[{"Name":"Introduction to Accounting Equation","TopicPlaylistFirstVideoID":0,"Duration":null,"Videos":[{"Watched":false,"Name":"Entity Concept","Duration":"7m 41s","ChapterTopicVideoID":25169,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":"https://www.proprep.uk/Images/Videos_Thumbnails/25169.jpeg","UploadDate":"2021-09-26T13:00:23.6700000","DurationForVideoObject":"PT7M41S","Description":null,"MetaTitle":"Entity Concept: Video + Workbook | Proprep","MetaDescription":"Accounting Equation - Introduction to Accounting Equation. Watch the video made by an expert in the field. Download the workbook and maximize your learning.","Canonical":"https://www.proprep.uk/general-modules/all/introduction-to-financial-accounting-and-reporting/accounting-equation/introduction-to-accounting-equation/vid25987","VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.430","Text":"Hello and welcome to this series of"},{"Start":"00:02.430 ","End":"00:08.295","Text":"video presentations on the accounting equation brought to you by Proprep."},{"Start":"00:08.295 ","End":"00:12.914","Text":"My name is Dave Cowlitz and by the end of the section,"},{"Start":"00:12.914 ","End":"00:18.435","Text":"you\u0027ll be able to: Explain the relevance of the entity theory for accounting,"},{"Start":"00:18.435 ","End":"00:20.880","Text":"describe the accounting equation,"},{"Start":"00:20.880 ","End":"00:24.465","Text":"explain and apply the definitions of an asset,"},{"Start":"00:24.465 ","End":"00:26.025","Text":"liability, and equity,"},{"Start":"00:26.025 ","End":"00:29.952","Text":"as well as the definitions of income and expense,"},{"Start":"00:29.952 ","End":"00:33.180","Text":"analyze basic business transactions,"},{"Start":"00:33.180 ","End":"00:39.070","Text":"and analyze transactions for profit retention and distribution."},{"Start":"00:39.100 ","End":"00:43.595","Text":"This video focuses on the entity theory."},{"Start":"00:43.595 ","End":"00:47.150","Text":"The entity theory and the concept of"},{"Start":"00:47.150 ","End":"00:53.435","Text":"perspective are very important principles to understand when learning accounting."},{"Start":"00:53.435 ","End":"00:56.570","Text":"These will be very important going forward,"},{"Start":"00:56.570 ","End":"01:01.145","Text":"especially when we start to analyze transactions."},{"Start":"01:01.145 ","End":"01:06.485","Text":"Let\u0027s start off by looking at a legal perspective."},{"Start":"01:06.485 ","End":"01:15.330","Text":"Let us assume that your name is Joe Soap and you start a business called the Soap Shop."},{"Start":"01:15.370 ","End":"01:22.770","Text":"Now you start this business as a sole trader, a one-person business."},{"Start":"01:22.770 ","End":"01:25.495","Text":"Now from a legal perspective,"},{"Start":"01:25.495 ","End":"01:29.050","Text":"as a sole trader, you,"},{"Start":"01:29.050 ","End":"01:32.740","Text":"Joe Soap, and the business,"},{"Start":"01:32.740 ","End":"01:39.325","Text":"the Soap Shop are in fact the same legal entity."},{"Start":"01:39.325 ","End":"01:42.955","Text":"This is because as a sole trader,"},{"Start":"01:42.955 ","End":"01:48.010","Text":"your business is not formed in terms of any statute."},{"Start":"01:48.010 ","End":"01:54.550","Text":"You can simply go out one afternoon and form your business and call it the Soap Shop."},{"Start":"01:54.550 ","End":"01:58.940","Text":"So you and the business are the same legal entity."},{"Start":"01:59.070 ","End":"02:03.310","Text":"Now consider what happens if you as"},{"Start":"02:03.310 ","End":"02:08.135","Text":"Joe soap instead of forming your business as a sole trader,"},{"Start":"02:08.135 ","End":"02:13.280","Text":"you form your business as a one-person company."},{"Start":"02:13.280 ","End":"02:17.190","Text":"You establish a company."},{"Start":"02:17.360 ","End":"02:23.520","Text":"Now you as the owner, Joe soap,"},{"Start":"02:23.520 ","End":"02:26.760","Text":"and your one-person company,"},{"Start":"02:26.760 ","End":"02:33.550","Text":"the Soap Shop are separate legal entities."},{"Start":"02:33.550 ","End":"02:36.650","Text":"This is because the company,"},{"Start":"02:36.650 ","End":"02:40.190","Text":"as a legal entity in its own right,"},{"Start":"02:40.190 ","End":"02:47.070","Text":"would have been formed in terms of statute and therefore it has some legal personality."},{"Start":"02:47.300 ","End":"02:53.970","Text":"Think of this business called the Soap Shop as a sole trader,"},{"Start":"02:53.970 ","End":"02:57.445","Text":"you and the Soap Shop are the same legal entity."},{"Start":"02:57.445 ","End":"02:59.779","Text":"But as a one-person company,"},{"Start":"02:59.779 ","End":"03:04.324","Text":"you and the Soap Shop are separate legal entities."},{"Start":"03:04.324 ","End":"03:10.370","Text":"Now thinking towards a large company,"},{"Start":"03:10.370 ","End":"03:13.355","Text":"the shareholders of a large company,"},{"Start":"03:13.355 ","End":"03:19.430","Text":"and the company itself are clearly also separate legal entities."},{"Start":"03:19.430 ","End":"03:25.370","Text":"That maybe makes more intuitive sense because if you are a shareholder,"},{"Start":"03:25.370 ","End":"03:31.459","Text":"you own some shares in a large company listed on a stock exchange."},{"Start":"03:31.459 ","End":"03:34.670","Text":"It should be reasonably obvious that you and"},{"Start":"03:34.670 ","End":"03:38.914","Text":"the company are in fact separate legal entities."},{"Start":"03:38.914 ","End":"03:44.665","Text":"But now let\u0027s consider what happens for accounting purposes."},{"Start":"03:44.665 ","End":"03:48.200","Text":"Think back to the same sole trader,"},{"Start":"03:48.200 ","End":"03:53.600","Text":"you as Joe Soap and your business, the Soap Shop."},{"Start":"03:53.600 ","End":"03:58.920","Text":"Now you as the owner or the sole trader,"},{"Start":"03:58.920 ","End":"04:07.640","Text":"the Soap Shop and the business are in fact now separate accounting entities."},{"Start":"04:07.640 ","End":"04:11.370","Text":"Compare this to the legal perspective."},{"Start":"04:11.370 ","End":"04:14.140","Text":"Although from a legal perspective,"},{"Start":"04:14.140 ","End":"04:16.000","Text":"you, Joe Soap,"},{"Start":"04:16.000 ","End":"04:22.945","Text":"and your business, the Soap Shop are the same legal entity operating as a sole trader."},{"Start":"04:22.945 ","End":"04:28.050","Text":"From accounting purposes, you, Joe Soap,"},{"Start":"04:28.050 ","End":"04:33.839","Text":"and your business, the Soap Shop are separate accounting entities."},{"Start":"04:33.839 ","End":"04:40.120","Text":"This has got a lot of implications going forward in analyzing business transactions."},{"Start":"04:40.120 ","End":"04:46.630","Text":"You will see in later videos that you as the owner can,"},{"Start":"04:46.630 ","End":"04:49.750","Text":"in fact, transact with your business."},{"Start":"04:49.750 ","End":"04:52.090","Text":"You can contribute funds to"},{"Start":"04:52.090 ","End":"04:58.030","Text":"the business or the business could in fact distribute funds to yourself."},{"Start":"04:58.030 ","End":"05:03.280","Text":"Those are transactions happening from an accounting perspective."},{"Start":"05:03.320 ","End":"05:06.574","Text":"Now clearly looking at a company,"},{"Start":"05:06.574 ","End":"05:10.330","Text":"whether that is a large company or a small company,"},{"Start":"05:10.330 ","End":"05:14.320","Text":"the owners who are also called shareholders,"},{"Start":"05:14.320 ","End":"05:21.620","Text":"and the company itself are also clearly separate accounting entities."},{"Start":"05:21.720 ","End":"05:29.485","Text":"To summarize, irrespective of the legal relationship from an accounting perspective,"},{"Start":"05:29.485 ","End":"05:36.335","Text":"the owner and the business are separate accounting entities."},{"Start":"05:36.335 ","End":"05:39.510","Text":"Turning now to perspective,"},{"Start":"05:39.510 ","End":"05:43.275","Text":"accounting always tells a story."},{"Start":"05:43.275 ","End":"05:47.170","Text":"It\u0027s quite useful to think of accounting as a story."},{"Start":"05:47.170 ","End":"05:49.360","Text":"Because as we will learn,"},{"Start":"05:49.360 ","End":"05:54.445","Text":"accounting will tell a story of the performance of the business,"},{"Start":"05:54.445 ","End":"05:58.285","Text":"which will in fact be told in the income statement."},{"Start":"05:58.285 ","End":"06:03.625","Text":"Accounting will tell a story of the financial position of a business,"},{"Start":"06:03.625 ","End":"06:07.630","Text":"which will in fact be told from a balance sheet."},{"Start":"06:07.630 ","End":"06:14.590","Text":"But both those stories are always told from the perspective of"},{"Start":"06:14.590 ","End":"06:22.504","Text":"the business entity and certainly not from the perspective of the owner or owners."},{"Start":"06:22.504 ","End":"06:25.580","Text":"This ties back to the entity theory,"},{"Start":"06:25.580 ","End":"06:28.144","Text":"where the owner and the business,"},{"Start":"06:28.144 ","End":"06:32.885","Text":"from an accounting perspective are separate entities."},{"Start":"06:32.885 ","End":"06:37.310","Text":"The story of the business is also not told from the perspective of"},{"Start":"06:37.310 ","End":"06:42.215","Text":"the customer or in fact, anyone else."},{"Start":"06:42.215 ","End":"06:47.840","Text":"Let\u0027s now think for a moment of the customer,"},{"Start":"06:47.840 ","End":"06:53.840","Text":"a customer coming in to by some soap from the Soap Shop."},{"Start":"06:53.840 ","End":"06:55.640","Text":"Here what I just said,"},{"Start":"06:55.640 ","End":"07:00.820","Text":"the customer comes in and buys some soap from the Soap Shop."},{"Start":"07:00.820 ","End":"07:03.665","Text":"From the customer\u0027s perspective,"},{"Start":"07:03.665 ","End":"07:06.665","Text":"there\u0027s a buying transaction happening."},{"Start":"07:06.665 ","End":"07:09.350","Text":"But remember we\u0027re telling the story from"},{"Start":"07:09.350 ","End":"07:12.590","Text":"the perspective of the business, from the Soap Shop."},{"Start":"07:12.590 ","End":"07:14.915","Text":"From the perspective of the Soap Shop,"},{"Start":"07:14.915 ","End":"07:18.335","Text":"a sale transaction is happening."},{"Start":"07:18.335 ","End":"07:24.200","Text":"That\u0027ll be very important when we start recording business transactions."},{"Start":"07:24.200 ","End":"07:28.730","Text":"The information that comes out from"},{"Start":"07:28.730 ","End":"07:33.935","Text":"the business story needs to be useful to shareholders,"},{"Start":"07:33.935 ","End":"07:36.890","Text":"the owners, and creditors,"},{"Start":"07:36.890 ","End":"07:40.230","Text":"and also any other user."}],"ID":25987},{"Watched":false,"Name":"Determining the Accounting Equation1","Duration":"24m 6s","ChapterTopicVideoID":25168,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:18.967","Text":"Hello"},{"Start":"00:18.967 ","End":"00:29.889","Text":"and"},{"Start":"00:29.889 ","End":"00:55.574","Text":"welcome"},{"Start":"00:55.574 ","End":"01:29.094","Text":"to another"},{"Start":"01:29.094 ","End":"01:47.922","Text":"video"},{"Start":"01:47.922 ","End":"02:33.549","Text":"presentation"},{"Start":"02:33.549 ","End":"02:41.238","Text":"in"},{"Start":"02:41.238 ","End":"02:56.793","Text":"this"},{"Start":"02:56.793 ","End":"03:20.409","Text":"series"},{"Start":"03:20.409 ","End":"03:40.518","Text":"on the"},{"Start":"03:40.518 ","End":"04:21.552","Text":"accounting"},{"Start":"04:21.552 ","End":"04:54.955","Text":"equation"},{"Start":"04:54.955 ","End":"05:24.792","Text":"brought"},{"Start":"05:24.792 ","End":"05:46.991","Text":"to you"},{"Start":"05:46.991 ","End":"05:56.237","Text":"by"},{"Start":"05:56.237 ","End":"06:34.454","Text":"ProPrep."},{"Start":"06:34.454 ","End":"06:44.463","Text":"My"},{"Start":"06:44.463 ","End":"07:05.593","Text":"name"},{"Start":"07:05.593 ","End":"07:16.971","Text":"is"},{"Start":"07:16.971 ","End":"07:42.003","Text":"Dave"},{"Start":"07:42.003 ","End":"07:42.011","Text":"Kolitz"},{"Start":"07:42.011 ","End":"07:42.103","Text":"In this video,"},{"Start":"07:42.103 ","End":"07:42.456","Text":"we will focus on determining the accounting equation."},{"Start":"07:42.456 ","End":"07:42.824","Text":"To understand how we determine the accounting equation,"},{"Start":"07:42.824 ","End":"07:43.294","Text":"let us start off by focusing on the assets of a business because after all,"},{"Start":"07:43.294 ","End":"07:43.625","Text":"the assets are needed in order to generate profits."},{"Start":"07:43.625 ","End":"07:43.935","Text":"Without assets, a business could not function."},{"Start":"07:43.935 ","End":"07:44.098","Text":"Then we ask the question,"},{"Start":"07:44.098 ","End":"07:44.589","Text":"what are the sources of funds available to a business to acquire its assets?"},{"Start":"07:44.589 ","End":"07:45.010","Text":"Now, in understanding and thinking about these sources of funds,"},{"Start":"07:45.010 ","End":"07:45.283","Text":"you have to bear in mind what you learned in"},{"Start":"07:45.283 ","End":"07:45.683","Text":"the previous video about the entity theory and perspective."},{"Start":"07:45.683 ","End":"07:46.123","Text":"We\u0027re looking at this from the perspective of the business entity."},{"Start":"07:46.123 ","End":"07:46.653","Text":"Remember, the owner and the business are in fact separate accounting entities."},{"Start":"07:46.653 ","End":"07:46.938","Text":"Therefore, when we are thinking about what"},{"Start":"07:46.938 ","End":"07:47.255","Text":"sources of funds are available to the business,"},{"Start":"07:47.255 ","End":"07:47.533","Text":"the owners or the investors are in fact 1"},{"Start":"07:47.533 ","End":"07:47.837","Text":"source of funds because the owner is, in fact,"},{"Start":"07:47.837 ","End":"07:48.205","Text":"a separate accounting entity apart from the business,"},{"Start":"07:48.205 ","End":"07:48.517","Text":"so the owner can provide funds to the business."},{"Start":"07:48.517 ","End":"07:48.949","Text":"The business can also borrow funds from lenders, lenders funds."},{"Start":"07:48.949 ","End":"07:49.405","Text":"I want you to think about these 2 sources of funds identified here,"},{"Start":"07:49.405 ","End":"07:49.749","Text":"funds provided by lenders and investors or owners,"},{"Start":"07:49.749 ","End":"07:50.038","Text":"and ask yourself the question, \"Are there,"},{"Start":"07:50.038 ","End":"07:50.424","Text":"in fact, other sources of funds available to a business\"."},{"Start":"07:50.424 ","End":"07:50.828","Text":"You may ask what happens if an investor inherits some funds."},{"Start":"07:50.828 ","End":"07:51.202","Text":"All those become investor\u0027s funds, the owner\u0027s funds."},{"Start":"07:51.202 ","End":"07:51.658","Text":"What happens if the business borrows from a friend or from the bank?"},{"Start":"07:51.658 ","End":"07:52.042","Text":"Irrespective of where the business borrows funds from,"},{"Start":"07:52.042 ","End":"07:52.321","Text":"they are both sourced as lenders\u0027 funds."},{"Start":"07:52.321 ","End":"07:52.681","Text":"Lenders funds, in terms of accounting definitions,"},{"Start":"07:52.681 ","End":"07:52.903","Text":"are referred to as liabilities,"},{"Start":"07:52.903 ","End":"07:53.306","Text":"and investors\u0027 or owners\u0027 funds are referred to as equity."