
-
building, the other account will be
accumulated depreciation furniture
-
We need to distinguish them
and to record them separately.
-
So we will have a depreciation expense
9900, one account,
-
and then we will have accumulated
depreciation of building, 5400.
-
Accumulated depreciation
of furniture, 4500.
-
and the journal entry, the adjusting
entry will be this one.
-
Here you can see 9900 depreciation
expense, one account.
-
All the depreciation expense together.
-
But then we have two different
accounts,
-
so accumulated depreciation
of the building, 5400,
-
accumulated depreciation
of furniture, 4500.
-
The sum of course is 9900 so...
-
it would be okay Jade that if you
separated depreciation expense
-
but we need to think that depreciation
expense is just one account.
-
It will not cause any problem
because at the end we will have two.
-
It's like we separate these
in two adjusting entries.
-
It is possible, it's ok,
it's not wrong,
-
but because we have one
depreciation expense,
-
we record them together.
-
Now this is a journal entry for adjusting
entries in which you have three entries.
-
Ok, I mentioned to you that most of
the you have two entries,
-
one debit, one credit,
there could be more.
-
this is the case.
-
In this case you have one debit
and you have two credits.
-
The important thing is any journal entry
or adjusting entry,
-
the total debit should be equal to
total credits which is the case here.
-
Ok, next one.
-
The mortgage interest rate is 6%.
-
The mortgage was taken out
on 1st April.
-
This is the only data that is given in the
additional data for adjusting entries,
-
so we need to look at the data in the
unadjusted trial balance to calculate this
-
so here we know 6% is the interest rate.
-
Always when it's given like this,
it's annual interest rate, ok?
-
Annual interest rate.
Always this is the annual,
-
that is the normal period for
the interest rate of a mortgage.
-
So we will need to see what is the total
of the mortgage
-
so we go to our...
-
And here you have mortgage payable.
-
This is the unadjusted trial balance,
mortgage payable 210000.
-
210000.
-
If you multiply 210000 by 6%
how much is that?
-
12600, very well Jade,
12600.
-
That is the interest for the year, ok?
-
But we need the interest for three months
so we divide this by 12
-
and we will have the interest
per month.
-
We multiply by 3, ok,
-
and that is the interest for
the three months
-
and for the three months
we will multiply that by three, Jade,
-
monthly it will be 3150, ok?
-
So 3150 is the interest expense
that we need to record here.
-
Good Jade.
-
Ok, so interest expense 3150.
-
Interest expense for the three months
and we have an interest payable
-
because we have not paid that.
-
So interest payable, 3150.
This is the adjusting entry.
-
Next one.
-
9000 of rent revenue paid in advance
pertains to June.
-
The remainder pertains to July,
so what does this mean?
-
The tenant paid in advance
-
for the rent until July,
-
but until June the tenant already used
$9000 of this payment
-
because they used the office
or the rent.
-
George, the previous one,
sorry, you're talking about the mortgage?
-
The mortgage interest?
-
It's that one?
Ok.
-
Ok, yeah, I will go through that George
as soon as I finish this that I started
-
so here we have the revenue
received in advance.
-
9000, that pertains to June,
that means the tenant already used this.
-
We have provided this credit to the tenant
until June for 9000.
-
So we need to record this income
because this is revenue
-
and we will credit rent revenue for 9000
and we will debit
-
the rent revenue received in advance
which is a liability
-
when the tenant pays in advance
the amount.
-
So this will be...
-
Debit rent revenue received in advance
we decrease the liability
-
because the tenant already used
this building until 30th June
-
and we record now the
rent revenue, ok?
-
So that is the number five.
I will go with the interest,
-
the interest of the number four.
I will go again with this.
-
The mortgage interest rate is 6%.
-
Please remember, always the interest
is per year,
-
so we need to know how much
is the interest per month.
-
How do we calculate that?
-
Well, 6% of what?
-
That is the thing that we need
to calculate.
-
6% of the total mortgage interest...
Sorry.
-
6% of the total mortgage that we have
for this loan that we have
-
so here you have,
this is our trial balance.
-
Remember this is our unadjusted
trial balance.
-
If we go down through the accounts
we will have this mortgage payable.
-
Credit because it's a loan,
it's a loan payable, it's a liability.
-
This is the total amount we borrow,
210000.
-
How much is the interest per year?
6% of this.
-
If you calculate your 6% of 210000,
then that is 12600,
-
but that is per year.
-
How many months is the period of time
here from 1st April to 30th June?
-
It's three months.
-
So 210000 divided by 12,
sorry.
-
210000 multiplied by 6% is 12600.
-
12600 divided by 12,
that will be per month
-
and then we multiply by three,
that will be three months.
-
The amount is 3150.
-
So we record that interest expense, 3150
because it's an interest already accrued
-
in this specific time, until 30th June,
three months.
-
And the interest payable because
we had not paid that
-
is the same amount,
3150.
-
We have this liability for
the interest payable
-
and we have the interest expense,
that clarified the point George?
-
Ok, excellent.
-
Now the last adjusting entry
is salaries.
-
This is a simple one.
-
Salaries of 1800 are unpaid at 30th June.
So what does this mean?
-
That means that the employees
already work for this amount,
-
1800 but the company didn't pay them.
-
So we owe that salary,
so we will record the expense,
-
salaries expense 1800,
and we have to record the liability
-
because we owe the salaries,
that means salaries payable,
-
that is the liability.
-
So debit salaries expense, 1800
credit salaries payable, ok?
-
1800. So there you have
the last adjusting entry.
-
So we've finished the adjusting
entries,
-
and now we can put all of these
adjusting entries
-
to the spreadsheet.
-
So if we put them
to the spreadsheet,
-
you have here all the adjustments.
-
There is a number that you can see
in this column after adjustment,
-
this is just a column
that can help you to know
-
which are the transactions that the...
-
the adjustment that we are recording
in the adjustment.
-
I will look at that,
I will go through the first one
-
just for you to have the reference
because we did this already.
-
We don't need to go through all of them.
-
In the first, this is the number one,
the first adjusting entry.
-
We record debit 2700 insurance expense,
credit 2700 prepaid insurance.
-
So prepaid insurance is a credit...
there you have the number one
-
for you to have as a reference.
-
This is the adjusting one.
Credit 2700
-
and we have a debit in insurance expense,
-
insurance expense a debit, 2700
-
and here you can see the number one
again as a reference.
-
So all of them have a reference
to what transaction it is.
-
So we can complete this table
-
just copying all the adjustments,
-
the debit and the credit in the
corresponding account
-
and we will complete the adjustment.
-
Then we can prepare
the adjusted trial balance
-
the same as I explained
in the previous exercise.
-
Cash for example, 15000 debit,
there are no adjustments,
-
so the adjusted trial balance
is 15000 debit cash.
-
Prepaid insurance we have it there 10800
in the unadjusted balance,
-
the adjustment is credit,
-
so credit decreases the debit
we need to strike this,
-
so the adjusted trial balance
is debit 8100.
-
And we continue with all the adjustments
until we have really
-
the adjusted trial balance.
-
So we can copy all the amounts here,
in the adjusted trial balance
-
and this is our adjusted trial balance.
-
So in the first exercise we finished
in this part,
-
but now we will continue
with the second part
-
which is the closing entries.
-
What are closing entries,
what are the closing entries?
-
So now I will explain a bit conceptually
what are closing entries
-
and then we will apply them
in this exercise.
-
I mentioned last week that there
are permanent accounts
-
from all the accounts of the company.
-
There are permanent accounts
and there are temporary accounts.
-
What is the difference between
the permanent accounts
-
and the temporary accounts?
-
The permanent accounts are accounts
that the ending balance of any period
-
is the beginning balance
of the following period.
-
So we carry forward the balance
of the accounts to the following period
-
and we continue for all the
life of the company with this.
-
Ending balance becomes the opening balance
of the following period.
-
If you remember when we balanced
the accounts last week
-
we ended each of the ledger accounts
with what is the opening balance
-
for the following period which was
ending balance for the current period.
-
So these are the permanent accounts.
But we have also temporary accounts.
-
What are temporary accounts?
-
Temporary accounts are accounts
that must be closed
-
at the end of the accounting period.
-
Why do we have to close them?
-
Because we want to start
the following period
-
with zero balance in each
of these accounts, zero balance.
-
So we need to keep these accounts
with zero balance.
-
How can we do this?
-
Well, we need to transfer the
balance of these accounts
-
to a permanent account.
-
Then we can leave the account
in zero balance.
-
This is very important for,
very good Joshua, to retain earnings.
-
This is very important particularly for
all the accounts of the income statement
-
because we want to start
each accounting period
-
with zero balances in the income
statement accounts,
-
that means all the revenues
and expenses account
-
should be zero, why?
-
Because we want to menasure
the profit for the period.
-
If we do not start from a zero balance
we will not have the profit of the period
-
we will have a mix of profit
of the periods and the current period, ok?
-
So to know the profit of the period
we have to start with zero balance
-
in all of these accounts.
-
So what are the temporary accounts?
All the income statement accounts.
-
That means all the revenues accounts
or any other income
-
and all the expenses accounts.
-
All of them are temporary accounts.
-
In addition there is one account
that we add retained earnings
-
or the equity account
which is dividends.
-
Dividends is also very good Tamara,
dividends is also a temporary account
-
and we need to close dividends
at the end of the accounting period.
-
So how do we close them?
-
Well, to know that,
we can start from here,
-
the adjusted trial balance.
-
Now what type of account do we have here?
And we always put these in this order.
-
First we have the asset account,
so you have cash here, ok?
-
Prepaid insurance, supplies, land,
building,
-
accumulated depreciation is an asset
account even though it's a credit,
-
but I already explained that and we will
go in more detail with this account
-
in another topic.
That is an asset account,
-
same to accumulated
depreciation of credit.
-
All of these are asset accounts.
-
After the asset account we record
the liabilities account.
-
So here you have accounts payable,
rent revenue received in advance,
-
salaries payable, interest payable,
mortgage payable, ok?
-
All of these are liabilities accounts.
-
After the liabilities accounts
we have the equity accounts,
-
so we have check capital and rent revenue.
-
These two are the equity accounts,
sorry, only check capital,
-
and retained earnings.
-
Check capital and retained earnings,
that's what I mean.
-
Check capital and retained earnings
are equity accounts.
-
In this case in this company
we don't have retained earnings.
-
Why don't we have retained earnings?
Because this company just started, ok?
-
It started on 1st April,
so this is the first period,
-
30th June 2017.
-
And because it's the first period we
don't have yet retained earnings account.
-
So check capital and retained earnings
are equity accounts.
-
Then we have the income
statement accounts.
-
The first account that we have
all the revenues.
-
Rent revenue in this case,
it may be service revenue,
-
it may be sales revenue,
fees revenue, interest revenues,
-
all the revenues accounts,
they will be in this part.
-
And then all the expenses accounts,
-
so we have advertisement expense,
depreciation expense,
-
electricity expense, insurance, interest,
salaries, supplies expenses,
-
all the expense accounts.
-
So this is the adjusted trial balance.
-
What are the accounts that
we need to close?
-
In this case we don not have dividends,
we have revenue, rent revenue,
-
and we have all of these expenses.
-
These are the accounts that
we need to bring.
-
How will we close this?
-
There are two steps to close the accounts.
-
The first step we will close
all the expenses and then the revenues
-
to another temporary account
that we will create
-
that the name is the income
summary account.
-
Income summary account is the name of
another temporary account
-
and the purpose is to close
all the expenses
-
and the revenues to this account.
-
So how do we close the expense?
here you have advertisement expenses,
-
(INAUDIBLE) 3000,
depreciation expense the balance
-
is debit 9900 so we have
a number of expenses.
-
We add all of them and we will debit the
income summary accounts for the sum
-
and we will credit each of them
one by one
-
we cannot credit the total of them,
-
we need to close each account one by one
so we need to credit advertisement expense
-
credit 3000,
depreciation expense credit 9900.
-
Electricity expense we credit 6000
and so on
-
because if you credit advertisement
expense by 3000,
-
what is the balance of advertising expense
after that? Zero.
-
If you credit depreciation expense by 9900
what is the balance after that? Zero.