},{"Start":"07:53.306 ","End":"07:53.695","Text":"That gives rise to what we call the accounting equation,"},{"Start":"07:53.695 ","End":"07:54.160","Text":"that all important equation of the assets of a business will always"},{"Start":"07:54.160 ","End":"07:54.710","Text":"equal the liabilities of the business plus the owner\u0027s equity of the business."},{"Start":"07:54.710 ","End":"07:55.228","Text":"You will see this account equation many times in your accounting studies."},{"Start":"07:55.228 ","End":"07:55.607","Text":"It is a very important equation which we will use a lot,"},{"Start":"07:55.607 ","End":"07:56.172","Text":"especially in analyzing transactions and understanding those transactions."},{"Start":"07:56.172 ","End":"07:56.662","Text":"We\u0027ve just seen the determination of the basic accounting equation."},{"Start":"07:56.662 ","End":"07:56.882","Text":"Assets equals liabilities plus equity."},{"Start":"07:56.882 ","End":"07:57.476","Text":"The assets of a business are funded by lenders, liabilities, and by owner\u0027s equity."},{"Start":"07:57.476 ","End":"07:57.971","Text":"Before we move on and look at what type of transactions affect equity,"},{"Start":"07:57.971 ","End":"07:58.470","Text":"let us just think a bit more about the accounting equation and in fact,"},{"Start":"07:58.470 ","End":"07:58.728","Text":"let\u0027s just rearrange it as follows."},{"Start":"07:58.728 ","End":"07:59.342","Text":"We can rearrange the accounting equation to say assets less liabilities is equal to,"},{"Start":"07:59.342 ","End":"07:59.793","Text":"and I\u0027m going to use the abbreviation, OE, for owner\u0027s equity."},{"Start":"07:59.793 ","End":"08:00.380","Text":"What you can see by looking at the accounting equation written in this way is that"},{"Start":"08:00.380 ","End":"08:00.725","Text":"the owner\u0027s equity is the residual interest in"},{"Start":"08:00.725 ","End":"08:01.166","Text":"the assets of the business after subtracting liabilities."},{"Start":"08:01.166 ","End":"08:01.514","Text":"For example, if the business has 100 of assets,"},{"Start":"08:01.514 ","End":"08:01.729","Text":"and it has 60 of liabilities,"},{"Start":"08:01.729 ","End":"08:02.268","Text":"the owner\u0027s equity or owner\u0027s interest in the business is therefore 40."},{"Start":"08:02.268 ","End":"08:02.556","Text":"Or putting it back in the original way,"},{"Start":"08:02.556 ","End":"08:02.916","Text":"you\u0027ve learned about the accounting equation,"},{"Start":"08:02.916 ","End":"08:03.305","Text":"and that is, assets equals liabilities plus owner\u0027s equity."},{"Start":"08:03.305 ","End":"08:03.922","Text":"We simply say assets of the business 100, are funded by liabilities 60+equity 40."},{"Start":"08:03.922 ","End":"08:04.281","Text":"Now, irrespective of which way you look at this"},{"Start":"08:04.281 ","End":"08:04.678","Text":"and both equations say the same thing effectively."},{"Start":"08:04.678 ","End":"08:05.058","Text":"It\u0027s important to understand what equity means."},{"Start":"08:05.058 ","End":"08:05.626","Text":"This is also a further application of the entity theory and perspective."},{"Start":"08:05.626 ","End":"08:06.180","Text":"Now we look at the business story from the perspective of the business."},{"Start":"08:06.180 ","End":"08:06.777","Text":"The owner\u0027s equity is in fact the amount that the business owes to the owner."},{"Start":"08:06.777 ","End":"08:07.055","Text":"In the little example we have here,"},{"Start":"08:07.055 ","End":"08:07.527","Text":"the business has 100 of assets which are funded by lenders,"},{"Start":"08:07.527 ","End":"08:07.913","Text":"liabilities of 60, and the owner\u0027s equity of 40."},{"Start":"08:07.913 ","End":"08:08.069","Text":"That 100 of assets,"},{"Start":"08:08.069 ","End":"08:08.649","Text":"which are the assets of the business from the business\u0027s perspective,"},{"Start":"08:08.649 ","End":"08:09.266","Text":"that business owes 60 to lenders and the business owes 40 back to the owner."},{"Start":"08:09.266 ","End":"08:09.829","Text":"Now, let\u0027s take a look at what types of transactions affect equity."},{"Start":"08:09.829 ","End":"08:10.369","Text":"There are only 4 types of transactions that ever affect equity:"},{"Start":"08:10.369 ","End":"08:10.822","Text":"contributions by owners, distributions to owners,"},{"Start":"08:10.822 ","End":"08:11.542","Text":"the value of income by the business, and the incurring of expenses by the business."},{"Start":"08:11.542 ","End":"08:12.275","Text":"We will look at each of these 4 types of transactions in an example in the next slide."},{"Start":"08:12.275 ","End":"08:12.752","Text":"Now assuming there are no contributions by owners in"},{"Start":"08:12.752 ","End":"08:13.382","Text":"a period and also there are no distributions to owners in the period,"},{"Start":"08:13.382 ","End":"08:13.674","Text":"it should be clear, therefore,"},{"Start":"08:13.674 ","End":"08:14.234","Text":"that if you compare the ending equity to beginning equity,"},{"Start":"08:14.234 ","End":"08:14.664","Text":"we will determine the profit for the period."},{"Start":"08:14.664 ","End":"08:15.171","Text":"That\u0027s clearly because income-expenses equals profit."},{"Start":"08:15.171 ","End":"08:15.714","Text":"Again, we will see an example of this in the next slide."},{"Start":"08:15.714 ","End":"08:16.616","Text":"Let us now take a look at an example of the principles discussed in the previous slide."},{"Start":"08:16.616 ","End":"08:17.368","Text":"We have learned the accounting equation states the assets of"},{"Start":"08:17.368 ","End":"08:18.224","Text":"the entity are equal to the entity\u0027s liabilities plus owner\u0027s equity."},{"Start":"08:18.224 ","End":"08:19.272","Text":"We also discussed that equity is affected only by 4 types of transactions"},{"Start":"08:19.272 ","End":"08:21.085","Text":": contributions by owners,"},{"Start":"08:21.085 ","End":"08:24.285","Text":"distributions to owners,"},{"Start":"08:24.285 ","End":"08:27.270","Text":"the value of income,"},{"Start":"08:27.270 ","End":"08:32.545","Text":"and the incurral of an expense."},{"Start":"08:32.545 ","End":"08:43.225","Text":"Let\u0027s assume that the owners contribute 100 to the business, 100 in cash."},{"Start":"08:43.225 ","End":"08:49.510","Text":"Therefore, you will see that the assets of the business will increase by a 100."},{"Start":"08:49.510 ","End":"08:54.295","Text":"In order to understand the impact of this on the accounting equation,"},{"Start":"08:54.295 ","End":"08:59.020","Text":"we ask ourselves what is the source of those funds?"},{"Start":"08:59.020 ","End":"09:02.185","Text":"Because the funds came from the owner,"},{"Start":"09:02.185 ","End":"09:09.530","Text":"the source of the funds is in fact owner\u0027s equity and not liabilities."},{"Start":"09:09.630 ","End":"09:15.294","Text":"We can see the accounting equation balances a 100 assets"},{"Start":"09:15.294 ","End":"09:23.260","Text":"equals 0 liabilities plus a 100 owner\u0027s equity."},{"Start":"09:23.260 ","End":"09:32.955","Text":"Then let\u0027s assume this business provides services or sells goods for cash,"},{"Start":"09:32.955 ","End":"09:37.390","Text":"so the assets to the business will increase by 50."},{"Start":"09:37.390 ","End":"09:43.123","Text":"We now have to ask the question looking at the accounting equation,"},{"Start":"09:43.123 ","End":"09:49.100","Text":"to whom does the business in fact owe that 50?"},{"Start":"09:49.350 ","End":"09:52.840","Text":"Another way to think of this is that"},{"Start":"09:52.840 ","End":"09:58.780","Text":"the lender\u0027s liabilities and"},{"Start":"09:58.780 ","End":"10:06.380","Text":"the owner\u0027s equity both have claims on the assets."},{"Start":"10:06.900 ","End":"10:13.825","Text":"Therefore, if the business earns 50 in cash by providing a service,"},{"Start":"10:13.825 ","End":"10:17.065","Text":"who has a claim on that 50?"},{"Start":"10:17.065 ","End":"10:23.860","Text":"It clearly won\u0027t be the lenders and the owners will have a claim on that 50,"},{"Start":"10:23.860 ","End":"10:30.370","Text":"and owners equity will increase by 50 in this case when the business"},{"Start":"10:30.370 ","End":"10:38.120","Text":"earned income by providing a service or selling goods for cash."},{"Start":"10:38.730 ","End":"10:44.455","Text":"Now, if the business incurs 30 as expenses,"},{"Start":"10:44.455 ","End":"10:50.440","Text":"let\u0027s assume the business pays out cash of 30 for some business expenses."},{"Start":"10:50.440 ","End":"10:58.520","Text":"The assets of the business will decrease and thinking again of this concept of claims,"},{"Start":"10:58.520 ","End":"11:03.745","Text":"whose claim on the business will decrease?"},{"Start":"11:03.745 ","End":"11:08.425","Text":"It must be the owner\u0027s claim on the business that will decrease."},{"Start":"11:08.425 ","End":"11:15.160","Text":"The lender\u0027s claim can\u0027t decrease if the business incurs a cash expense,"},{"Start":"11:15.160 ","End":"11:22.375","Text":"so the owner\u0027s equity will decrease when the business incurs an expense."},{"Start":"11:22.375 ","End":"11:28.585","Text":"Then finally, if the business distributes cash to its owners,"},{"Start":"11:28.585 ","End":"11:34.150","Text":"let\u0027s assume the business distributes 10 in cash to the owners."},{"Start":"11:34.150 ","End":"11:38.260","Text":"It should be obvious that the owner\u0027s claim"},{"Start":"11:38.260 ","End":"11:43.705","Text":"on the assets of the business must also decrease."},{"Start":"11:43.705 ","End":"11:51.430","Text":"What you\u0027ve seen here in this very short example is that these 4 types of transactions,"},{"Start":"11:51.430 ","End":"11:56.425","Text":"contributions by owners just abbreviate it as C,"},{"Start":"11:56.425 ","End":"12:01.405","Text":"income earned by the business abbreviate to an I,"},{"Start":"12:01.405 ","End":"12:06.475","Text":"expenses incurred by the business, abbreviate to an E,"},{"Start":"12:06.475 ","End":"12:09.055","Text":"and distributions to the owners,"},{"Start":"12:09.055 ","End":"12:15.355","Text":"abbreviate to a D are the only 4 types of transactions that affect equity."},{"Start":"12:15.355 ","End":"12:19.165","Text":"Contributions will increase equity,"},{"Start":"12:19.165 ","End":"12:22.630","Text":"income will increase equity,"},{"Start":"12:22.630 ","End":"12:26.290","Text":"expenses will decrease equity,"},{"Start":"12:26.290 ","End":"12:30.415","Text":"and distributions will decrease equity."},{"Start":"12:30.415 ","End":"12:38.065","Text":"You should also appreciate that income less expenses is equal to profit,"},{"Start":"12:38.065 ","End":"12:43.850","Text":"a concept we will develop further in later slides."},{"Start":"12:44.580 ","End":"12:48.670","Text":"To further develop this concept of profit,"},{"Start":"12:48.670 ","End":"12:55.250","Text":"and our profit impacts upon equity let us take a look at example number 1."},{"Start":"12:55.740 ","End":"12:59.950","Text":"We are assuming in this example that there are"},{"Start":"12:59.950 ","End":"13:06.045","Text":"no contributions or distributions in this period."},{"Start":"13:06.045 ","End":"13:10.500","Text":"In other words, the owner has not contributed any cash to the business,"},{"Start":"13:10.500 ","End":"13:15.790","Text":"and the business has not distributed any cash to the owner."},{"Start":"13:15.900 ","End":"13:18.813","Text":"At the beginning of the period,"},{"Start":"13:18.813 ","End":"13:23.395","Text":"the business has assets of 1,000."},{"Start":"13:23.395 ","End":"13:32.470","Text":"Those assets are funded by liabilities of 400 and equity of 600."},{"Start":"13:32.470 ","End":"13:37.720","Text":"Therefore, you will see the accounting equation in fact balances assets of"},{"Start":"13:37.720 ","End":"13:43.340","Text":"1,000 equals liabilities plus owner\u0027s equity."},{"Start":"13:43.530 ","End":"13:50.170","Text":"Let\u0027s now assume that the business earns income in cash,"},{"Start":"13:50.170 ","End":"13:55.255","Text":"provides a service for cash of 250."},{"Start":"13:55.255 ","End":"13:58.330","Text":"As you\u0027ve seen in the previous slide,"},{"Start":"13:58.330 ","End":"14:00.760","Text":"when the business earns income,"},{"Start":"14:00.760 ","End":"14:06.610","Text":"it is the owners claim on those assets that in fact increases,"},{"Start":"14:06.610 ","End":"14:13.075","Text":"and the 250 represents income earned, which increases equity."},{"Start":"14:13.075 ","End":"14:18.205","Text":"If the business incurs expenses in cash,"},{"Start":"14:18.205 ","End":"14:25.570","Text":"let us say the business pays out 200 as expenses in operating the business."},{"Start":"14:25.570 ","End":"14:28.060","Text":"Again, as we saw before,"},{"Start":"14:28.060 ","End":"14:30.925","Text":"when the business incurs an expense,"},{"Start":"14:30.925 ","End":"14:36.745","Text":"it is the owners claim on the assets which decreases."},{"Start":"14:36.745 ","End":"14:44.200","Text":"We can\u0027t decrease liabilities when the business incurs an expense,"},{"Start":"14:44.200 ","End":"14:50.530","Text":"because the lenders still have a claim of 400 over the assets."},{"Start":"14:50.530 ","End":"14:54.100","Text":"We\u0027ll note down here these as expenses,"},{"Start":"14:54.100 ","End":"14:58.690","Text":"and in fact they are decreasing equity."},{"Start":"14:58.690 ","End":"15:08.409","Text":"You\u0027ll note in accounting that we use a bracket to indicate a negative."},{"Start":"15:08.409 ","End":"15:11.425","Text":"You could use a subtraction sign,"},{"Start":"15:11.425 ","End":"15:16.900","Text":"but accountants often use brackets to indicate a negative."},{"Start":"15:16.900 ","End":"15:25.900","Text":"Further transaction, the business now borrows a further 50 in cash,"},{"Start":"15:25.900 ","End":"15:30.355","Text":"so the assets of the business increase by 50."},{"Start":"15:30.355 ","End":"15:36.190","Text":"Now, in order to determine how this will be recorded in the accounting equation,"},{"Start":"15:36.190 ","End":"15:38.350","Text":"we also solve the question,"},{"Start":"15:38.350 ","End":"15:41.860","Text":"who has a claim on that 50?"},{"Start":"15:41.860 ","End":"15:43.615","Text":"Is it the lenders?"},{"Start":"15:43.615 ","End":"15:45.550","Text":"Or is it the owners?"},{"Start":"15:45.550 ","End":"15:51.490","Text":"Clearly, if the business has borrowed a further 50 in cash,"},{"Start":"15:51.490 ","End":"15:57.790","Text":"it is the lenders or liability which must increase by 50,"},{"Start":"15:57.790 ","End":"16:03.399","Text":"and clearly no effect on equity."},{"Start":"16:03.399 ","End":"16:05.850","Text":"So coming to the end of the period,"},{"Start":"16:05.850 ","End":"16:08.130","Text":"we can total up the assets,"},{"Start":"16:08.130 ","End":"16:11.085","Text":"which comes to 1,100."},{"Start":"16:11.085 ","End":"16:14.640","Text":"Liabilities total to 450,"},{"Start":"16:14.640 ","End":"16:18.345","Text":"and equity totals to 650."},{"Start":"16:18.345 ","End":"16:22.305","Text":"Let us pause for a moment and think what this is saying."},{"Start":"16:22.305 ","End":"16:26.850","Text":"This is it saying; at the end of the period the assets to the business,"},{"Start":"16:26.850 ","End":"16:30.240","Text":"remember this is again from the perspective of the business,"},{"Start":"16:30.240 ","End":"16:36.375","Text":"the assets of the business are 1,100,"},{"Start":"16:36.375 ","End":"16:40.240","Text":"of those assets of 1,100,"},{"Start":"16:40.280 ","End":"16:46.350","Text":"the business owes 450 to lenders,"},{"Start":"16:46.350 ","End":"16:51.809","Text":"and the business owes 650 to the owners."},{"Start":"16:51.809 ","End":"16:58.590","Text":"Remember again, the owners are a separate accounting entity apart from the business."},{"Start":"16:58.590 ","End":"17:03.210","Text":"Again, I could rearrange this and simply say assets minus"},{"Start":"17:03.210 ","End":"17:09.150","Text":"liabilities equals owner\u0027s equity."},{"Start":"17:09.150 ","End":"17:13.710","Text":"The assets of 1,100,"},{"Start":"17:13.710 ","End":"17:16.110","Text":"assets of the business,"},{"Start":"17:16.110 ","End":"17:19.545","Text":"less the amount of the business owes to lenders."},{"Start":"17:19.545 ","End":"17:26.670","Text":"Liabilities of 450 equals the amount of the owner\u0027s interest in the business."},{"Start":"17:26.670 ","End":"17:29.190","Text":"Again, to emphasize the owner\u0027s equity,"},{"Start":"17:29.190 ","End":"17:33.660","Text":"the owners interest in the business is the residual interest of"},{"Start":"17:33.660 ","End":"17:40.410","Text":"the owners in the assets of the business after subtracting liabilities,"},{"Start":"17:40.410 ","End":"17:44.050","Text":"and that gives us a number of 650."},{"Start":"17:44.120 ","End":"17:50.594","Text":"But now if we compare the ending equity,"},{"Start":"17:50.594 ","End":"17:53.295","Text":"which we know as 650,"},{"Start":"17:53.295 ","End":"17:55.605","Text":"the 650 over here,"},{"Start":"17:55.605 ","End":"18:01.005","Text":"compared to the beginning equity of 600."},{"Start":"18:01.005 ","End":"18:06.220","Text":"We can see equity is moved by 50 in the period."},{"Start":"18:06.440 ","End":"18:09.225","Text":"Now what does this 50 represent?"},{"Start":"18:09.225 ","End":"18:12.429","Text":"This movement, in equity?"},{"Start":"18:12.429 ","End":"18:16.070","Text":"Because there were no contributions,"},{"Start":"18:16.070 ","End":"18:19.478","Text":"and no distributions in the period,"},{"Start":"18:19.478 ","End":"18:26.305","Text":"that 50 must represent the profit for the period."},{"Start":"18:26.305 ","End":"18:36.045","Text":"In this case, we know that the income earned was 250 and the expenses incurred were 200."},{"Start":"18:36.045 ","End":"18:42.045","Text":"Clearly therefore, the profit is equal to 50,"},{"Start":"18:42.045 ","End":"18:46.230","Text":"but the important principle to understand by looking at"},{"Start":"18:46.230 ","End":"18:52.575","Text":"the accounting equation is that we can examine the ending equity"},{"Start":"18:52.575 ","End":"19:00.330","Text":"of 650 and compare it to the beginning equity of 600 and determine that"},{"Start":"19:00.330 ","End":"19:05.400","Text":"the profit equals 50 without in fact"},{"Start":"19:05.400 ","End":"19:11.415","Text":"knowing the breakdown of that profit into the income and expenses."},{"Start":"19:11.415 ","End":"19:15.870","Text":"Let us now take a look at example number 2 in further"},{"Start":"19:15.870 ","End":"19:22.244","Text":"understanding the impact of profit on the accounting equation."},{"Start":"19:22.244 ","End":"19:30.975","Text":"Again, this example assumes no contributions and no distributions during the period."},{"Start":"19:30.975 ","End":"19:33.390","Text":"At the beginning of the period,"},{"Start":"19:33.390 ","End":"19:36.270","Text":"there\u0027s owner\u0027s equity of 600,"},{"Start":"19:36.270 ","End":"19:40.245","Text":"there are also abilities of 400,"},{"Start":"19:40.245 ","End":"19:45.480","Text":"and that is how the assets of 1,000 have been funded."},{"Start":"19:45.480 ","End":"19:50.020","Text":"Let us now look at some transactions during the period."},{"Start":"19:50.060 ","End":"19:53.940","Text":"In terms of income earned in cash,"},{"Start":"19:53.940 ","End":"20:01.875","Text":"we would assume the same 250 has been earned in cash as in example number 1."},{"Start":"20:01.875 ","End":"20:07.620","Text":"Example number 1 you saw that when the business earned income,"},{"Start":"20:07.620 ","End":"20:17.080","Text":"the owner\u0027s equity must increase because the owners claim on the assets increases."},{"Start":"20:17.630 ","End":"20:21.060","Text":"This time looking at expenses,"},{"Start":"20:21.060 ","End":"20:25.935","Text":"let\u0027s assume that the business incurs expenses in cash."},{"Start":"20:25.935 ","End":"20:30.735","Text":"It pays expenses in cash of 280."},{"Start":"20:30.735 ","End":"20:32.985","Text":"Now you may have noticed,"},{"Start":"20:32.985 ","End":"20:36.000","Text":"as I\u0027ve been talking about these transactions,"},{"Start":"20:36.000 ","End":"20:41.820","Text":"I haven\u0027t said the owner earned income or the owner incurred"},{"Start":"20:41.820 ","End":"20:48.360","Text":"an expense because we are always looking at this from the perspective of the business."},{"Start":"20:48.360 ","End":"20:50.640","Text":"This may be a sole trader,"},{"Start":"20:50.640 ","End":"20:55.590","Text":"a 1 person business operating as a sole trader but all"},{"Start":"20:55.590 ","End":"20:59.250","Text":"these transactions from an accounting perspective"},{"Start":"20:59.250 ","End":"21:02.950","Text":"are done from perspective of the business entity."},{"Start":"21:02.950 ","End":"21:08.730","Text":"280, cash paid by the business must"},{"Start":"21:08.730 ","End":"21:14.070","Text":"decrease the owner\u0027s equity because as I\u0027ve said before,"},{"Start":"21:14.070 ","End":"21:20.140","Text":"it is the owners claim on those assets, which will decrease."},{"Start":"21:20.210 ","End":"21:24.405","Text":"Now, the business borrows funds."},{"Start":"21:24.405 ","End":"21:29.474","Text":"Again, let\u0027s say the business borrows funds of 50."},{"Start":"21:29.474 ","End":"21:32.820","Text":"The assets to the business increase by 50."},{"Start":"21:32.820 ","End":"21:35.760","Text":"Now who has a claim on those assets?"},{"Start":"21:35.760 ","End":"21:38.445","Text":"Is it the lenders? Or is it the owners?"},{"Start":"21:38.445 ","End":"21:44.115","Text":"Clearly again must be the lenders having a claim on those assets."},{"Start":"21:44.115 ","End":"21:47.550","Text":"We wouldn\u0027t total up the assets at the end of the period,"},{"Start":"21:47.550 ","End":"21:51.240","Text":"the assets total 1,020,"},{"Start":"21:51.240 ","End":"21:56.790","Text":"that 1,020 of assets has been funded 450 by"},{"Start":"21:56.790 ","End":"22:04.710","Text":"lenders liabilities and 570 by owners."},{"Start":"22:04.710 ","End":"22:07.425","Text":"What a state does in a different way,"},{"Start":"22:07.425 ","End":"22:16.470","Text":"of the assets of 1,020 that this business owns at the end of the period,"},{"Start":"22:16.470 ","End":"22:22.920","Text":"the lenders have a claim of 450 on those assets,"},{"Start":"22:22.920 ","End":"22:29.235","Text":"and the owner as a claim of 570 of those assets."},{"Start":"22:29.235 ","End":"22:35.265","Text":"Now what we will do here is look at the owners claim at the beginning of the period,"},{"Start":"22:35.265 ","End":"22:38.835","Text":"and look at the owners claim at the end of the period,"},{"Start":"22:38.835 ","End":"22:47.895","Text":"and you\u0027ll see the owners claim has in fact decreased from 600 to 570."},{"Start":"22:47.895 ","End":"22:50.775","Text":"Looking at it in a slightly different way,"},{"Start":"22:50.775 ","End":"22:56.805","Text":"comparing ending equity, which is 570, beginning equity,"},{"Start":"22:56.805 ","End":"23:04.440","Text":"which is 600 owners equity in the business has in fact decreased by 30,"},{"Start":"23:04.440 ","End":"23:12.850","Text":"which we can see by comparing the 600 over here with the 570."},{"Start":"23:13.010 ","End":"23:19.800","Text":"Now again, we can look at the income minus expenses and we can say income of"},{"Start":"23:19.800 ","End":"23:27.220","Text":"250 minus expenses of 280 in fact gives a loss of 30,"},{"Start":"23:27.410 ","End":"23:33.405","Text":"but even without knowing the detail of that income minus expenses,"},{"Start":"23:33.405 ","End":"23:37.680","Text":"but simply understanding the fact that only 4 types of"},{"Start":"23:37.680 ","End":"23:41.940","Text":"transactions ever affect equity and if there are in fact"},{"Start":"23:41.940 ","End":"23:47.850","Text":"no contributions by the owners and no distributions to"},{"Start":"23:47.850 ","End":"23:56.985","Text":"the owners by comparing the ending equity of 570 to the beginning equity of 600."},{"Start":"23:56.985 ","End":"24:01.350","Text":"The fact that equity has come down must mean that"},{"Start":"24:01.350 ","End":"24:06.790","Text":"this business has incurred a loss for the period."}],"ID":25986},{"Watched":false,"Name":"Balance Sheet","Duration":"20m 30s","ChapterTopicVideoID":26486,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.200","Text":"Hello. Welcome to another video presentation in"},{"Start":"00:04.200 ","End":"00:08.895","Text":"the series on the accounting equation brought to you by appropriate."},{"Start":"00:08.895 ","End":"00:10.800","Text":"My name is Dave [inaudible]."},{"Start":"00:10.800 ","End":"00:14.970","Text":"In this video, we will focus on the balance sheet and"},{"Start":"00:14.970 ","End":"00:20.500","Text":"the definitions of an asset liability and equity."},{"Start":"00:20.900 ","End":"00:27.960","Text":"A balance sheet is also known as a statement of financial position."},{"Start":"00:27.960 ","End":"00:31.470","Text":"This is a summary of the financial position of"},{"Start":"00:31.470 ","End":"00:35.730","Text":"the business at a particular point in time."},{"Start":"00:35.730 ","End":"00:38.760","Text":"This is why the balance sheet is often called a"},{"Start":"00:38.760 ","End":"00:43.980","Text":"snapshot of the financial position of the business."},{"Start":"00:44.260 ","End":"00:50.450","Text":"It lists the resources of the business known as the assets."},{"Start":"00:50.450 ","End":"00:53.090","Text":"As you learned in previous videos,"},{"Start":"00:53.090 ","End":"01:00.410","Text":"the funding of those resources known as liabilities and equity."},{"Start":"01:00.410 ","End":"01:04.760","Text":"These terms assets, liabilities, and equity,"},{"Start":"01:04.760 ","End":"01:06.475","Text":"should be familiar to you,"},{"Start":"01:06.475 ","End":"01:10.040","Text":"because they form the basis of the accounting equation."},{"Start":"01:10.040 ","End":"01:17.375","Text":"Remember, assets equals liabilities plus owner\u0027s equity."},{"Start":"01:17.375 ","End":"01:22.415","Text":"There are 2 common presentation formats for the balance sheet."},{"Start":"01:22.415 ","End":"01:25.265","Text":"1 is the horizontal presentation,"},{"Start":"01:25.265 ","End":"01:26.990","Text":"which we will look at now,"},{"Start":"01:26.990 ","End":"01:29.930","Text":"and the other is a vertical presentation,"},{"Start":"01:29.930 ","End":"01:33.275","Text":"which we will look at on the next slide."},{"Start":"01:33.275 ","End":"01:37.670","Text":"Looking at this horizontal presentation first,"},{"Start":"01:37.670 ","End":"01:43.745","Text":"notice the total assets are 1,000."},{"Start":"01:43.745 ","End":"01:47.705","Text":"The total liabilities are 400,"},{"Start":"01:47.705 ","End":"01:51.470","Text":"the total equity is 600,"},{"Start":"01:51.470 ","End":"01:55.940","Text":"and the accounting equation in fact balances."},{"Start":"01:55.940 ","End":"02:00.245","Text":"Because here you will see that the total assets of"},{"Start":"02:00.245 ","End":"02:07.480","Text":"1,000 is equal to the liabilities of 400 plus the equity of 600."},{"Start":"02:07.480 ","End":"02:11.050","Text":"That is in fact how a balance sheet balances."},{"Start":"02:11.050 ","End":"02:15.670","Text":"It\u0027s called a balance sheet because it balances by"},{"Start":"02:15.670 ","End":"02:20.890","Text":"showing that the assets are equal to the liabilities plus the equity,"},{"Start":"02:20.890 ","End":"02:24.649","Text":"the fundamental accounting equation."},{"Start":"02:24.720 ","End":"02:28.855","Text":"You will see on this balance sheet,"},{"Start":"02:28.855 ","End":"02:36.085","Text":"reference to non-current assets and current assets,"},{"Start":"02:36.085 ","End":"02:40.195","Text":"and also a reference to non-current liabilities,"},{"Start":"02:40.195 ","End":"02:42.760","Text":"as well as current liabilities."},{"Start":"02:42.760 ","End":"02:46.195","Text":"We will focus more on the distinction between"},{"Start":"02:46.195 ","End":"02:52.290","Text":"non-current and current assets and liabilities in later videos."},{"Start":"02:52.330 ","End":"02:58.685","Text":"Here now is an example of a balance sheet in a vertical presentation."},{"Start":"02:58.685 ","End":"03:01.445","Text":"Note the balance sheet still balances."},{"Start":"03:01.445 ","End":"03:06.106","Text":"Here are the total assets of 1,000,"},{"Start":"03:06.106 ","End":"03:09.395","Text":"here are the total liabilities of 400,"},{"Start":"03:09.395 ","End":"03:13.025","Text":"and the total equity of 600."},{"Start":"03:13.025 ","End":"03:16.015","Text":"As you saw on the previous slide,"},{"Start":"03:16.015 ","End":"03:18.110","Text":"and thinking back to the accounting equation,"},{"Start":"03:18.110 ","End":"03:19.955","Text":"which we\u0027ll write out again,"},{"Start":"03:19.955 ","End":"03:26.055","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"03:26.055 ","End":"03:30.320","Text":"All we are doing in a vertical presentation format is saying"},{"Start":"03:30.320 ","End":"03:35.799","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"03:35.799 ","End":"03:38.120","Text":"We\u0027ll put the = sign over here,"},{"Start":"03:38.120 ","End":"03:40.190","Text":"and the + sign over there."},{"Start":"03:40.190 ","End":"03:44.420","Text":"The balance sheet in fact, still balances."},{"Start":"03:44.420 ","End":"03:47.435","Text":"What you see at the bottom of the screen,"},{"Start":"03:47.435 ","End":"03:50.695","Text":"there\u0027s a term called net assets."},{"Start":"03:50.695 ","End":"03:56.105","Text":"Now, the term net assets refers to assets less liabilities."},{"Start":"03:56.105 ","End":"03:57.920","Text":"Net assets in fact,"},{"Start":"03:57.920 ","End":"04:01.820","Text":"is equal to the owner\u0027s equity."},{"Start":"04:01.820 ","End":"04:05.400","Text":"We can rearrange this accounting equation."},{"Start":"04:05.400 ","End":"04:09.950","Text":"Instead of saying assets equals liabilities + owner\u0027s equity,"},{"Start":"04:09.950 ","End":"04:18.065","Text":"we can simply say assets - liabilities equals owner\u0027s equity."},{"Start":"04:18.065 ","End":"04:23.120","Text":"Owner\u0027s equity is in fact the net assets,"},{"Start":"04:23.120 ","End":"04:27.350","Text":"meaning assets less liabilities."},{"Start":"04:27.350 ","End":"04:32.660","Text":"We are now going to focus on the definitions of the balance sheet elements."},{"Start":"04:32.660 ","End":"04:35.960","Text":"Now remember, there are only 3 elements on"},{"Start":"04:35.960 ","End":"04:40.055","Text":"the balance sheet: assets, liabilities, and equity."},{"Start":"04:40.055 ","End":"04:42.605","Text":"As you will see in later slides,"},{"Start":"04:42.605 ","End":"04:49.655","Text":"there are in fact 2 elements belonging to the income statement; income and expenses."