-
We're leaving each account at zero
that's why we need to do one by one.
-
But for the sum of all of this credit
we will have one debit which is
-
the income summary account,
or profit and loss summary account.
-
It could be any of these.
-
With revenue we do the same.
-
So to close these revenue accounts,
what we should do?
-
We need to debit by 64200.
-
We debit rent revenue by 64200,
what is the balance after this? Zero.
-
And what we credit?
Income summary account again.
-
So income summary account will be
the same account that we use for expenses
-
but in this case we credit the
income summary account.
-
So you can see what we have done
at this point is to transfer
-
the amount of all the expenses
and revenues to this temporary account
-
which is income summary account.
-
Here you have the closing entries.
-
We credit all of the expense accounts,
remember the normal balance is a debit
-
so to close them we credit.
This is a journal entry.
-
You can see this is a journal entry
in which we debit income summary,
-
the sum of all the expenses.
-
We debit income summary and
we credit each of these accounts.
-
How many entries has this journal entry?
-
You can see it has eight entries.
-
We have one debit, and seven credits.
-
So this is one journal entry,
with this journal entry we close
-
all the expense accounts.
-
That means these are closing entries.
-
We transfer the expenses
to the income summary accounts.
-
For debt revenue, the same.
-
In this case we need to debit
the revenue account
-
because the balance is credit
so when we credit,
-
we leave this account in zero,
and we debit the rent revenue
-
and we credit the income
summary account.
-
This is another journal entry,
a closing entry.
-
What is next?
-
Then we need to close
the income summary account.
-
What is the balance of the
income summary account?
-
The income summary account
is the difference
-
between the credit and the debit .
-
what is higher?
-
Well, we have 64200 credit
and 48750 debit.
-
so that difference is 15450 credit, ok?
-
That is the balance of the income
summary account at this point.
-
To close that, we need to debit,
it is the third closing entry.
-
We debit 15450 from the
income summary account
-
and we credit retained earnings.
This is a permanent account.
-
So we transfer this balance to
the retained earnings account.
-
Now the income summary account is closed.
-
You can verify this if you were
at all debit,
-
48750 + 15450
will be equal to 64200.
-
Income summary account is closed
the ending balance in this case is zero
-
and all the balance is transferred
to retained profit.
-
You can see what we have done
is to transfer the profit
-
of the accounting period through
the journal entries
-
that are the closing entries.
-
We transfer the profit to
the retained earnings
-
an that is what we do every period
at the end of each period we do this.
-
So what is retained earnings?
-
It's the accumulation of all profits
and all losses since the company started
-
because we do this at the end
of this period.
-
So we are accumulating the profits
in this written profit account.
-
What about dividends?
-
Dividends is another temporary account
we will see another exercise
-
in which dividends is included
in the workshop exercise
-
in which dividends is also closed
to retained earnings,
-
so retained earnings are
decreased by dividends.
-
Now, one last word in relation
to closing entries.
-
Closing entries you can see
is very simple.
-
It's just to close each of the expense
and revenues accounts
-
and also dividends,
-
and leaving the accounts
with zero balance.
-
The normal mistake that the students do
in this part even is simple
-
is the confusion between the debit
or the credit to close the account.
-
So because students know that
expenses are debit,
-
they close all expense accounts
with the debit here.
-
Put the debit and put the income
summary account as the credit.
-
But that, what is the effect of that?
-
With that, the effect that will be
will be that you double
-
the balance of each account.
-
If you debit advertisement expenses
by 3000 and you have a balance of 3000
-
what is the ending balance of
the advertisement expenses? 6000.
-
Ok, you double the balance on the account
you are not closing the account.
-
To close the account should
be the opposite side,
-
it should be you credit 3000 because
the account has a balance of debit, 3000.
-
So be careful with that, I have seen
so many times the same mistake.
-
Remember that taking out on these
so do not make this type of mistake.
-
Any question about closing entries?
-
The whole point Natalia,
or the last part?
-
The last part?
Excellent, yes.
-
Ok, excellent.
-
For one second I thought
it was the whole point.
-
Excellent.
Thank you Natalia.
-
A common mistake,
what is the common mistake?
-
Here we are closing the account
to ...
-
Remember two things,
to close has a meaning.
-
What is the meaning to close?
-
To close means leave with zero balance
that is the meaning, ok.
-
Close means leave this account
with zero balance.
-
So if we close advertisement expense
it means leave this with zero balance
-
at the end of the period.
-
After closing entries we want
advertising expense equals zero balance
-
so that means we transfer
the balance to another account.
-
We're transferring here to income summary
in this first step.
-
So what about if we have instead of,
I will write over here,
-
instead of credit 3000,
we put 3000 here, we debit.
-
And we do the same with
all the other accounts.
-
That means that this, the income
summary will not be a debit of 48000
-
but will be a credit of 48750, ok?
-
So what will be the effect of this?
-
And we put here the 9900,
the 6000, the 2000...
-
All of them in debit.
-
What is the balance of all of these
accounts if you do that?
-
What is the balance after closing entries
if you debit this account?
-
What will be the balance
of advertisement expense?
-
It will be 6000 because the balance
before closing entries is debit 3000.
-
If you debit in the closing entry by 3000
the debit increases the debit
-
so a debit of 3000 will be added
to the debit of 3000,
-
that means now the balance is 6000.
-
You're not closing the account,
you double the balance of the account.
-
So that's why you need to be very careful
that the closing entry
-
should be the opposite side of the
accounts that we are closing.
-
All the expense accounts,
they have a debit balance.
-
What is the opposite side?
Credit.
-
So we need to credit all the
expense accounts.
-
The revenues accounts,
what is the normal balance? Credit.
-
To close we need to debit,
the opposite side.
-
That is the important thing
so be careful with that,
-
so do not make a mistake on this.
-
Ok, Yes, Zijing, only need to close
the temporary account.
-
The permanent account we will
carry forward the balance.
-
The ending balance at
the end of the period
-
will be the beginning balance
of the next period.
-
We do not start with a zero balance.
-
We start with the ending balance
of the previous period
-
so we only close temporary accounts.
What are the temporary accounts?
-
All the income statement accounts
plus dividends, ok?