},{"Start":"04:49.655 ","End":"04:52.940","Text":"Let us start with the asset definition."},{"Start":"04:52.940 ","End":"04:59.060","Text":"An asset is defined as a present economic resource,"},{"Start":"04:59.060 ","End":"05:06.539","Text":"which is controlled by the entity as a result of past events."},{"Start":"05:06.580 ","End":"05:11.150","Text":"That present economic resource in turn is"},{"Start":"05:11.150 ","End":"05:17.989","Text":"a right that has the potential to produce economic benefits."},{"Start":"05:17.989 ","End":"05:20.975","Text":"Before we look at some examples,"},{"Start":"05:20.975 ","End":"05:25.040","Text":"let us spend a bit of time unpacking and looking"},{"Start":"05:25.040 ","End":"05:29.800","Text":"at each of these component parts of the asset definition."},{"Start":"05:29.800 ","End":"05:34.325","Text":"You see that an economic resource is a right."},{"Start":"05:34.325 ","End":"05:41.479","Text":"That right has the potential or must have the potential to produce economic benefits."},{"Start":"05:41.479 ","End":"05:48.650","Text":"Therefore, the term economic resource emphasizes that the resource is not for example,"},{"Start":"05:48.650 ","End":"05:53.330","Text":"a physical object, such as maybe inventory or equipment,"},{"Start":"05:53.330 ","End":"05:58.595","Text":"but it\u0027s rather a right over that physical object."},{"Start":"05:58.595 ","End":"06:06.810","Text":"Those rights that have the potential to produce economic benefits may take many forms,"},{"Start":"06:06.810 ","End":"06:11.010","Text":"and this we will look at in the examples that follow."},{"Start":"06:11.020 ","End":"06:16.865","Text":"Control links the economic resource to the entity."},{"Start":"06:16.865 ","End":"06:21.410","Text":"This means that the entity is able to direct how"},{"Start":"06:21.410 ","End":"06:27.230","Text":"the economic resources are used and is able to obtain the potential benefits."},{"Start":"06:27.230 ","End":"06:35.375","Text":"Control of an economic resource usually arises from the ability to enforce legal rights."},{"Start":"06:35.375 ","End":"06:40.265","Text":"Again, this we will examine further in examples that follow."},{"Start":"06:40.265 ","End":"06:43.265","Text":"Looking at the past events,"},{"Start":"06:43.265 ","End":"06:46.820","Text":"for a resource to be a present economic resource,"},{"Start":"06:46.820 ","End":"06:50.015","Text":"it must have arisen from a past event."},{"Start":"06:50.015 ","End":"06:56.075","Text":"In other words, an event that occurred on or before the reporting date."},{"Start":"06:56.075 ","End":"07:02.310","Text":"The reporting date being the last day of the reporting period of financial year."},{"Start":"07:03.100 ","End":"07:07.490","Text":"Let\u0027s now take a look at some application examples and"},{"Start":"07:07.490 ","End":"07:11.855","Text":"apply the definition of the asset to some common items."},{"Start":"07:11.855 ","End":"07:14.450","Text":"Starting with equipment."},{"Start":"07:14.450 ","End":"07:18.155","Text":"To decide if equipment is in fact an asset,"},{"Start":"07:18.155 ","End":"07:20.495","Text":"which maybe intuitively it is."},{"Start":"07:20.495 ","End":"07:24.485","Text":"[inaudible] the definition of an asset to equipment."},{"Start":"07:24.485 ","End":"07:26.390","Text":"The starting point then,"},{"Start":"07:26.390 ","End":"07:30.780","Text":"is there a present economic resource."},{"Start":"07:30.850 ","End":"07:34.130","Text":"The present economic resource means there must be"},{"Start":"07:34.130 ","End":"07:39.289","Text":"a right that is the potential for future benefits."},{"Start":"07:39.289 ","End":"07:41.615","Text":"We also solve the question,"},{"Start":"07:41.615 ","End":"07:45.380","Text":"what right does an entity have over the equipment?"},{"Start":"07:45.380 ","End":"07:49.890","Text":"The right here will be to use the equipment."},{"Start":"07:50.440 ","End":"07:57.920","Text":"What potential future benefits will flow to the entity from using the equipment?"},{"Start":"07:57.920 ","End":"08:02.260","Text":"Will there be probably future cash flows"},{"Start":"08:02.260 ","End":"08:09.080","Text":"from selling the items produced by that equipment?"},{"Start":"08:09.080 ","End":"08:12.200","Text":"Secondly, we asked ourselves the question,"},{"Start":"08:12.200 ","End":"08:16.580","Text":"is the equipment controlled by the entity?"},{"Start":"08:16.580 ","End":"08:19.159","Text":"Will be controlled by the entity,"},{"Start":"08:19.159 ","End":"08:23.404","Text":"typically through a legal right of ownership."},{"Start":"08:23.404 ","End":"08:25.730","Text":"Then the last question,"},{"Start":"08:25.730 ","End":"08:28.310","Text":"is there in fact a past event?"},{"Start":"08:28.310 ","End":"08:35.940","Text":"The past event would be the original purchase of the equipment."},{"Start":"08:37.140 ","End":"08:43.240","Text":"Let\u0027s now look at the example relating to accounts receivable or"},{"Start":"08:43.240 ","End":"08:50.440","Text":"debtors and decide if these items meet the definition of an asset."},{"Start":"08:50.440 ","End":"08:56.260","Text":"You should know that accounts receivable or debtors come about when"},{"Start":"08:56.260 ","End":"09:02.125","Text":"an entity sells goods or provide services to customers on credit."},{"Start":"09:02.125 ","End":"09:08.290","Text":"In other words, the goods are sold or the services are provided in"},{"Start":"09:08.290 ","End":"09:15.760","Text":"the current period and the customer will only pay the amount owing in a future period."},{"Start":"09:15.890 ","End":"09:18.725","Text":"You have to say intuitively,"},{"Start":"09:18.725 ","End":"09:23.050","Text":"debtors or accounts receivable are an asset but let"},{"Start":"09:23.050 ","End":"09:27.790","Text":"us prove that by applying the definition of an asset."},{"Start":"09:27.790 ","End":"09:29.800","Text":"You start off by saying,"},{"Start":"09:29.800 ","End":"09:33.925","Text":"is there a present economic resource?"},{"Start":"09:33.925 ","End":"09:37.030","Text":"For there to be a present economic resource,"},{"Start":"09:37.030 ","End":"09:42.685","Text":"there needs to be a right which has the potential for future benefits."},{"Start":"09:42.685 ","End":"09:45.505","Text":"You have to ask yourself the question,"},{"Start":"09:45.505 ","End":"09:51.475","Text":"what right is associated with the asset accounts receivable or debtors."},{"Start":"09:51.475 ","End":"09:59.684","Text":"The right here, is in fact to collect the amounts owing from the customers."},{"Start":"09:59.684 ","End":"10:04.209","Text":"Will they give rise to potential future benefits?"},{"Start":"10:04.209 ","End":"10:08.590","Text":"Yes, it will because when the amounts are collected from the customers,"},{"Start":"10:08.590 ","End":"10:12.940","Text":"there\u0027ll be a receipt of cash in the future."},{"Start":"10:12.940 ","End":"10:16.732","Text":"Is this item controlled by the entity?"},{"Start":"10:16.732 ","End":"10:18.400","Text":"The answer is going to be yes,"},{"Start":"10:18.400 ","End":"10:22.970","Text":"it\u0027s controlled through a legal contract of sale."},{"Start":"10:23.370 ","End":"10:28.220","Text":"Lastly, is there a past event?"},{"Start":"10:28.220 ","End":"10:32.050","Text":"The past event relating to the asset accounts"},{"Start":"10:32.050 ","End":"10:38.120","Text":"receivable will be the sale of the goods to the customer."},{"Start":"10:38.820 ","End":"10:43.820","Text":"Let us turn now the definition of a liability."},{"Start":"10:43.830 ","End":"10:51.340","Text":"A liability is defined as a present obligation of the entity to"},{"Start":"10:51.340 ","End":"10:59.065","Text":"transfer an economic resource and this is also as a result of past events."},{"Start":"10:59.065 ","End":"11:04.150","Text":"A note that present obligation is a duty"},{"Start":"11:04.150 ","End":"11:11.080","Text":"or responsibility that the entity has no practical way to avoid."},{"Start":"11:11.080 ","End":"11:17.800","Text":"Looking at the duty or responsibility that the entity has no practical way to avoid,"},{"Start":"11:17.800 ","End":"11:23.020","Text":"this often comes about as a result of a legal obligation."},{"Start":"11:23.020 ","End":"11:28.099","Text":"We will examine some examples in the next few slides."},{"Start":"11:28.350 ","End":"11:35.080","Text":"The transfer of an economic resources will often be in the form of cash."},{"Start":"11:35.080 ","End":"11:39.475","Text":"Although as you will also see in later presentations,"},{"Start":"11:39.475 ","End":"11:46.315","Text":"resources other than cash may in fact be transferred in order to settle the obligation."},{"Start":"11:46.315 ","End":"11:48.625","Text":"Again, similar to assets,"},{"Start":"11:48.625 ","End":"11:55.400","Text":"the obligation has to rise as a result of a past event."},{"Start":"11:56.190 ","End":"12:01.090","Text":"Here is an example of a loan from the bank."},{"Start":"12:01.090 ","End":"12:04.375","Text":"The entity has borrowed money from the bank."},{"Start":"12:04.375 ","End":"12:09.340","Text":"Again, intuitively, the loan from the bank is a liability."},{"Start":"12:09.340 ","End":"12:14.605","Text":"But let us examine this in relation to the liability definition."},{"Start":"12:14.605 ","End":"12:17.815","Text":"Is there a present obligation?"},{"Start":"12:17.815 ","End":"12:25.405","Text":"Is there a duty or responsibility that the entity has no practical way of avoiding?"},{"Start":"12:25.405 ","End":"12:32.485","Text":"The duty responsibility here is to repay the amount to the bank,"},{"Start":"12:32.485 ","End":"12:35.575","Text":"is to repay the loan,"},{"Start":"12:35.575 ","End":"12:40.300","Text":"which the entity will have a legal obligation to do so."},{"Start":"12:40.300 ","End":"12:45.564","Text":"Looking at the transfer of an economic resource,"},{"Start":"12:45.564 ","End":"12:53.770","Text":"cash will be used to repay the loan to the bank and is there a past event."},{"Start":"12:53.770 ","End":"13:00.835","Text":"The past event here will be the original borrowing of the cash in the first place."},{"Start":"13:00.835 ","End":"13:08.500","Text":"Further example looks at the liability accounts payable or creditors."},{"Start":"13:08.500 ","End":"13:13.555","Text":"The opposite side of the coin to accounts receivable or debtors,"},{"Start":"13:13.555 ","End":"13:17.080","Text":"the liability accounts payable or creditors comes"},{"Start":"13:17.080 ","End":"13:22.990","Text":"about where the entity purchases goods or services on credit."},{"Start":"13:22.990 ","End":"13:26.590","Text":"In other words, it buys the goods in the current period,"},{"Start":"13:26.590 ","End":"13:29.890","Text":"or has access to the services in the current period,"},{"Start":"13:29.890 ","End":"13:34.555","Text":"but will only pay the supplier in a later period."},{"Start":"13:34.555 ","End":"13:37.420","Text":"Give your answers to solve the question,"},{"Start":"13:37.420 ","End":"13:40.750","Text":"is there a present obligation?"},{"Start":"13:40.750 ","End":"13:44.830","Text":"In other words, is there a duty or responsibility"},{"Start":"13:44.830 ","End":"13:49.525","Text":"that the entity has no practical way of avoiding?"},{"Start":"13:49.525 ","End":"13:52.630","Text":"The duty here is clearly to pay"},{"Start":"13:52.630 ","End":"13:59.395","Text":"the supplier from whom the entity obtained these goods or services."},{"Start":"13:59.395 ","End":"14:02.170","Text":"There\u0027ll be no practical way of avoiding"},{"Start":"14:02.170 ","End":"14:05.770","Text":"this obligation because there\u0027s probably going to be"},{"Start":"14:05.770 ","End":"14:12.880","Text":"a legal contract relating to the purchase of those goods."},{"Start":"14:12.880 ","End":"14:17.950","Text":"Will there be a transfer of an economic resource?"},{"Start":"14:17.950 ","End":"14:20.440","Text":"The answer clearly is, yes,"},{"Start":"14:20.440 ","End":"14:24.069","Text":"we\u0027ll use cash to pay the supplier."},{"Start":"14:24.069 ","End":"14:29.470","Text":"The past event in this scenario is going to be"},{"Start":"14:29.470 ","End":"14:35.920","Text":"the obtaining of economic benefits from receiving the goods or services."},{"Start":"14:35.920 ","End":"14:43.490","Text":"We\u0027re just going to put over here the receipt of those goods or services."},{"Start":"14:44.580 ","End":"14:49.675","Text":"Finally, we turn our attention to the definition of equity."},{"Start":"14:49.675 ","End":"14:54.430","Text":"Equity is defined as the residual interest in"},{"Start":"14:54.430 ","End":"14:59.590","Text":"the assets of the entity after deducting all of its liabilities."},{"Start":"14:59.590 ","End":"15:07.960","Text":"As mentioned before, equity is also often known as the net assets of the business entity."},{"Start":"15:07.960 ","End":"15:13.900","Text":"Assets clearly means assets less liabilities, which as you know,"},{"Start":"15:13.900 ","End":"15:18.565","Text":"is simply another way of stating the accounting equation,"},{"Start":"15:18.565 ","End":"15:25.360","Text":"of assets equals liabilities plus owner\u0027s equity."},{"Start":"15:25.360 ","End":"15:33.175","Text":"It is important to understand that equity does not refer to cash."},{"Start":"15:33.175 ","End":"15:36.565","Text":"There\u0027s no cash inside equity."},{"Start":"15:36.565 ","End":"15:40.285","Text":"Let us take a look at this very simple example."},{"Start":"15:40.285 ","End":"15:46.990","Text":"If a business has assets of 100,"},{"Start":"15:46.990 ","End":"15:50.950","Text":"all represented by cash,"},{"Start":"15:50.950 ","End":"15:54.865","Text":"and the business has liabilities,"},{"Start":"15:54.865 ","End":"16:01.195","Text":"obligations to lenders of, for example, 60."},{"Start":"16:01.195 ","End":"16:06.010","Text":"We know the balance sheet will balance by saying assets are a 100,"},{"Start":"16:06.010 ","End":"16:14.950","Text":"liabilities are 60, and owner\u0027s equity is 40 and the balance sheet will clearly balanced."},{"Start":"16:14.950 ","End":"16:18.892","Text":"Now looking at this equity figure of 40,"},{"Start":"16:18.892 ","End":"16:24.550","Text":"all that 40 Is representing and going through the 3 components or"},{"Start":"16:24.550 ","End":"16:30.610","Text":"the 3 alternative ways to understand or define equity,"},{"Start":"16:30.610 ","End":"16:37.885","Text":"that 40 is the residual interest in the assets of 100,"},{"Start":"16:37.885 ","End":"16:48.145","Text":"after deducting liabilities of 60 or the 40 is simply the net assets of the entity."},{"Start":"16:48.145 ","End":"16:57.115","Text":"In the words, the 40 is the assets less liabilities equals owner\u0027s equity of 40."},{"Start":"16:57.115 ","End":"17:01.000","Text":"But there\u0027s no cash in that 40."},{"Start":"17:01.000 ","End":"17:08.395","Text":"The only cash in this business is the cash sitting in the assets of 100."},{"Start":"17:08.395 ","End":"17:13.270","Text":"Equity can also be thought of thinking back to perspective."},{"Start":"17:13.270 ","End":"17:16.130","Text":"Because remember we prepare financial statements from"},{"Start":"17:16.130 ","End":"17:19.325","Text":"the perspective of the business entity."},{"Start":"17:19.325 ","End":"17:26.540","Text":"Equity can also be thought of as the amount the business owes back to the owner."},{"Start":"17:26.540 ","End":"17:29.345","Text":"Looking again at the simple balance sheet,"},{"Start":"17:29.345 ","End":"17:33.405","Text":"this entity here has resources of 100,"},{"Start":"17:33.405 ","End":"17:40.400","Text":"of those resources are 100 the entity has an obligation to lenders of 60,"},{"Start":"17:40.400 ","End":"17:45.660","Text":"and the entity owes the balance of 40 to the owner."},{"Start":"17:46.870 ","End":"17:52.850","Text":"The name balance sheet implies it\u0027s a sheet which balances."},{"Start":"17:52.850 ","End":"17:55.415","Text":"How does the balance sheet balance?"},{"Start":"17:55.415 ","End":"18:00.169","Text":"The balance sheet balances through the accounting equation."},{"Start":"18:00.169 ","End":"18:07.813","Text":"Looking at the equation in the form of assets equals liabilities plus equity,"},{"Start":"18:07.813 ","End":"18:11.480","Text":"we here have total assets of 7,200,"},{"Start":"18:11.480 ","End":"18:20.245","Text":"which in this example equals the abilities of 4,500 and the equity of 2,700."},{"Start":"18:20.245 ","End":"18:26.360","Text":"The second example, we have the same assets of 7,200."},{"Start":"18:26.360 ","End":"18:30.540","Text":"We subtract the liabilities of 4,400."},{"Start":"18:30.540 ","End":"18:36.305","Text":"We end up with the equity or net assets of 2700."},{"Start":"18:36.305 ","End":"18:45.480","Text":"Both of these are examples of displaying how a balance sheet, in fact, balances."},{"Start":"18:45.520 ","End":"18:49.280","Text":"Here we have an example from"},{"Start":"18:49.280 ","End":"18:55.310","Text":"the published financial statements of the large retail group, Marks and Spencer."},{"Start":"18:55.310 ","End":"19:00.380","Text":"There are many items here which you will not understand that it\u0027s not important."},{"Start":"19:00.380 ","End":"19:03.350","Text":"The important item here is to look at"},{"Start":"19:03.350 ","End":"19:08.135","Text":"the assets of Marks and Spencer and as mentioned before,"},{"Start":"19:08.135 ","End":"19:12.695","Text":"they have non-current assets and current assets."},{"Start":"19:12.695 ","End":"19:16.849","Text":"But importantly here, the total assets"},{"Start":"19:16.849 ","End":"19:24.090","Text":"or number of 7,200.2."},{"Start":"19:24.090 ","End":"19:28.100","Text":"Looking at the liability side of the balance sheet,"},{"Start":"19:28.100 ","End":"19:33.660","Text":"they have also current liabilities and non-current liabilities,"},{"Start":"19:33.660 ","End":"19:39.539","Text":"and without paying too much attention to the individual line items,"},{"Start":"19:39.539 ","End":"19:42.170","Text":"we see that the current liabilities"},{"Start":"19:42.170 ","End":"19:51.180","Text":"total 2,228.4 and non-current liabilities total 2,290.9."},{"Start":"19:51.180 ","End":"19:54.290","Text":"If you remember those 2 numbers, we just looked at,"},{"Start":"19:54.290 ","End":"19:59.930","Text":"the total assets were 7,200.2 and"},{"Start":"19:59.930 ","End":"20:06.060","Text":"the total liabilities come to 4,519.3."},{"Start":"20:06.060 ","End":"20:14.521","Text":"Applying the accounting equation of assets less liabilities equals equity,"},{"Start":"20:14.521 ","End":"20:19.625","Text":"we know equity must be 2,680.9,"},{"Start":"20:19.625 ","End":"20:22.963","Text":"and on the balance sheet of Marks and Spencer,"},{"Start":"20:22.963 ","End":"20:27.720","Text":"we do see here equity of 2,680.9."}],"ID":27401},{"Watched":false,"Name":"Income Statement","Duration":"13m 12s","ChapterTopicVideoID":25170,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.080 ","End":"00:06.870","Text":"The income statement is also known as the statement of profit or loss."},{"Start":"00:06.870 ","End":"00:09.060","Text":"This is a summary of"},{"Start":"00:09.060 ","End":"00:17.510","Text":"the financial performance of the business over a particular period of time."},{"Start":"00:17.510 ","End":"00:21.620","Text":"Take a moment now to compare this with the definition of"},{"Start":"00:21.620 ","End":"00:26.330","Text":"the balance sheet which we discussed in the previous video."},{"Start":"00:26.330 ","End":"00:31.855","Text":"The balance sheet was known as a statement of financial position,"},{"Start":"00:31.855 ","End":"00:35.705","Text":"and it showed the financial position of the business"},{"Start":"00:35.705 ","End":"00:40.130","Text":"at a particular point in time whereas here you see"},{"Start":"00:40.130 ","End":"00:42.170","Text":"the income statement shows"},{"Start":"00:42.170 ","End":"00:48.860","Text":"the financial performance of the business over a period of time."},{"Start":"00:48.860 ","End":"00:57.420","Text":"There are 2 elements or components of the income statements: income and expenses."},{"Start":"00:57.420 ","End":"01:04.250","Text":"An income less expenses equals the profit of the business entity."},{"Start":"01:04.250 ","End":"01:11.365","Text":"We now need to turn our attention to definitions of these 2 income statement elements,"},{"Start":"01:11.365 ","End":"01:17.710","Text":"the definitions of income and of expenses."},{"Start":"01:17.710 ","End":"01:21.970","Text":"Looking at the definition of income first."},{"Start":"01:21.970 ","End":"01:28.870","Text":"Income is defined as an increase in assets,"},{"Start":"01:28.870 ","End":"01:34.255","Text":"or a decrease in liabilities."},{"Start":"01:34.255 ","End":"01:38.530","Text":"In other words, income can come about either"},{"Start":"01:38.530 ","End":"01:43.885","Text":"when assets increase or when liabilities decrease."},{"Start":"01:43.885 ","End":"01:47.020","Text":"We will see examples of this in"},{"Start":"01:47.020 ","End":"01:51.235","Text":"both this presentation and in later presentations as well,"},{"Start":"01:51.235 ","End":"01:55.625","Text":"but it\u0027s probably worthwhile just to think about this for a moment."},{"Start":"01:55.625 ","End":"01:59.170","Text":"Remember that whenever you are processing"},{"Start":"01:59.170 ","End":"02:05.705","Text":"an accounting transaction which is going to result in the recognition of income,"},{"Start":"02:05.705 ","End":"02:13.225","Text":"it will always be a corresponding increase in assets or a decrease in liabilities."},{"Start":"02:13.225 ","End":"02:17.575","Text":"If there\u0027s no increase in assets or decrease in liabilities,"},{"Start":"02:17.575 ","End":"02:21.780","Text":"there cannot possibly be any income earned."},{"Start":"02:21.780 ","End":"02:28.670","Text":"The definition goes on further to say that those increases in assets or decreases in"},{"Start":"02:28.670 ","End":"02:36.005","Text":"liabilities will result in an increase in equity because when income is earned,"},{"Start":"02:36.005 ","End":"02:40.655","Text":"it is the owners who will ultimately benefit from that income."},{"Start":"02:40.655 ","End":"02:44.150","Text":"The lenders will not have any claim on"},{"Start":"02:44.150 ","End":"02:48.710","Text":"the increased assets resulting from income being earned."},{"Start":"02:48.710 ","End":"02:58.569","Text":"But also note that the definition excludes contributions from holders of equity claims."},{"Start":"02:58.569 ","End":"03:01.170","Text":"Now the holders of equity claims,"},{"Start":"03:01.170 ","End":"03:06.545","Text":"simply another word for owners of the business."},{"Start":"03:06.545 ","End":"03:12.175","Text":"The owners or the shareholders are the holders of the equity claims."},{"Start":"03:12.175 ","End":"03:17.180","Text":"Now the definition had to exclude contributions from holders,"},{"Start":"03:17.180 ","End":"03:21.750","Text":"and this, we will explain further in the next slide."},{"Start":"03:21.830 ","End":"03:25.125","Text":"We will now consider the definition again,"},{"Start":"03:25.125 ","End":"03:29.740","Text":"and this time apply it to a couple examples."},{"Start":"03:29.740 ","End":"03:35.750","Text":"If the income definition reads an increase in assets,"},{"Start":"03:35.750 ","End":"03:42.845","Text":"let\u0027s assume the business entity provides a service for cash."},{"Start":"03:42.845 ","End":"03:46.910","Text":"The cash asset will increase by let\u0027s say, for example,"},{"Start":"03:46.910 ","End":"03:51.740","Text":"100. Who has a claim on that?"},{"Start":"03:51.740 ","End":"03:53.695","Text":"It\u0027s not the lenders."},{"Start":"03:53.695 ","End":"03:59.075","Text":"Therefore, the owners must have a claim on that asset, and therefore,"},{"Start":"03:59.075 ","End":"04:06.700","Text":"equity increases, and we will designate that with an I for income."},{"Start":"04:06.700 ","End":"04:10.355","Text":"Now, from a purely mathematical perspective,"},{"Start":"04:10.355 ","End":"04:14.660","Text":"a decrease in liabilities will also give rise to"},{"Start":"04:14.660 ","End":"04:19.760","Text":"an increase in equity and the earning of income."},{"Start":"04:19.760 ","End":"04:23.660","Text":"But we can only look at examples of this once we have"},{"Start":"04:23.660 ","End":"04:28.080","Text":"covered some more principles in this accounting course."},{"Start":"04:28.080 ","End":"04:37.665","Text":"Turning now to the increases in equity excluding the contributions from the owners,"},{"Start":"04:37.665 ","End":"04:41.375","Text":"other words, holders of equity claims."},{"Start":"04:41.375 ","End":"04:46.795","Text":"If the owners invest cash into the business,"},{"Start":"04:46.795 ","End":"04:51.875","Text":"so there is a investment of cash by the owners,"},{"Start":"04:51.875 ","End":"04:53.685","Text":"and the owners, for example,"},{"Start":"04:53.685 ","End":"04:57.915","Text":"invest 5,000 cash into the business."},{"Start":"04:57.915 ","End":"05:03.880","Text":"That 5,000 investment in cash increases the assets to the business."},{"Start":"05:03.880 ","End":"05:08.050","Text":"The lenders can\u0027t have any claim on those assets."},{"Start":"05:08.050 ","End":"05:10.575","Text":"Therefore, owner\u0027s equity,"},{"Start":"05:10.575 ","End":"05:13.520","Text":"as you know from previous examples,"},{"Start":"05:13.520 ","End":"05:19.380","Text":"must increase when owners contribute cash to the business,"},{"Start":"05:19.380 ","End":"05:24.820","Text":"but that contribution of cash by the owner cannot represent"},{"Start":"05:24.820 ","End":"05:31.940","Text":"income because remember the income refers to the measure of performance,"},{"Start":"05:31.940 ","End":"05:35.630","Text":"how well has the business performed in the period,"},{"Start":"05:35.630 ","End":"05:42.955","Text":"and contributions of cash by an owner can\u0027t affect performance."},{"Start":"05:42.955 ","End":"05:47.160","Text":"We will refer to this 5,000 as,"},{"Start":"05:47.160 ","End":"05:49.545","Text":"I\u0027m going to use the abbreviation C,"},{"Start":"05:49.545 ","End":"05:53.340","Text":"a capital contribution to equity."},{"Start":"05:53.340 ","End":"05:58.510","Text":"It increases equity, but it does not income."},{"Start":"05:58.510 ","End":"06:02.380","Text":"Now for that reason, the income definition had to"},{"Start":"06:02.380 ","End":"06:07.660","Text":"exclude contributions by owners from its ambit."},{"Start":"06:07.660 ","End":"06:13.540","Text":"We now turn our attention to the definition of an expense."},{"Start":"06:13.540 ","End":"06:18.880","Text":"Expense come about through decreases in assets,"},{"Start":"06:18.880 ","End":"06:25.735","Text":"or they come about through an increase in liabilities."},{"Start":"06:25.735 ","End":"06:28.915","Text":"Similar to the income definition,"},{"Start":"06:28.915 ","End":"06:36.765","Text":"expenses come about either through a decrease in assets or an increase in liabilities."},{"Start":"06:36.765 ","End":"06:39.800","Text":"Therefore, looking at all transactions"},{"Start":"06:39.800 ","End":"06:42.905","Text":"that you may come across in your accounting studies,"},{"Start":"06:42.905 ","End":"06:46.025","Text":"if you\u0027re going to recognize an expense,"},{"Start":"06:46.025 ","End":"06:49.730","Text":"there is going to have to be a corresponding decrease in"},{"Start":"06:49.730 ","End":"06:54.480","Text":"assets or an increase in liabilities."},{"Start":"06:54.480 ","End":"07:01.815","Text":"Expenses will result in decreases in equity."},{"Start":"07:01.815 ","End":"07:06.180","Text":"Now, a similar rider to"},{"Start":"07:06.180 ","End":"07:12.439","Text":"the definition is that those decreases in equity will exclude, in this case,"},{"Start":"07:12.439 ","End":"07:18.380","Text":"distributions to holders of equity claims, other words,"},{"Start":"07:18.380 ","End":"07:25.710","Text":"the expense definition excludes distributions or dividends to owners."},{"Start":"07:25.750 ","End":"07:30.410","Text":"Let\u0027s now look at a few applications or"},{"Start":"07:30.410 ","End":"07:34.864","Text":"examples to understand the definition of an expense."},{"Start":"07:34.864 ","End":"07:37.374","Text":"Starting off with an expense,"},{"Start":"07:37.374 ","End":"07:43.520","Text":"as you know it comes about through a decrease in assets."},{"Start":"07:43.520 ","End":"07:50.620","Text":"For example, the business entity pays for repairs."},{"Start":"07:50.620 ","End":"07:54.855","Text":"If it pays for repairs in cash,"},{"Start":"07:54.855 ","End":"08:00.320","Text":"let\u0027s assume, the cash assets will decrease by 50."},{"Start":"08:00.320 ","End":"08:05.785","Text":"That can\u0027t affect the amount the business owes to lenders, and therefore,"},{"Start":"08:05.785 ","End":"08:10.565","Text":"equity must decrease to keep the accounting equation in balance,"},{"Start":"08:10.565 ","End":"08:16.390","Text":"and we will designate that with an E to represent an expense."},{"Start":"08:16.390 ","End":"08:19.055","Text":"Now, as with the income definition,"},{"Start":"08:19.055 ","End":"08:24.980","Text":"I\u0027m not going to give an example here of a increase in liabilities,"},{"Start":"08:24.980 ","End":"08:30.770","Text":"those we\u0027ll come across in further examples in later presentations."},{"Start":"08:30.770 ","End":"08:34.505","Text":"But purely from a mathematical perspective,"},{"Start":"08:34.505 ","End":"08:42.005","Text":"if a liability does increase correspondingly to make the accounting equation balance,"},{"Start":"08:42.005 ","End":"08:48.815","Text":"equity will decrease and that will represent the expense being incurred."},{"Start":"08:48.815 ","End":"08:53.465","Text":"We also said that expenses, as you can see,"},{"Start":"08:53.465 ","End":"08:57.139","Text":"always result in a decrease in equity,"},{"Start":"08:57.139 ","End":"09:03.320","Text":"but they exclude these distributions or dividends to owners."},{"Start":"09:03.320 ","End":"09:12.140","Text":"If the entity declares a dividend to the owners and it pays the dividend in cash."},{"Start":"09:12.140 ","End":"09:17.735","Text":"If a dividend of 10 is paid in cash and assets decrease,"},{"Start":"09:17.735 ","End":"09:22.670","Text":"that again, can\u0027t affect the amount the entity owes to lenders."},{"Start":"09:22.670 ","End":"09:26.930","Text":"But now the owners\u0027 interest in the business will clearly"},{"Start":"09:26.930 ","End":"09:32.380","Text":"decrease because if equity is the owner\u0027s interest in the business,"},{"Start":"09:32.380 ","End":"09:38.000","Text":"then if the business pays out part of its assets, in this case,"},{"Start":"09:38.000 ","End":"09:42.555","Text":"cash to the owners as a dividend or distribution,"},{"Start":"09:42.555 ","End":"09:47.010","Text":"the owners\u0027 interest and equity must come down."