-
So we finish with this and here
you have all the closing entries
-
and that's the last part of this
exercise I think, yes.
-
Yes, that was the last question
to prepare the closing entries.
-
So we finish,
just we finish the lecture,
-
and it is time to (INAUDIBLE)
-
We need still to go through
the workshop.
-
Yes I did here profit and loss,
there are different names for this,
-
and over time the name has changed
in the accounting standards,
-
but when we talk about income statements
it's the same as profit and loss statement
-
it's the same.
And we talk, there is another name,
-
it's not very used now,
but you can see in some books
-
that there's the statement
of financial performance.
-
That is also called the income statement.
-
And the balance sheet has another name,
it's the statement of financial position.
-
But for the names that we're using
is normally income statement
-
or statement of profit or loss.
-
And then we have,
-
retained profit will always credit, right?
-
Good question Ezekiel.
-
Retained profit normally should be
and has to be in the credit side
-
except if the company has a lot of loss
and then retained profit
-
will go to the other side,
we'll have a debit balance.
-
That is a company that has
accumulated losses,
-
and they don't have profit.
it's not the normal situation
-
and it will be very bad for the company.
Normally it should be on the credit side.
-
It is possible the debit side,
but not usual, and not good.
-
Ok, so now we can go
through the workshop.
-
So we need to plan a bit at this point
because 3.50.
-
The normal time from 1.00-4.00
is the workshop and the lecture,
-
and then 4.00-5.00
I have the consultation
-
but what I am doing is just to answer
all the questions
-
while I am explaining the exercise,
so I go through the questions immediately.
-
That I think is better because we
don't need to go back
-
but we solve anything that you have,
any question you have immediately.
-
But because we have not gone
through the workshop,
-
I will use the consultation time
for the workshop.
-
Now I understand if any of you
cannot stay for the workshop,
-
for the consultation which is 4.00-5.00,
-
it's ok, so feel free to go,
no problem.
-
Remember the lecture and the workshop
will be recorded
-
and will be uploaded
on the ECOS 360 tab,
-
so you will have the complete record,
yes and there's no problem.
-
You will have the complete record
of the lecture and the workshop.
-
So I will explain this as part
of the consultation,
-
the exercise of the workshop, ok?
-
And then if you have more questions
yes, please feel free to ask
-
any question you may have.
-
Ok, so we go through the second one.
-
The workshop, the scheme that we have used
is similar to the lecture,
-
we start with four multiple choice
questions to revise some concepts
-
and then we go through the exercise.
-
And in the exercise we will do the same,
we will practice with adjusting entries,
-
we will practice with closing entries
and that is the topic for today,
-
so a lot of practice in this.
-
So we will start with this.
-
I will have a look at the first question
which is similar to the first question
-
of the lecture.
-
Ok, have a look at this,
I will update the poll.
-
Ok, so furniture factory employees
work overtime to finish an order
-
that was sold on 28th February.
-
The office sent a statement
to the customer in early March
-
and the payment is received
by mid March.
-
The overtime expenses should be
expressed in which period?
-
Ok, good practically most of you
have the right answer,
-
in February.
Why in February?
-
Because they said that when
it's sold this order?
-
On 28th February, so it's February,
-
the month is February and
the employees work during February.
-
So the resource,
that means the work of the employees
-
was used on February,
that means the right answer is that one,
-
February, A.
-
A is the right answer, ok?
-
Number two, have a look,
I will update the poll.
-
The company purchased office supplies
costing $4000 and debit office supplies
-
for the full amount.
At the end of the accounting period,
-
a critical count of supplies reveal 1600
is still on hand.
-
What is the appropriate journal entry?
-
We have done already two weeks
aside for this,
-
so if you understood well,
please apply the same as we have done
-
in the first two exercises.
-
Ok, most of you correct,
what is the...
-
The right answer is C.
Ok, why?
-
if the company purchases office supplies
costing 4000, debit all these supplies,
-
so what is the balance of these accounts?
-
The unadjusted balance is office supplies
or simply supplies, debit $4000,
-
that is the unadjusted balance
but at the end of the accounting period
-
the physical count revealed 1600.
-
So that is what we have
in the supplies account.
-
The rest were consumed,
what's due,
-
so we need to record a
debit supplies expense
-
by the difference, 2400,
-
that is the difference between
4000 and 1600.
-
And we credit office supplies so we
reduced the balance of office supplies
-
by 2400 and now what is the balance
after adjustment? 1600, ok?
-
This is the normal way that you will see
always what happened
-
with the supplies account,
but there is another way
-
that I will explain,
I will explain it now.
-
What about if this company purchased
office supplies that cost 4000 dollars,
-
but debit the supplies expense,
the office supplies expense.
-
So we debit, ok?
-
And that is the journal entry
that they record
-
because they thought that they would
consume all of this
-
in this accounting period.
-
So they debit supplies 4000.
-
They debit supplies 4000,
and then credit.
-
If they paid cash, 4000.
That is the original entry, ok?
-
Supplies expense.
-
So they debit an expense account.
Why do they do this?
-
Because they think that they will consume
all of these supplies in the month.
-
But at the end of the month they realize
that they still have 1600 on hand.
-
What will be the adjusting entry
in this case?
-
Think a bit.
-
And think what would be the
adjusting entry in this case
-
because we need to adjust this,
the expense was not 4000.
-
It was less than 4000 because we
still have 1600.
-
We need to adjust that.
-
What will be the adjusting entry
in this case if we record everything?
-
Debit office supplies,
and credit supplies expenses, very good.
-
For what amount?
For 1600.
-
So we will debit office supplies 1600
-
so now we have this, ok?
-
1600 debit, now we have the balance,
and we need to credit the expense
-
because the expense was not 4000.
-
The expense was the difference,
so we will credit the expense by 1600.
-
This is a different way to look at
the supplies expenses account.
-
It is possible, it's not frequent but it
is possible that this is what may happen.
-
A full reversal if it is...
if it is given.
-
It's not a reversal actually,
it depends on how the data is presented.
-
For example if the data is presented
as I did in this exercise
-
or all the previous ones,
you only need to adjust as we have done
-
but if the data is presented in this way
that all the expenses,
-
all the supplies purchased are recorded
as an expense,
-
then the other adjustment
should be reversed.