},{"Start":"09:47.650 ","End":"09:53.524","Text":"I\u0027ll just give the abbreviation of a D for distributions or dividends."},{"Start":"09:53.524 ","End":"09:56.600","Text":"But note again, similar to income,"},{"Start":"09:56.600 ","End":"10:02.690","Text":"both the expenses and the dividends decrease equity,"},{"Start":"10:02.690 ","End":"10:09.665","Text":"but the dividends cannot be regarded as measuring performance, because again,"},{"Start":"10:09.665 ","End":"10:11.975","Text":"remember the income statement measures"},{"Start":"10:11.975 ","End":"10:17.460","Text":"the performance of the business for a period of time."},{"Start":"10:17.460 ","End":"10:21.935","Text":"In the same way, as contributions by the owners"},{"Start":"10:21.935 ","End":"10:26.150","Text":"to the business cannot affect income and performance,"},{"Start":"10:26.150 ","End":"10:30.530","Text":"distributions by the business back to its owners"},{"Start":"10:30.530 ","End":"10:36.505","Text":"also are not included in the determination of performance."},{"Start":"10:36.505 ","End":"10:43.940","Text":"Here we see a basic example of an income statement presentation."},{"Start":"10:43.940 ","End":"10:47.315","Text":"You will see it starts off with income."},{"Start":"10:47.315 ","End":"10:53.300","Text":"This example introduces an expense called cost of sales."},{"Start":"10:53.300 ","End":"10:58.805","Text":"Now, as you will learn in later presentations,"},{"Start":"10:58.805 ","End":"11:01.610","Text":"the cost of sales is defined as"},{"Start":"11:01.610 ","End":"11:07.840","Text":"the opening or beginning inventory to which we add the purchases,"},{"Start":"11:07.840 ","End":"11:13.025","Text":"and we then subtract the ending or closing inventory."},{"Start":"11:13.025 ","End":"11:20.785","Text":"For example, if the business had 20,000 of opening inventory,"},{"Start":"11:20.785 ","End":"11:25.610","Text":"and it purchased 50,000 of opening inventory,"},{"Start":"11:25.610 ","End":"11:33.230","Text":"the business has 70,000 of inventory of goods available for sale."},{"Start":"11:33.230 ","End":"11:35.300","Text":"If at the end of the period,"},{"Start":"11:35.300 ","End":"11:42.325","Text":"the business owners count a closing inventory of 60,"},{"Start":"11:42.325 ","End":"11:49.115","Text":"that must mean that the cost of sales is 10,000."},{"Start":"11:49.115 ","End":"11:54.015","Text":"Other words, the business started with 20,000 of opening inventory,"},{"Start":"11:54.015 ","End":"11:58.365","Text":"it purchased 50,000 of inventory during the period,"},{"Start":"11:58.365 ","End":"12:02.910","Text":"giving it 70,000 of inventory available to sell."},{"Start":"12:02.910 ","End":"12:07.755","Text":"If it counted 50,000 unsold at the end of the period,"},{"Start":"12:07.755 ","End":"12:12.240","Text":"the cost of the inventory sold is 10,000."},{"Start":"12:12.240 ","End":"12:14.825","Text":"In this very simple example,"},{"Start":"12:14.825 ","End":"12:18.650","Text":"there are no other operating expenses,"},{"Start":"12:18.650 ","End":"12:23.125","Text":"and therefore the profit remains at 5,000."},{"Start":"12:23.125 ","End":"12:27.050","Text":"Here, you see an extract from the published financial statements,"},{"Start":"12:27.050 ","End":"12:31.405","Text":"again, of the large retail group Marks \u0026 Spencer."},{"Start":"12:31.405 ","End":"12:37.385","Text":"Again, do not concern yourselves too much with the individual line items,"},{"Start":"12:37.385 ","End":"12:40.385","Text":"let\u0027s just focus on the top of income statement,"},{"Start":"12:40.385 ","End":"12:42.894","Text":"you see a line item, revenue."},{"Start":"12:42.894 ","End":"12:46.070","Text":"Now, revenue is a term often used on"},{"Start":"12:46.070 ","End":"12:51.665","Text":"income statements to describe the income from business operations."},{"Start":"12:51.665 ","End":"13:01.080","Text":"Marks \u0026 Spencer has a total revenue of £10,377.3 million."},{"Start":"13:01.280 ","End":"13:06.080","Text":"It has various income and expense items resulting in"},{"Start":"13:06.080 ","End":"13:12.330","Text":"a profit for the year of £37.3 million."}],"ID":25988},{"Watched":false,"Name":"Transaction Analysis","Duration":"28m 7s","ChapterTopicVideoID":25172,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.410 ","End":"00:05.430","Text":"Hello and welcome to another video presentation in the series on"},{"Start":"00:05.430 ","End":"00:09.870","Text":"The Accounting Equation brought to you by ProPrep."},{"Start":"00:09.870 ","End":"00:16.450","Text":"My name is Dave Kolitz and in this video we will focus on transaction analysis."},{"Start":"00:16.450 ","End":"00:20.570","Text":"We will here look at a number of transactions which will give you"},{"Start":"00:20.570 ","End":"00:25.400","Text":"some practice in analyzing basic business transactions."},{"Start":"00:25.400 ","End":"00:32.510","Text":"For each 1 we will consider the impact of the transaction on the accounting equation."},{"Start":"00:32.510 ","End":"00:35.285","Text":"Looking at Transaction number 1,"},{"Start":"00:35.285 ","End":"00:38.480","Text":"this investor starts a new company and opens"},{"Start":"00:38.480 ","End":"00:43.065","Text":"a business bank account and invests 100,000 CU,"},{"Start":"00:43.065 ","End":"00:47.985","Text":"currency units, in return for 100,000 shares of the company."},{"Start":"00:47.985 ","End":"00:52.070","Text":"To analyze transaction we have"},{"Start":"00:52.070 ","End":"00:56.180","Text":"to consider the impact of the transaction on the accounting equation,"},{"Start":"00:56.180 ","End":"01:00.320","Text":"which will wrap the accounting equation at the top here for all of"},{"Start":"01:00.320 ","End":"01:08.075","Text":"the transactions assets equals liabilities plus owner\u0027s equity."},{"Start":"01:08.075 ","End":"01:11.480","Text":"Remember the accounting equation has to hold for"},{"Start":"01:11.480 ","End":"01:16.150","Text":"every transaction in order for the balance sheet to ultimately balance."},{"Start":"01:16.150 ","End":"01:20.030","Text":"When the owner contributes cash into the business,"},{"Start":"01:20.030 ","End":"01:23.750","Text":"which is what is happening in this transaction,"},{"Start":"01:23.750 ","End":"01:27.965","Text":"we can start off by looking at the source of the funds."},{"Start":"01:27.965 ","End":"01:34.310","Text":"The source of these funds is clearly equity funds and not liability funds."},{"Start":"01:34.310 ","End":"01:36.470","Text":"The funds are coming from the owner."},{"Start":"01:36.470 ","End":"01:44.610","Text":"Therefore, equity in the form of share capital is increasing by 100,000."},{"Start":"01:44.610 ","End":"01:48.550","Text":"Now note there\u0027s no cash in this 100,000."},{"Start":"01:48.550 ","End":"01:51.230","Text":"There is no cash in here at all."},{"Start":"01:51.230 ","End":"01:53.704","Text":"That\u0027s very important to appreciate."},{"Start":"01:53.704 ","End":"01:58.460","Text":"The cash is recorded as an asset of the company."},{"Start":"01:58.460 ","End":"02:03.305","Text":"We record an increase in the asset cash of 100,000."},{"Start":"02:03.305 ","End":"02:05.750","Text":"Note the accounting equation balances,"},{"Start":"02:05.750 ","End":"02:08.245","Text":"assets have increased by 100,000,"},{"Start":"02:08.245 ","End":"02:10.620","Text":"equities increased by 100,000."},{"Start":"02:10.620 ","End":"02:17.705","Text":"We can label this item here a C or a capital contribution from the owner."},{"Start":"02:17.705 ","End":"02:20.704","Text":"Because remember it\u0027s increased equity,"},{"Start":"02:20.704 ","End":"02:23.070","Text":"but it is not income."},{"Start":"02:23.070 ","End":"02:27.305","Text":"It\u0027s certainly not an income item."},{"Start":"02:27.305 ","End":"02:30.335","Text":"There\u0027s no measure of the businesses performance"},{"Start":"02:30.335 ","End":"02:34.160","Text":"from the contribution of cash by an owner."},{"Start":"02:34.160 ","End":"02:36.350","Text":"In Transaction number 2,"},{"Start":"02:36.350 ","End":"02:39.800","Text":"the company now buys a building to use as"},{"Start":"02:39.800 ","End":"02:44.315","Text":"its retail shop and it pays 30,000 for the building."},{"Start":"02:44.315 ","End":"02:46.775","Text":"We now need to analyze this transaction."},{"Start":"02:46.775 ","End":"02:49.220","Text":"We wrap the accounting equation out again."},{"Start":"02:49.220 ","End":"02:54.635","Text":"Assets equals liabilities plus owner\u0027s equity."},{"Start":"02:54.635 ","End":"02:58.640","Text":"Now note for this transaction there\u0027s going to be no impact,"},{"Start":"02:58.640 ","End":"03:01.050","Text":"no effect on equity,"},{"Start":"03:01.050 ","End":"03:06.290","Text":"because all that is happening is that the entity is exchanging 1 asset,"},{"Start":"03:06.290 ","End":"03:09.620","Text":"it\u0027s cash in the bank for another asset,"},{"Start":"03:09.620 ","End":"03:12.410","Text":"it\u0027s property, plant and equipment."},{"Start":"03:12.410 ","End":"03:19.175","Text":"The asset cash and bank is decreasing by 30,000 and the assets,"},{"Start":"03:19.175 ","End":"03:20.900","Text":"property, plant and equipment,"},{"Start":"03:20.900 ","End":"03:23.725","Text":"is increasing by 30,000."},{"Start":"03:23.725 ","End":"03:28.670","Text":"Note the accounting equation balances because we have on the left side of"},{"Start":"03:28.670 ","End":"03:35.785","Text":"the equation both an increase in assets and also a decrease in assets."},{"Start":"03:35.785 ","End":"03:37.385","Text":"As I\u0027ve said before,"},{"Start":"03:37.385 ","End":"03:39.950","Text":"no effect on equity."},{"Start":"03:39.950 ","End":"03:42.530","Text":"Looking at Transaction number 3,"},{"Start":"03:42.530 ","End":"03:49.015","Text":"the company now buys inventory for 50,000 in cash."},{"Start":"03:49.015 ","End":"03:51.955","Text":"This will be similar to Transaction number 2,"},{"Start":"03:51.955 ","End":"03:58.075","Text":"there is no effect on equity because all that is happening over here is again,"},{"Start":"03:58.075 ","End":"04:02.800","Text":"the business entity is exchanging 1 asset for another asset."},{"Start":"04:02.800 ","End":"04:11.650","Text":"The accounting equation of assets equals liabilities plus owner\u0027s equity."},{"Start":"04:11.650 ","End":"04:16.180","Text":"The asset called bank is decreasing by"},{"Start":"04:16.180 ","End":"04:22.920","Text":"50,000 and the asset called inventory is increasing by 50,000."},{"Start":"04:22.920 ","End":"04:28.250","Text":"Again, the accounting equation remains balanced because 1 asset on"},{"Start":"04:28.250 ","End":"04:31.280","Text":"the left-hand side of the equation is increasing and"},{"Start":"04:31.280 ","End":"04:34.915","Text":"the other asset called bank is in fact decreasing."},{"Start":"04:34.915 ","End":"04:37.880","Text":"Note in case you\u0027re thinking there cannot be"},{"Start":"04:37.880 ","End":"04:42.710","Text":"any impact on equity in this example because there\u0027s no expense,"},{"Start":"04:42.710 ","End":"04:44.870","Text":"the inventory has not yet been sold."},{"Start":"04:44.870 ","End":"04:48.235","Text":"The inventory upon purchase is an asset."},{"Start":"04:48.235 ","End":"04:50.515","Text":"In Transaction number 4,"},{"Start":"04:50.515 ","End":"04:56.155","Text":"the entity or the company is purchasing further inventory for 20,000."},{"Start":"04:56.155 ","End":"04:57.550","Text":"But this time note,"},{"Start":"04:57.550 ","End":"05:00.635","Text":"the inventory is being purchased on credit."},{"Start":"05:00.635 ","End":"05:03.200","Text":"Other words, the entity is buying the inventory"},{"Start":"05:03.200 ","End":"05:06.785","Text":"now and will pay for it in a later period."},{"Start":"05:06.785 ","End":"05:09.965","Text":"Similar to the previous example,"},{"Start":"05:09.965 ","End":"05:13.725","Text":"the assets of the entity are increasing,"},{"Start":"05:13.725 ","End":"05:16.615","Text":"in this case by 20,000."},{"Start":"05:16.615 ","End":"05:19.385","Text":"But there\u0027s no cash going out of the business"},{"Start":"05:19.385 ","End":"05:23.180","Text":"now because the entity has purchased this inventory on credit."},{"Start":"05:23.180 ","End":"05:25.955","Text":"Therefore, thinking of the accounting equation,"},{"Start":"05:25.955 ","End":"05:30.710","Text":"assets equals liabilities plus owner\u0027s equity,"},{"Start":"05:30.710 ","End":"05:34.385","Text":"the amount that the business owes to lenders,"},{"Start":"05:34.385 ","End":"05:37.280","Text":"in this case the suppliers of the goods,"},{"Start":"05:37.280 ","End":"05:40.680","Text":"which we\u0027ll call accounts payable or creditors."},{"Start":"05:40.680 ","End":"05:44.695","Text":"This will increase by 20,000."},{"Start":"05:44.695 ","End":"05:51.650","Text":"Note this is an increase in liabilities and not an increase in equity."},{"Start":"05:51.650 ","End":"05:57.215","Text":"There has been no contribution by the owner and no income has been earned."},{"Start":"05:57.215 ","End":"06:03.590","Text":"Again, the accounting equation balances because we have now in this case, an increase,"},{"Start":"06:03.590 ","End":"06:07.610","Text":"in this case assets on the left side of the equation and an increase"},{"Start":"06:07.610 ","End":"06:11.875","Text":"in liabilities on the right side of the equation."},{"Start":"06:11.875 ","End":"06:14.350","Text":"In Transaction 5,"},{"Start":"06:14.350 ","End":"06:17.300","Text":"the company sells inventory."},{"Start":"06:17.300 ","End":"06:26.640","Text":"This inventory which it\u0027s selling had a cost of 10,000 and the selling price is 15,000."},{"Start":"06:26.640 ","End":"06:37.205","Text":"To summarize that, the selling price is 15,000 and the cost price is 10,000."},{"Start":"06:37.205 ","End":"06:40.940","Text":"Now, all that selling price of 15,000,"},{"Start":"06:40.940 ","End":"06:49.675","Text":"you are told that the customer pays 9,000 immediately in cash and the rest is on credit."},{"Start":"06:49.675 ","End":"06:55.270","Text":"Therefore, looking at the total selling price of 15,000,"},{"Start":"06:55.270 ","End":"07:04.260","Text":"9,000 is for cash and therefore obviously 6,000 is on credit."},{"Start":"07:04.260 ","End":"07:08.705","Text":"We will need to be with that in mind when analyzing the transaction."},{"Start":"07:08.705 ","End":"07:11.265","Text":"Let\u0027s write in the accounting equation."},{"Start":"07:11.265 ","End":"07:15.950","Text":"Assets equals liabilities plus owner\u0027s equity."},{"Start":"07:15.950 ","End":"07:20.120","Text":"Now what is important to realize here is that we will have"},{"Start":"07:20.120 ","End":"07:29.180","Text":"both an income side of this transaction and also an expense side of this transaction."},{"Start":"07:29.180 ","End":"07:35.300","Text":"Let\u0027s look at the income side first and go back to the income definition."},{"Start":"07:35.300 ","End":"07:37.985","Text":"Remember, the income definition,"},{"Start":"07:37.985 ","End":"07:43.700","Text":"income will always increase equity and it will come about through"},{"Start":"07:43.700 ","End":"07:50.100","Text":"either an increase in assets or a decrease in liabilities."},{"Start":"07:50.100 ","End":"07:53.030","Text":"In this case here, the income is clearly being"},{"Start":"07:53.030 ","End":"07:56.555","Text":"earned in the form of an increase in assets."},{"Start":"07:56.555 ","End":"08:00.780","Text":"I will start off by putting the increase in equity,"},{"Start":"08:00.780 ","End":"08:05.110","Text":"in other words the total selling price of 15,000,"},{"Start":"08:05.110 ","End":"08:08.060","Text":"into the equity column,"},{"Start":"08:08.060 ","End":"08:12.110","Text":"which I will designate with an I for income."},{"Start":"08:12.110 ","End":"08:13.700","Text":"Now bearing in mind,"},{"Start":"08:13.700 ","End":"08:15.260","Text":"as I\u0027ve just said,"},{"Start":"08:15.260 ","End":"08:19.003","Text":"that income will come about through an increase in assets,"},{"Start":"08:19.003 ","End":"08:24.140","Text":"the entity now is increasing an asset called cash by 6,000"},{"Start":"08:24.140 ","End":"08:30.740","Text":"and also increasing an asset called accounts receivable by 9,000."},{"Start":"08:30.740 ","End":"08:35.660","Text":"You have now learned an additional principle that the assets that are"},{"Start":"08:35.660 ","End":"08:44.000","Text":"increasing when we recognize income don\u0027t always have to be a cash asset."},{"Start":"08:44.000 ","End":"08:47.885","Text":"In this case, the asset accounts receivable is increasing"},{"Start":"08:47.885 ","End":"08:52.645","Text":"because these goods are in fact being sold on credit."},{"Start":"08:52.645 ","End":"08:58.025","Text":"Note that accounting equation balances for the income side of the transaction."},{"Start":"08:58.025 ","End":"09:01.820","Text":"Now turning our attention to the expense side of the transaction,"},{"Start":"09:01.820 ","End":"09:08.360","Text":"we know this inventory which we are selling has a cost of 10,000."},{"Start":"09:08.360 ","End":"09:13.715","Text":"The asset inventory needs to decrease by an amount of"},{"Start":"09:13.715 ","End":"09:19.910","Text":"10,000 to represent the inventory which is leaving the business."},{"Start":"09:19.910 ","End":"09:22.520","Text":"That represents an expense."},{"Start":"09:22.520 ","End":"09:25.625","Text":"Because if you think about the expense definition,"},{"Start":"09:25.625 ","End":"09:33.695","Text":"expenses come about through a decrease in assets or an increase in liabilities."},{"Start":"09:33.695 ","End":"09:40.735","Text":"In this case, the asset inventory is decreasing when the expense is being"},{"Start":"09:40.735 ","End":"09:48.800","Text":"incurred and we recognize that with a decrease in equity of 10,000,"},{"Start":"09:48.800 ","End":"09:53.554","Text":"which I will use an E to designate that decrease."},{"Start":"09:53.554 ","End":"10:02.270","Text":"Note the accounting equation balances is a 10,000 decrease on the asset side of"},{"Start":"10:02.270 ","End":"10:07.010","Text":"the accounting equation and also a 10,000 decrease on"},{"Start":"10:07.010 ","End":"10:12.350","Text":"the liabilities and equity side of the accounting equation."},{"Start":"10:12.350 ","End":"10:15.530","Text":"Going back to the income side of the transaction,"},{"Start":"10:15.530 ","End":"10:24.650","Text":"there was here a 6,000 and a 9,000 increase in assets on the left side or assets side of"},{"Start":"10:24.650 ","End":"10:29.240","Text":"the equation and a 15,000 increase in"},{"Start":"10:29.240 ","End":"10:34.885","Text":"the right side or liabilities and equity side of the accounting equation."},{"Start":"10:34.885 ","End":"10:37.485","Text":"In Transaction number 6,"},{"Start":"10:37.485 ","End":"10:47.000","Text":"the company hires a shop manager whose salary of 4,000 is paid in cash."},{"Start":"10:47.000 ","End":"10:51.655","Text":"See here we have an example of a cash expense."},{"Start":"10:51.655 ","End":"11:00.800","Text":"Put an accounting equation again of assets equals liabilities plus owner\u0027s equity."},{"Start":"11:00.800 ","End":"11:04.790","Text":"Remembering expenses come about"},{"Start":"11:04.790 ","End":"11:08.959","Text":"through a decrease in assets or an increase in liabilities."},{"Start":"11:08.959 ","End":"11:14.900","Text":"In this case, the asset cash is decreasing and that"},{"Start":"11:14.900 ","End":"11:21.965","Text":"represents a decrease in equity of the same amount of 4,000,"},{"Start":"11:21.965 ","End":"11:26.680","Text":"which I will designate with an E to represent an expense."},{"Start":"11:26.680 ","End":"11:30.990","Text":"The left side of the equation assets are decreasing,"},{"Start":"11:30.990 ","End":"11:36.758","Text":"on the right side of the equation equity is decreasing."},{"Start":"11:36.758 ","End":"11:38.815","Text":"In Transaction 7,"},{"Start":"11:38.815 ","End":"11:43.600","Text":"the company receives a telephone bill for 1,000,"},{"Start":"11:43.600 ","End":"11:47.020","Text":"but note this bill is not yet paid."},{"Start":"11:47.020 ","End":"11:49.945","Text":"It is not paid in cash."},{"Start":"11:49.945 ","End":"11:52.960","Text":"Before we start analyzing the transaction,"},{"Start":"11:52.960 ","End":"11:55.330","Text":"this is right in the accounting equation,"},{"Start":"11:55.330 ","End":"12:00.505","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"12:00.505 ","End":"12:03.940","Text":"Again, let also remind ourselves about"},{"Start":"12:03.940 ","End":"12:08.875","Text":"the expense definition and how expenses can come about."},{"Start":"12:08.875 ","End":"12:13.885","Text":"Expenses can can come about through a decrease in assets,"},{"Start":"12:13.885 ","End":"12:19.345","Text":"or expenses can come about through a increase in liabilities."},{"Start":"12:19.345 ","End":"12:21.115","Text":"Now, in this example,"},{"Start":"12:21.115 ","End":"12:26.620","Text":"we will see expenses coming about through an increase in liabilities."},{"Start":"12:26.620 ","End":"12:28.900","Text":"What is happening over here,"},{"Start":"12:28.900 ","End":"12:32.095","Text":"is that the company has received the telephone bill,"},{"Start":"12:32.095 ","End":"12:34.165","Text":"but it has not been paid,"},{"Start":"12:34.165 ","End":"12:38.500","Text":"so there is no implication in the assets."},{"Start":"12:38.500 ","End":"12:42.070","Text":"There is no change in the assets at all,"},{"Start":"12:42.070 ","End":"12:51.040","Text":"but a liability being the amount owed to the telephone company, increases by 1,000."},{"Start":"12:51.040 ","End":"12:54.535","Text":"This represents the expense of the business."},{"Start":"12:54.535 ","End":"13:01.840","Text":"Therefore, equity decreases because we know expenses decrease equity,"},{"Start":"13:01.840 ","End":"13:03.910","Text":"1 point to bear in mind,"},{"Start":"13:03.910 ","End":"13:06.655","Text":"which I haven\u0027t mentioned in previous slides,"},{"Start":"13:06.655 ","End":"13:13.180","Text":"is that when you see this negative as the decrease in equity,"},{"Start":"13:13.180 ","End":"13:16.855","Text":"note the expense is actually increasing,"},{"Start":"13:16.855 ","End":"13:20.710","Text":"the expense itself is increasing,"},{"Start":"13:20.710 ","End":"13:26.590","Text":"but the increase in expense is causing the equity to come down,"},{"Start":"13:26.590 ","End":"13:32.860","Text":"in the accounting equation balancing because the liabilities are increasing,"},{"Start":"13:32.860 ","End":"13:34.990","Text":"equity is decreasing,"},{"Start":"13:34.990 ","End":"13:37.600","Text":"but to understand this importantly,"},{"Start":"13:37.600 ","End":"13:45.170","Text":"note equity is decreasing as result of the increase in expenses."},{"Start":"13:45.270 ","End":"13:51.685","Text":"Transaction number 8 looks at the concept called depreciation,"},{"Start":"13:51.685 ","End":"13:58.975","Text":"which we\u0027ll learn about further in a later set of video presentations."},{"Start":"13:58.975 ","End":"14:07.300","Text":"Depreciation effectively refers to the expense related to the usage of an asset."},{"Start":"14:07.300 ","End":"14:09.250","Text":"In this example here,"},{"Start":"14:09.250 ","End":"14:15.925","Text":"the depreciation on the building is calculated at an amount of 3,000."},{"Start":"14:15.925 ","End":"14:17.905","Text":"As I\u0027ve just explained,"},{"Start":"14:17.905 ","End":"14:23.185","Text":"depreciation can be seen as a asset usage expense."},{"Start":"14:23.185 ","End":"14:28.855","Text":"Therefore, the assets called property, plant and equipment,"},{"Start":"14:28.855 ","End":"14:33.565","Text":"will have to decrease by an amount of 3000,"},{"Start":"14:33.565 ","End":"14:41.785","Text":"representing the decrease in the accounting carrying amount of the cup and bar, 3000."},{"Start":"14:41.785 ","End":"14:46.810","Text":"That represents a expense of the entity."},{"Start":"14:46.810 ","End":"14:48.880","Text":"In this case over here,"},{"Start":"14:48.880 ","End":"14:51.925","Text":"thinking back to how expenses come about,"},{"Start":"14:51.925 ","End":"14:56.830","Text":"expenses come about through either decreases in assets,"},{"Start":"14:56.830 ","End":"14:59.275","Text":"or increases in liabilities."},{"Start":"14:59.275 ","End":"15:03.160","Text":"The expenses here coming about through a decrease in assets,"},{"Start":"15:03.160 ","End":"15:05.770","Text":"but note that asset is not cash."},{"Start":"15:05.770 ","End":"15:10.990","Text":"The asset decreasing in fact is the property plan, and equipment."},{"Start":"15:10.990 ","End":"15:13.585","Text":"The account equation balances,"},{"Start":"15:13.585 ","End":"15:19.284","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"15:19.284 ","End":"15:23.950","Text":"We have a decrease in the assets on the left side of"},{"Start":"15:23.950 ","End":"15:26.860","Text":"the accounting equation and a decrease in"},{"Start":"15:26.860 ","End":"15:31.015","Text":"equity on the right-hand side of the accounting equation."},{"Start":"15:31.015 ","End":"15:34.120","Text":"But as I mentioned in the previous transaction,"},{"Start":"15:34.120 ","End":"15:40.104","Text":"this decrease in equity has come about through an increase in the expense."},{"Start":"15:40.104 ","End":"15:43.855","Text":"The expense, has in fact increased."},{"Start":"15:43.855 ","End":"15:49.735","Text":"What you see here is now a complete transaction analysis worksheet."},{"Start":"15:49.735 ","End":"15:53.725","Text":"This is the summary of all the transactions from number 1 to number"},{"Start":"15:53.725 ","End":"15:57.699","Text":"8 that we analyzed in the previous slides."},{"Start":"15:57.699 ","End":"16:02.575","Text":"This is often also called an accounting equation worksheet."},{"Start":"16:02.575 ","End":"16:04.629","Text":"As you would expect,"},{"Start":"16:04.629 ","End":"16:12.385","Text":"we find the assets equals liabilities plus owner\u0027s equity."},{"Start":"16:12.385 ","End":"16:16.525","Text":"Now, each type of asset has a column."},{"Start":"16:16.525 ","End":"16:20.525","Text":"There\u0027s a column you will see for cash,"},{"Start":"16:20.525 ","End":"16:23.040","Text":"for accounts receivable,"},{"Start":"16:23.040 ","End":"16:28.510","Text":"for inventory, for property, plant and equipment."},{"Start":"16:28.510 ","End":"16:33.385","Text":"For liabilities, there\u0027s a column for accounts payable."},{"Start":"16:33.385 ","End":"16:37.765","Text":"For equity, a column for share capital,"},{"Start":"16:37.765 ","End":"16:40.255","Text":"and the retained profits,"},{"Start":"16:40.255 ","End":"16:47.170","Text":"as well as the column analyzing the income and expense items for the period."},{"Start":"16:47.170 ","End":"16:52.420","Text":"Now, I don\u0027t intend to work through all 8 transactions again,"},{"Start":"16:52.420 ","End":"16:53.920","Text":"it is not necessary,"},{"Start":"16:53.920 ","End":"16:58.465","Text":"but I just want to go through a couple of transactions just to point"},{"Start":"16:58.465 ","End":"17:03.070","Text":"out to you how these transactions fits into the bigger worksheet,"},{"Start":"17:03.070 ","End":"17:08.185","Text":"and also, as a brief recap of some of the transactions."},{"Start":"17:08.185 ","End":"17:11.845","Text":"Let\u0027s start off then looking at the first transaction,"},{"Start":"17:11.845 ","End":"17:15.400","Text":"which was the transaction on formation of the business,"},{"Start":"17:15.400 ","End":"17:21.715","Text":"where the owner invested 100 currency units into the business."},{"Start":"17:21.715 ","End":"17:24.220","Text":"When we analyze that transaction,"},{"Start":"17:24.220 ","End":"17:27.880","Text":"we ask ourselves what is the source of those funds?"},{"Start":"17:27.880 ","End":"17:33.415","Text":"The source of the funds was the share capital introduced by the owner."},{"Start":"17:33.415 ","End":"17:36.790","Text":"Remember, there was no cash in the share capital."},{"Start":"17:36.790 ","End":"17:43.720","Text":"That is simply the representation of the source of funds coming from the owner as equity."},{"Start":"17:43.720 ","End":"17:50.994","Text":"The cash was recorded as an asset on the left-hand side of the equation."},{"Start":"17:50.994 ","End":"17:53.635","Text":"Looking at Transaction number 4,"},{"Start":"17:53.635 ","End":"18:00.385","Text":"where the business entity purchased inventory on credit, here,"},{"Start":"18:00.385 ","End":"18:04.690","Text":"you saw that an asset inventory increased by"},{"Start":"18:04.690 ","End":"18:11.935","Text":"20 and the 20 was represented by a obligation,"},{"Start":"18:11.935 ","End":"18:14.110","Text":"a liability, in this case,"},{"Start":"18:14.110 ","End":"18:15.535","Text":"the accounts payable,"},{"Start":"18:15.535 ","End":"18:18.865","Text":"increased by an amount of 20."},{"Start":"18:18.865 ","End":"18:21.940","Text":"Looking at Transaction 5,"},{"Start":"18:21.940 ","End":"18:24.745","Text":"remember for Transaction 5,"},{"Start":"18:24.745 ","End":"18:28.300","Text":"there was both an income side of"},{"Start":"18:28.300 ","End":"18:34.780","Text":"the transaction as well as an expense side to the transaction."},{"Start":"18:34.780 ","End":"18:37.885","Text":"For the income side of the transaction,"},{"Start":"18:37.885 ","End":"18:45.130","Text":"the entity you recall sold inventory for both cash and on credit."},{"Start":"18:45.130 ","End":"18:49.690","Text":"Income increased by 15."},{"Start":"18:49.690 ","End":"18:54.160","Text":"Income came about through an increase in both the assets,"},{"Start":"18:54.160 ","End":"18:59.029","Text":"cash, and the asset accounts receivable."},{"Start":"18:59.460 ","End":"19:08.245","Text":"The expense side of the transaction was recorded by showing a decrease in equity of 10,"},{"Start":"19:08.245 ","End":"19:11.215","Text":"representing the cost of the goods sold."},{"Start":"19:11.215 ","End":"19:18.594","Text":"That was reflected as a reduction in the asset inventory."},{"Start":"19:18.594 ","End":"19:22.735","Text":"Now focusing on the income statement column within equity,"},{"Start":"19:22.735 ","End":"19:25.975","Text":"the 15 was clearly income,"},{"Start":"19:25.975 ","End":"19:29.245","Text":"the 10 cost of sales and expense,"},{"Start":"19:29.245 ","End":"19:32.230","Text":"the salaries and expense,"},{"Start":"19:32.230 ","End":"19:35.560","Text":"the telephone bill not paid,"},{"Start":"19:35.560 ","End":"19:38.335","Text":"still an expense for the current period,"},{"Start":"19:38.335 ","End":"19:41.020","Text":"but because it was not paid, remember,"},{"Start":"19:41.020 ","End":"19:48.655","Text":"it is recorded as a increase in a liability rather than a decrease in the asset cash,"},{"Start":"19:48.655 ","End":"19:53.785","Text":"and the depreciation is an expense as well."