-
What will give you the clue is
how we record the purchase of this.
-
We record as supplies,
or we record as supplies expense.
-
That will make the difference.
-
Ok, it's good to clarify this,
because I have seen an exercise
-
in which they use the other way.
-
We have two possibilities and
I will put this in here.
-
First, all purchases are
recorded as supplies.
-
Ok, all purchases are
recorded as supplies.
-
Now this you want....
-
All purchases are recorded as supplies.
-
What we should do when all purchases
are recorded as supplies,
-
we do what you have learnt in
the two previous exercises
-
in the lecture and in this...
-
in this multiple choice question.
-
We adjust the ending balance
of supplies, ok?
-
But what about all purchases are
recorded as expenses?
-
That is the other situation,
all purchases are recorded as supplies
-
first situation we have worked with that,
the second situation,
-
all purchases are recorded as expenses
and we purchased $4000 of supplies
-
and because we think that we will use
all of them in this accounting period
-
we record the 4000 as supplies expense
when we purchase them.
-
At the end of the month we have
1600 on hand,
-
so we didn't spend all of them.
We still have supplies
-
and we need to prepare an adjusting
entry to reflect this.
-
So how we will reflect in this case, we
will record in this case a debit supplies
-
1600, ok?
We record 1600 supplies
-
and we credit supplies expense,
1600.
-
That will be the adjusting entry.
What do we do with this adjusting entry?
-
We put in supplies which is
an asset account,
-
we put the amount that we have on hand
at the end of the period, 1600.
-
And we reduce the supplies
expense by 1600
-
because we didn't consume
all of them, ok?
-
This is the situation when purchases
are recorded as expenses.
-
It's another situation,
it's not the most common situation
-
but it's good that you know that
adjustment is to reflect
-
what we have at the
end of the period, ok?
-
It's clear now?
-
What are the questions?
-
Ok, Tablynn,
Tablynn please clarify the point.
-
We go to the next one, number 3.
-
I will update the poll,
thank you Tablynn.
-
Ok, this company purchased a computer
for 3000 on 1st December.
-
It is estimated the annual depreciation
of the computer is $600,
-
the annual depreciation.
-
A financial statement had to be prepared
on 31st December.
-
The company should make
the following adjustment.
-
So it's not very difficult,
what is the adjusting entry in this case?
-
Have a look at the alternatives
and choose one of them.
-
Ok, are you ready?
-
We have most of you answered correctly
but we have a distribution
-
in the answer as well.
-
The correct answer is B.
-
What is the, I would not say tricky,
-
but what is the thing that you
need to be careful of
-
with the data provided?
-
It is important and this is a good
practice for you for the final exam
-
because in the final exam you will have
multiple choice questions
-
and you will have exercises.
-
And the multiple choice questions
what is essential?
-
In the multiple question it is to read
carefully everything in the question
-
before you choose one of the answers
because here I can see
-
why there are some errors.
-
It says this is the amount
of the computer, $3000.
-
It is estimated annual depreciation
is $600, annual depreciation.
-
Financial statements are to be prepared
on 31st December.
-
What is the period of time for
this accounting period?
-
It's from the 1st of December
to the 31st of December,
-
that's one month.
-
So were talking about an accounting
period of one month, exactly Joshua.
-
One month, and here we have the
depreciation of a whole year,
-
so to calculate the depreciation
for one month
-
you need to divide this by 12.
-
If you divide by 12 it's 50
-
so that immediately leaves out A and E
and also the answer,
-
so we're not only between B and C, ok?
-
Now to record the depreciation expense
debit always,
-
always debit depreciation expense
always it's a debit,
-
and credit the accumulated depreciation.
-
That's why this is the right answer, ok?
-
So this is a good opportunity I can use
to explain to you how to avoid
-
some common errors when you do this
in an exam,
-
and only, maybe you know the answer,
-
but because you didn't read
very carefully the data
-
then you can make a mistake.
-
So be careful with these types of things
when you answer these questions.
-
Ok, now the last multiple choice question,
-
is this one,
I will update the poll.
-
An entity failed to adjust the revenue
received in advance account
-
for rent that has been earned.
-
What effect will this have
on the financial statements?
-
(COUGHS)
-
Ok, most of you again are correct,
-
but there are different answers as well.
-
But the right answer is E,
ok? That is the right answer.
-
I will explain how to solve this
type of questions,
-
because there are many similar questions,
but the question is,
-
what is the effect on the
financial statement
-
if an adjustment entry is not prepared?
-
Ok, so how we answer
this type of question?
-
The best way is to go step by step.
-
It says the entity failed to adjust
revenue received in advance account
-
for rent that has bee earned.
-
So what happens when we have
a revenue received in advance?
-
Yes, it is a liability.
-
Revenue received in advance is
a liability account,
-
and what happens when we earn the rent
and we do not adjust this liability?
-
The adjustment means a decrease
of the liability.
-
If we do not decrease the liability,
revenue received in advance,
-
these liabilities will be overstated.
-
How many of the answers,
and that is the way that you can see
-
when you are answering this type
of question in an exam,
-
how many of the answers have that,
that the liabilities will be overstated?
-
Well, we have D and E only,
only two,
-
so you can discard already three.
-
So you are going step by step
answering the question,
-
and even you don't know the second part
but now your choice is only between two
-
so a better probability
to have the correct answer.
-
These are just some tricks that you
can apply when you answer
-
these types of questions, ok?
-
So first, liabilities will be overstated
and what else?
-
The difference is in revenue.
-
What happens in revenue
if we do not record this?
-
If we do not record this it means
we do not record revenue already earned,
-
so the revenue account will be understated
because we miss to record this revenue.
-
So this will be the second part,
understated,
-
and that's why the right answer is E.
-
Any questions? Any conceptual questions?
-
Because with these four questions
we finished up the conceptual part.
-
Excellent Jade, we finished all the
conceptual part about adjusting entries
-
but now we will apply them again
in a couple of exercises.
-
So we go through the first exercise
which is this.
-
This company began operations
1st February 2019
-
and the trial balance is at 30th June.
-
So how many months is
this accounting period?
-
The accounting period is five months,
very good.
-
We need to keep that in mind,
five months is the accounting period
-
to calculate the revenues, expenses
or anything that we will need.
-
What we have here is the
trial balance again,
-
the unadjusted trial balance.
-
We have all the debit accounts,
all the credit accounts.
-
They are not all the accounts because
there are other accounts here,
-
you can see other accounts that have
zero balance at this moment
-
but they are accounts of the company
that we will use.
-
And then we have the transactions,
not transactions, sorry.
-
Not transactions,
the data for the adjustments.
-
The first again we have supplies,
so these are similar,
-
so I will go a bit quick,
-
but please stop me if there's anything
that you don't follow well.
-
So supplies on hand, 490,
-
how much we have in the
unadjusted trial balance?
-
supplies, 2350, so 2350 less 490
-
that will be 1860.
-
Less 490 that will be 1860,
-
so we record supplies expense
and supplies.
-
We'll record expense for the
supplies consumed
-
and we decrease the balance
of the supplies accounts.
-
Ok, second, electricity bill 110
has not been recorded,
-
and will not be paid until next month.
-
Quite similar to what we have done,
we need to record the expense,
-
electricity expense debit 110,
-
and electricity payable credit 110.
-
So here you have electricity expense 110,
electricity payable 110.
-
The insurance policy is for the year
commencing 1st February 2019.
-
This is the day that the company started
for the year,
-
so we need to see here how much is...
-
prepaid insurance in total for
a year is 2520,
-
so if we divide this by 12
and we have five months in this period
-
we will need to multiply by 5,
so dividing this by 12, multiplied by five
-
the insurance expense will be 1050
-
so we have insurance expense debit 1050
-
credit prepaid insurance will decrease
the amount that we have
-
in prepaid insurance, 1050.
-
Services were performed during the period
in relation to 800 of revenue
-
received in advance.
-
So we have a revenue received in advance
and we need to decrease that 800
-
to record the service revenue.
-
We will debit revenue received
in advance by 800,
-
we will credit service revenue
by the same amount.
-
So we debit the service revenue
received in advance, 800
-
and we credit service revenue.
-
Next one.
-
Ok, yes.
Yeah, that's good.
-
Services were perfomed during the period
-
in relation to 800 of revenue
received in advance
-
What does that mean?
-
That means that previously
we have received cash
-
for services that we have not provided,
we received in advance,
-
so we record this as a liability.
-
The liability, the name of the account
is service revenue received in advance
-
and we can confirm this
in the trial balance.
-
The liability here you can see
service revenue received in advance.
-
We have received cash for 1500
for services we have not provided, ok?
-
Now in this data it says services were
performed during the period
-
for 800 of this 1500 that we received cash
we provide service for 800,
-
so we will have this revenue credit
and we need to decrease
-
the liability that we have
by the same amount, by 800.
-
Ok, so the journal entry will be service
revenue received in advance we credit
-
so we decrease that 1500 that we have
-
we decrease for the services
already performed.
-
And we record the service revenue credit.
-
Now it's better George?
-
Shouldn't we be deducting?
-
(INAUDIBLE)
-
Actually we are deducting 800
from the 1500 we have with this
-
in the debit entry because we debit.
-
We are reducing the balance of service
revenue received in advance
-
that has a credit balance of 1500.
-
We debit 800 because we performed
services for 800,
-
so we deduct that.
-
With the debit entry we are reducing
an account that has a credit balance.
-
Excellent, very good.
-
You're welcome.
-
Ok, so the next one, salaries.
-
Salaries of 770 are owed
at 30th June,
-
we have done something similar.
-
So what are the accounts to record
the expense, salaries expense 770
-
and because we have not paid
these salaries,
-
they will be liability
salaries payable, 770.
-
Here you have salaries
expense 770 debit,
-
salaries payable liability 770.
-
The next one, office equipment has
a five year life with no resale value
-
and is being depreciated at $375
per month for 60 months.
-
Ok, this is the amount per month,
depreciation expense per month.
-
But how many months do we have?
Five months.
-
So we need to multiply 375 by five,
that is 1875
-
so we record depreciation expense
here is the adjusting entry,
-
depreciation expense 1875 debit
-
and we credit the accumulated
depreciation office equipment 1875.
-
And the last.
-
Invoices representing 1500
of services performed during the month
-
have not been recorded.
-
So we provide services, we send
the invoice but we have not recorded
-
so we need to record, simply record
that we have not received cash
-
so we record a debit to
accounts receivable
-
and a credit to service revenue.
-
And here you have 1500
debit account receivable,
-
credit service revenue.
-
So we went a bit more faster through
the adjusting entry
-
because you have seen they're
very similar,
-
so if you become accustomed with this
you will do well in any adjusting entries
-
that you may face in any exercise.
-
They're similar once you become accustomed
to how to record adjusting entries,
-
it will be easier for you to do this.
-
Invoices...
sorry, what was the question reading?
-
Invoices we did combine them.
-
You mean in the last transaction
the number seven?
-
The number seven when it says
invoices representing 1500 of services,
-
yes, it could be one, it could be two,
it could be more than one,
-
but here we put all together
-
because all of them are
for the same period
-
so we can add them and in total
it's 1500.
-
We do not record invoice by invoice
unless they're from different dates
-
and we're preparing
-
each day by day as we did last week,
that is day by day,
-
in that case we need to record each time
but we're preparing adjusting entries.
-
Adjusting entries is for the whole month
-
so we need to include all the invoices
of the month, ok?
-
Because the one point in time
that we're doing this
-
is the last day of the
accounting period
-
so we add all the invoices for the month.
-
Just because we have only one
service revenue account,
-
we have one service revenue account
and therefore we add them.
-
If you remember the ledger last week,
we have one service revenue account
-
or sales revenue account.
-
Now if we have two different accounts
for example
-
we have invoices for services
that we provided
-
and we have invoices for products
that we delivered
-
and we have one service account
and we have one sales revenue account,
-
two different accounts,
one for services one for products,
-
in that case we need to add
all the services invoices
-
and to put them in the service
revenue account
-
and all the sales of products
and we put them in the other account
-
in that case we need to
keep them separated.
-
But if it is only one account
that we are using
-
this is the adjusting entry,
we add all of them.
-
Ok, accounts receivable debit
and services performed credit
-
for the seventh transaction.
-
Ok, well yes.
-
The seventh transaction we have
a number of invoices
-
but the total is 1500.
-
Services performed.
-
Invoices for services performed
means service revenue,
-
we've earned this revenue because
we provided the services
-
so we have a credit in the account
of service revenue, 1500.
-
But we have not received the cash
for this.
-
It doesn't say here that we
buy services for cash
-
so therefore it is an account receivable.
-
We need to debit the
accounts receivable
-
Ok, so once we have this,
all the adjusting entries recorded
-
we can go to our worksheet
-
and here in the worksheet,
the same as we have done,
-
we have the unadjusted trial balance.
-
We copy all the adjtustments here and
we prepare the adjusted trial balance.
-
Ok, I will not repeat this part
because it's very simple.
-
You know for example if you
have account receivable
-
this is the unadjusted trial balance
3150, ok, in here.
-
Debit and in the adjustment
you have another debit.
-
You need to add the two of them
to have the adjusted trial balance.
-
If you have the prepaid insurance debit
and the adjustment is a credit,
-
you need to subtract this and
to calculate the adjusted trial balance.
-
So it's exactly the same as
we have done before.
-
The important thing, all of them,
the unadjusted trial balance,
-
total debit equals total credit.
-
The adjustment, this is the sum
of all the adjusting entries,
-
total debit again equals total credit.
-
The adjusted trial balance again,
total debit again equals total credit.
-
So always in the trial balance,
total debit equals total credit.
-
The same as any journal entry.
Total debit equals total credit.
-
So from that worksheet we can prepare
what is the adjusted trial balance
-
at 30th June after all the adjustments
-
and here you have the adjustment
trial balance.
-
It's just a copy of what we have
in the worksheet.
-
The last problem for today is this one.
-
Here we will start with
the adjusted trial balance.
-
If you remember the previous problem,
we had started the problem
-
with the unadjusted trial balance
and we prepared all the adjustments
-
and at the end we end with
the adjusted trial balance.
-
In this problem we will start
with the adjusted trial balance.
-
So here you have the trial balance
after all adjustments.
-
All adjustments we have
the trial balance.
-
In this exercise which is a different
exercise of course from the previous one
-
you can see trial balance have
the same structure.
-
We have first all the asset accounts,
cash, accounts receivable,
-
office supplies, equipment,
accumulated depreciation equipment
-
which is an asset account
but is credit balance, ok?
-
Then we have the liabilities,
accounts payable, salaries payable,
-
interest payable,
rent revenue received in advance
-
bank loans, all of these are
liabilities accounts.
-
Then we have check capital
and retained earnings.
-
These are equity accounts.
-
Here we have one temporary account,
part of equity dividends.
-
Why is dividends on the debit side?
-
Because dividends decrease
retained earning, ok?
-
But this is a temporary account
that we need to close
-
to retained earnings account,
-
and then we have the income
statements account.
-
Revenues, we have two revenues accounts,
sales revenue and rent revenue,
-
and we have all of these
expenses accounts.
-
And the total of course should be equal.
Total debit equals total credit.
-
So the question or the exercise,
start with the adjusted trial balance.
-
What is required in this question?
-
Prepare the closing entries and prepare
a post closing entries trial balance,
-
just that.
-
Prepare closing entries and prepare
post closing entries trial balance
-
starting with the adjusted trial balance.
-
So we will return to the
adjusted trial balance.
-
How will we prepare the closing entries?
-
We will start with the expenses.
-
Here you have all the expense accounts.
-
How do we close these expenses?
All the expenses accounts?
-
Well, the balance of these accounts
is debit,
-
so to close them,
to leave them with zero balance
-
we need to credit for the same amount.
-
That is the part that I mentioned before,
don't make a mistake.
-
To close these we need to credit,
not to debit.
-
If you debit you will double the balance
of these accounts.
-
So we need to credit by the same amounts.
-
It's very simple, the journal entry.
-
The income summary debit
and expenses credit, exactly George.
-
That is the point.
-
So the journal entry will be
credit salaries expense 11340,
-
credit rent expense 6000,
credit depreciation expense,
-
equipment 1750.
-
Credit supplies expense 900,
credit electricity expense 750.
-
Credit interest expense 500.
-
So you can see, you have to go one by one
closing each of these accounts
-
with a credit entry of the same amount
that we have in the balance.
-
Then you add all of these and you will
record a debit entry
-
in the income summary account
for the sum of all of that.
-
In this case if you add this it's 20990
-
so you record your first closing entry
which is this one.
-
Profit and loss summary or
income summary accounts, 20990,
-
and the credit in all the
expense accounts, ok?
-
Salaries expense, rent expense,
depreciation expense.
-
After this, the balance of all of this
expense accounts will be zero, ok?
-
Because we have the same amount
debits and credits so the balance is zero.
-
Then we close the revenues accounts
and we have two.
-
So we have sales revenue,
and we have rent revenue.
-
Credit balance, so to close this,
we need to debit for the same amount.
-
We need to debit sales revenue,
18600.
-
We need to debit rent revenue 12000,
one by one again.
-
And then we will credit the income
summary account
-
for the total.
-
How much is the total?
30600, the sum of these two,
-
and we have the second closing entry
which is this.
-
Here we have debit, the sales revenue,
the rent revenue, now the balance is zero
-
and we credit the profit and loss summary
or income summary account,
-
you can put the name profit
and loss summary
-
or income summary accounts,
correct.
-
You credit by that amount.
-
So we closed all the expenses
and revenue accounts.
-
But we have opened this
temporary account
-
that is the profit and loss
summary account.
-
We need to close that because
it's also a temporary account.
-
What is the balance of this account
after all of these closing entries?
-
The balance is the difference between
30600 credit
-
and 20990 debit,
-
so the difference will be a credit
because this is higher,
-
will be a credit of 9610.
That is the next closing entry.
-
Because it will be a credit balance
we need to debit this account
-
by 9610.
-
Now this account is zero, ok?
-
The profit and loss summary account,
the balance is zero,
-
we've closed that with this debit entry?
-
What is the credit entry?
-
Retained earnings account
which is a permanent account.
-
So we close all the
income statement accounts
-
and the profit and loss summary accounts
and we only need to close now
-
one additional account that we have
in the adjusted trial balance.
-
Yes Josh?
-
JOSHUA: Could you explain the second last,
the (INAUDIBLE)
-
HERMAN: Sorry, I couldn't hear very well,
can you repeat please?
-
JOSHUA: Yeah, could you explain
the second last transaction
-
which was about the retained earnings?
-
The income summary to retained earnings.
-
HERMAN: Yes, sure, sure.
-
Here you have the...
How many closing entries do we have?
-
The first closing entry we close
all the expenses as I said here.
-
All the expenses are closed
to profit and loss summary account.
-
The second entry we close the revenues.
-
So all the revenues are closed
to profit and loss summary account.
-
Now we need to close the profit
and loss summary account.
-
How much is the balance of
profit and loss summary accounts
-
after the first two closing entries?
-
In the first closing entry we have
a debit of 20990.
-
In the second closing entry
we have a credit of 30600.
-
It's the same account, ok?
-
So we have a credit of 30600,
we have a debit of 20900,
-
what is the balance?
-
The balance will be a credit
because this is higher, ok?
-
We have more credit than debit.
-
We subtract this from the credit
that we have,
-
and the difference will be a credit
of 9610.
-
That is after the second closing entry.
-
We have a debit balance
in this temporary account 9610.
-
Now we want to close that.
How do we close it?
-
Because we have a debit balance,
we need to credit,
-
so we credit by that amount 9610
-
and with that the balance of the profit
and loss summary account is zero now.
-
But in this third closing entry,
the other entry is retained earnings.
-
So in retained earnings, we credit
retained earnings by this amount.
-
You can see that this is the way
that you transfer the profits
-
to retained earnings because the profit
is revenues less expenses.
-
That difference is included
in the profit and loss summary account.
-
We've closed the revenue,
we've closed expenses
-
to profit and loss summary account
so we have a profit of 9610
-
and we close that to retained earnings.
-
And we have one more account.
-
That is dividends.
Here you can see dividends.
-
They will balance 600.
-
Dividends we know is a temporary account
that decrease retained earnings,
-
dividends are paid from retained earnings.
-
We need to close this.
How do we close this?
-
We close to retained earnings account.
-
So to close this which has a debit balance
we need to credit this account
-
and we will debit retained earnings.
-
You can see we've done a
debit to retained earnings,
-
decreased retained earnings.
-
So that last closing entry
-
in which we debit the
retained earnings account.
-
600 and we credit dividends by 600.
-
What is the balance of dividends after
this closing entry? Zero
-
And retained earnings are decreased
by this amount.
-
If you think about what we've learnt
in the first or the second module,
-
how the retained earnings account changed
-
from the beginning of the period
until the end of the period,
-
well we start with the beginning balance
of the retained earnings.
-
We add the profits, we subtract
the dividends
-
and then we have the ending balance
of retained earnings.
-
Now you can see how we do this
through journal entries,
-
actually closing entries.
-
It is exactly the same thing.
-
So now we have the closing entries.
-
We can prepare the post
closing entries trial balance.
-
To prepare the post closing entries
trial balance is very simple
-
and I will show you exactly
how to do this
-
from the adjusted trial balance.
-
This is the adjusted trial balance,
we start with this.
-
What do we have in the
adjusted trial balance?
-
Asset accounts, liabilities accounts,
equity accounts
-
and then we have the revenues,
expenses and dividends accounts
-
that are all temporary.
-
The post closing entry trial balance,
the main difference
-
with the adjusted trial balance is that
in the post closing entry trial balance
-
you only have permanent accounts.
-
Is there any change between
the adjusted trial balance
-
and the post closing entry trial balance
in the asset accounts? No.
-
Because we didn't close any of them.
-
In the liabilities accounts? No.
Because we didn't close any of them.
-
What about equity?
Well, in share capital no,
-
but retained earnings yes.
-
That is the only account
that will be different
-
in the post closing entry trial balance,
compared with the adjusted trial balance.
-
Of course the post closing
entry trial balance,
-
they do not have any income
statement accounts or dividend accounts.
-
We can see easily how we calculate that
going from the retained earnings
-
that you have here, ok?
-
Look at here, 1500.
-
What is that 1500 that we have...
-
That we have in the adjusted
trial balance? Retained earnings.
-
This retained earnings balance is the
beginning balance of retained earnings
-
not the ending balance.
-
This is not the balance at 30th June.
-
This is the beginning balance
of retained earnings.
-
Why is it the beginning balance?
-
Because in this statement which is
the adjusted trial balance
-
you have all revenues,
you have all the expenses,
-
you have the dividends,
so all the accounts that affect
-
the ending balance of retained earnings
are here,
-
and because they are here,
this is the beginning balance.
-
How we transform this to the ending
balance of retained earnings?
-
First we need to add the profit.
What is the profit?
-
We calculate the profit through
the profit and loss summary account.
-
This is the profit 9610
-
so we will need to add 1500 plus 9610
-
and we need to deduct the dividends 600.
-
That's why in the post closing
entries trial balance,
-
all the accounts are the same
as the adjusting trial balance
-
after adjustment but retained earnings
is 10510.
-
How do we calculate this?
-
This is the ending balance
of retained earnings.
-
Here you have the explanation.
-
Beginning balance 1500 that we have
in the adjusted trial balance
-
plus the profit 9610
-
which is the result of the profit
and loss summary account
-
less the dividends, 600.
-
If you calculate this you get,
-
you will get the ending balance
of retained earnings
-
And this will be the total.
-
Total debit, total credit,
that should be the same
-
Any question?
-
All good?
Excellent.
-
Excellent, we've finished.
-
At least we finished earlier
than last week.
-
Last week was a marathon that we did
-
but today we finished earlier
than last week.
-
But if you have any last questions
of course I will be happy to answer you.
-
Anything that you would like
to ask or discuss?
-
Yeah last week was a lot,
yes.
-
Okay, thank you very much.
-
Have a great evening and a great week.
-
Ok, see you next week.
-
Bye, thank you all of you.
Thank you.