},{"Start":"19:53.785 ","End":"20:00.430","Text":"The total of all the expenses amounts to 18,"},{"Start":"20:00.430 ","End":"20:03.310","Text":"yet the income is 15."},{"Start":"20:03.310 ","End":"20:06.520","Text":"Clearly, comparing income and expenses,"},{"Start":"20:06.520 ","End":"20:11.320","Text":"this business has incurred a loss for the period that\u0027s"},{"Start":"20:11.320 ","End":"20:16.150","Text":"recorded by transferring that amount of 3,"},{"Start":"20:16.150 ","End":"20:20.020","Text":"which is the loss out of the income statement column,"},{"Start":"20:20.020 ","End":"20:24.250","Text":"now clearly a positive figure here to balance back to 0,"},{"Start":"20:24.250 ","End":"20:29.440","Text":"and this goes into the retained profit column to show a negative"},{"Start":"20:29.440 ","End":"20:37.285","Text":"3 as the retained profit at the end of this being the first period of trading."},{"Start":"20:37.285 ","End":"20:43.360","Text":"We can now prepare an income statement by looking at the numbers in"},{"Start":"20:43.360 ","End":"20:45.250","Text":"the income statement column of"},{"Start":"20:45.250 ","End":"20:49.735","Text":"the previous transactions or accounting equation worksheet."},{"Start":"20:49.735 ","End":"20:55.224","Text":"You will recall that there are 2 elements of the income statements."},{"Start":"20:55.224 ","End":"20:59.890","Text":"We have income, less expenses,"},{"Start":"20:59.890 ","End":"21:02.095","Text":"which gives us the profit,"},{"Start":"21:02.095 ","End":"21:05.335","Text":"or if expenses are greater than the income,"},{"Start":"21:05.335 ","End":"21:07.330","Text":"the loss for the period."},{"Start":"21:07.330 ","End":"21:09.474","Text":"On the income statement,"},{"Start":"21:09.474 ","End":"21:15.715","Text":"we have the revenue which represents the income for the period."},{"Start":"21:15.715 ","End":"21:19.510","Text":"Here\u0027s the revenue that represents the income."},{"Start":"21:19.510 ","End":"21:22.900","Text":"Now, most companies will not"},{"Start":"21:22.900 ","End":"21:28.735","Text":"refer to the word income on the face of the income statement."},{"Start":"21:28.735 ","End":"21:33.565","Text":"Different words will be used to describe the nature of the income."},{"Start":"21:33.565 ","End":"21:36.490","Text":"Because this is a trading entity,"},{"Start":"21:36.490 ","End":"21:38.395","Text":"it\u0027s been buying and selling goods,"},{"Start":"21:38.395 ","End":"21:41.560","Text":"the income is referred to as revenue."},{"Start":"21:41.560 ","End":"21:47.815","Text":"Possibly revenue from sales where even turnover can be used."},{"Start":"21:47.815 ","End":"21:51.190","Text":"We could have the word turnover"},{"Start":"21:51.190 ","End":"21:55.945","Text":"written here as well as a description of the type of income."},{"Start":"21:55.945 ","End":"22:01.935","Text":"Then you will see the expenses are broken down into 2 categories of expenses."},{"Start":"22:01.935 ","End":"22:08.245","Text":"The cost of sales is known as a trading expense,"},{"Start":"22:08.245 ","End":"22:11.020","Text":"whereas the salaries, depreciation,"},{"Start":"22:11.020 ","End":"22:17.590","Text":"and telephone are known as operating expenses."},{"Start":"22:17.590 ","End":"22:25.705","Text":"Now when we subtract the cost of sales from the revenue,"},{"Start":"22:25.705 ","End":"22:28.315","Text":"that gives us a subtotal,"},{"Start":"22:28.315 ","End":"22:33.175","Text":"which is referred to as the gross profit."},{"Start":"22:33.175 ","End":"22:38.330","Text":"The gross profit is in effect a trading profit."},{"Start":"22:38.370 ","End":"22:42.640","Text":"Only after deducting the operating expenses,"},{"Start":"22:42.640 ","End":"22:46.060","Text":"will we get the profit or in this case,"},{"Start":"22:46.060 ","End":"22:48.490","Text":"loss for the period."},{"Start":"22:48.490 ","End":"22:51.025","Text":"Turning to the balance sheet."},{"Start":"22:51.025 ","End":"22:55.390","Text":"We prepare the balance sheet by looking at the asset,"},{"Start":"22:55.390 ","End":"23:02.200","Text":"liability, and equity columns on that transactions or accounting equation worksheet."},{"Start":"23:02.200 ","End":"23:04.480","Text":"As you would expect,"},{"Start":"23:04.480 ","End":"23:07.480","Text":"on the balance sheet,"},{"Start":"23:07.480 ","End":"23:10.615","Text":"we see a total assets number."},{"Start":"23:10.615 ","End":"23:12.445","Text":"This case it\u0027s 118,"},{"Start":"23:12.445 ","End":"23:14.335","Text":"we\u0027ll come back to that in a moment."},{"Start":"23:14.335 ","End":"23:17.515","Text":"That equals the total liabilities,"},{"Start":"23:17.515 ","End":"23:21.745","Text":"and equity, also a 118,000."},{"Start":"23:21.745 ","End":"23:24.910","Text":"That should not come as a surprise because we know this"},{"Start":"23:24.910 ","End":"23:27.550","Text":"from the accounting equation that the assets to"},{"Start":"23:27.550 ","End":"23:33.625","Text":"the entity must equal liabilities plus the owner\u0027s equity."},{"Start":"23:33.625 ","End":"23:35.980","Text":"On this balance sheet,"},{"Start":"23:35.980 ","End":"23:43.120","Text":"you will see that the entity has non-current assets comprising the property,"},{"Start":"23:43.120 ","End":"23:47.965","Text":"plant and equipment, and current assets comprising the cash,"},{"Start":"23:47.965 ","End":"23:50.845","Text":"inventory, and accounts receivable."},{"Start":"23:50.845 ","End":"23:56.305","Text":"The total assets together amount to 118,000."},{"Start":"23:56.305 ","End":"23:59.465","Text":"We are now on non-current liabilities."},{"Start":"23:59.465 ","End":"24:04.860","Text":"The current liabilities comprise the accounts payable of 21,000,"},{"Start":"24:04.860 ","End":"24:07.545","Text":"and take a look at the equity."},{"Start":"24:07.545 ","End":"24:11.255","Text":"The equity amount is 97,000."},{"Start":"24:11.255 ","End":"24:14.005","Text":"How is that broken down?"},{"Start":"24:14.005 ","End":"24:21.355","Text":"The 97,000 comprises the original capital contribution by the owner."},{"Start":"24:21.355 ","End":"24:28.329","Text":"In this case, 100,000 less the retained profit,"},{"Start":"24:28.329 ","End":"24:33.940","Text":"which in this case in fact is a retained loss of 3,000."},{"Start":"24:33.940 ","End":"24:37.075","Text":"Both are components of equity."},{"Start":"24:37.075 ","End":"24:40.810","Text":"The capital contribution is a component of equity as"},{"Start":"24:40.810 ","End":"24:44.410","Text":"the original contribution by the owner and in this case,"},{"Start":"24:44.410 ","End":"24:47.605","Text":"the retained loss, as you know,"},{"Start":"24:47.605 ","End":"24:52.195","Text":"is the excess of expenses over income."},{"Start":"24:52.195 ","End":"24:57.610","Text":"The income less expenses in this case gave us not a profit,"},{"Start":"24:57.610 ","End":"25:01.645","Text":"but a loss for the period of 3,000."},{"Start":"25:01.645 ","End":"25:07.510","Text":"You recall that income increased equity and expenses decreased equity."},{"Start":"25:07.510 ","End":"25:10.165","Text":"Therefore, if expenses are greater than income,"},{"Start":"25:10.165 ","End":"25:13.660","Text":"the net loss must decrease equity."},{"Start":"25:13.660 ","End":"25:19.780","Text":"You see the word retained there."},{"Start":"25:19.780 ","End":"25:25.225","Text":"As retained loss, this is carried forward to the balance sheet of the next period."},{"Start":"25:25.225 ","End":"25:31.150","Text":"Now we can also prove that profit or loss, in this case,"},{"Start":"25:31.150 ","End":"25:39.500","Text":"the loss of 3,000 by going back to a concept that we learned in a previous video."},{"Start":"25:39.780 ","End":"25:43.510","Text":"In the previous video we learned that there are only 4 types"},{"Start":"25:43.510 ","End":"25:46.975","Text":"of transactions affecting equity."},{"Start":"25:46.975 ","End":"25:50.920","Text":"What type of transactions affect equity?"},{"Start":"25:50.920 ","End":"25:56.320","Text":"There are contributions from the owners,"},{"Start":"25:56.320 ","End":"25:58.930","Text":"which we know increase equity,"},{"Start":"25:58.930 ","End":"26:03.084","Text":"there are distributions to the owners,"},{"Start":"26:03.084 ","End":"26:05.523","Text":"which we know decrease equity,"},{"Start":"26:05.523 ","End":"26:09.475","Text":"there\u0027s income earned by the business,"},{"Start":"26:09.475 ","End":"26:11.962","Text":"which we know increases equity,"},{"Start":"26:11.962 ","End":"26:19.105","Text":"and they are the expenses incurred by the business which we know decrease equity."},{"Start":"26:19.105 ","End":"26:22.930","Text":"We also know that income less expenses is equal to"},{"Start":"26:22.930 ","End":"26:27.580","Text":"the profit or possibly a loss for the period."},{"Start":"26:27.580 ","End":"26:31.825","Text":"You should remember that we can compare"},{"Start":"26:31.825 ","End":"26:38.968","Text":"the ending equity of 97,000 with the beginning equity of 0,"},{"Start":"26:38.968 ","End":"26:44.199","Text":"and the reason it is 0 is because this is the first period of trading."},{"Start":"26:44.199 ","End":"26:49.915","Text":"Note the initial contribution as a transaction during the period."},{"Start":"26:49.915 ","End":"26:53.290","Text":"We now want to identify the profit."},{"Start":"26:53.290 ","End":"26:57.850","Text":"We want to focus on the profit or loss for the period."},{"Start":"26:57.850 ","End":"27:05.245","Text":"We then eliminate or reverse the effect of the contributions and distributions."},{"Start":"27:05.245 ","End":"27:10.525","Text":"We must land up with the net effect of income or expenses,"},{"Start":"27:10.525 ","End":"27:14.590","Text":"which in fact is the profit for the period."},{"Start":"27:14.590 ","End":"27:18.565","Text":"In this case, what we do is we reverse out"},{"Start":"27:18.565 ","End":"27:23.410","Text":"the contributions because we know the contributions increased equity."},{"Start":"27:23.410 ","End":"27:26.125","Text":"By reversing out the contributions and"},{"Start":"27:26.125 ","End":"27:30.069","Text":"because there were no distributions in this example,"},{"Start":"27:30.069 ","End":"27:38.380","Text":"the number we are left with must be the effect of the income less expenses."},{"Start":"27:38.380 ","End":"27:41.335","Text":"In this case, the income less expenses,"},{"Start":"27:41.335 ","End":"27:45.460","Text":"is a loss of 3,000 for the period."},{"Start":"27:45.460 ","End":"27:51.129","Text":"We could also look at this in a different way by looking at the change in the assets."},{"Start":"27:51.129 ","End":"27:55.285","Text":"Now, the change in the assets amounts to 18,000."},{"Start":"27:55.285 ","End":"27:59.170","Text":"The change in liabilities amounts of 21,000."},{"Start":"27:59.170 ","End":"28:07.760","Text":"Therefore, the change in equity is a negative 3,000 which is the loss for the period."}],"ID":25990},{"Watched":false,"Name":"Retention and Distribution Profit","Duration":"5m 56s","ChapterTopicVideoID":25171,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.290","Text":"Hello, and welcome to another video presentation in"},{"Start":"00:04.290 ","End":"00:09.045","Text":"the series on the accounting equation brought to you by Proprep."},{"Start":"00:09.045 ","End":"00:11.220","Text":"My name is Dave [inaudible]."},{"Start":"00:11.220 ","End":"00:17.805","Text":"In this video, we will focus on the retention and distribution of profit."},{"Start":"00:17.805 ","End":"00:21.765","Text":"Look at the concept of profit retention."},{"Start":"00:21.765 ","End":"00:25.770","Text":"This refers to the transferring of profit from"},{"Start":"00:25.770 ","End":"00:30.600","Text":"the income statement to the balance sheet when closing the year."},{"Start":"00:30.600 ","End":"00:32.680","Text":"Now what this means,"},{"Start":"00:32.680 ","End":"00:36.315","Text":"and thinking back to the income statement."},{"Start":"00:36.315 ","End":"00:38.744","Text":"On the income statement,"},{"Start":"00:38.744 ","End":"00:42.965","Text":"we have income and we have expenses,"},{"Start":"00:42.965 ","End":"00:47.255","Text":"which gives rise to a profit or as we know,"},{"Start":"00:47.255 ","End":"00:49.955","Text":"possibly a loss for the period."},{"Start":"00:49.955 ","End":"00:55.520","Text":"Now going back to your understanding of the income statement and the balance sheet,"},{"Start":"00:55.520 ","End":"01:02.820","Text":"we describe the income statements as measuring the performance for one period of time,"},{"Start":"01:02.820 ","End":"01:09.685","Text":"whereas the balance sheet measure the financial position at a point in time."},{"Start":"01:09.685 ","End":"01:13.970","Text":"The balance sheet or the statement of financial position,"},{"Start":"01:13.970 ","End":"01:17.765","Text":"we know has assets of some number."},{"Start":"01:17.765 ","End":"01:22.130","Text":"The total assets equals liabilities of"},{"Start":"01:22.130 ","End":"01:27.580","Text":"some number plus the owner\u0027s equity of some number."},{"Start":"01:27.580 ","End":"01:30.080","Text":"The total there equals the assets."},{"Start":"01:30.080 ","End":"01:31.550","Text":"Now as we\u0027ve just said,"},{"Start":"01:31.550 ","End":"01:37.010","Text":"the income statement measures the performance over a period of time,"},{"Start":"01:37.010 ","End":"01:44.015","Text":"whereas the balance sheet shows the financial position at a point in time."},{"Start":"01:44.015 ","End":"01:50.330","Text":"Therefore, this profit or loss needs to find its way into"},{"Start":"01:50.330 ","End":"01:54.380","Text":"the equity part of the balance sheet in order for"},{"Start":"01:54.380 ","End":"01:59.089","Text":"it to be carried forward into future periods."},{"Start":"01:59.089 ","End":"02:04.850","Text":"That is what we refer to as the transfer of the profit or"},{"Start":"02:04.850 ","End":"02:11.780","Text":"loss from the income statement into the retained profit,"},{"Start":"02:11.780 ","End":"02:13.580","Text":"which as you\u0027ve seen,"},{"Start":"02:13.580 ","End":"02:16.655","Text":"is an account within equity."},{"Start":"02:16.655 ","End":"02:24.320","Text":"Now because the income statement compute the profit or loss for a period of time only,"},{"Start":"02:24.320 ","End":"02:26.375","Text":"clearly then the following year,"},{"Start":"02:26.375 ","End":"02:32.000","Text":"the income statement starts off with a clean slate from 0."},{"Start":"02:32.000 ","End":"02:36.375","Text":"Turning our attention now to the distribution of profit."},{"Start":"02:36.375 ","End":"02:41.350","Text":"When a entity or company pays a dividend,"},{"Start":"02:41.350 ","End":"02:46.360","Text":"that dividend is taken from the retained profit."},{"Start":"02:46.360 ","End":"02:53.815","Text":"Remember the retained profit is part of the owner\u0027s equity of the business."},{"Start":"02:53.815 ","End":"02:56.945","Text":"Because remember from the accounting equation of"},{"Start":"02:56.945 ","End":"03:01.165","Text":"assets equals liabilities plus owner\u0027s equity,"},{"Start":"03:01.165 ","End":"03:05.259","Text":"when there is a distribution or dividends,"},{"Start":"03:05.259 ","End":"03:10.015","Text":"that distribution or dividends reduces equity."},{"Start":"03:10.015 ","End":"03:16.300","Text":"Now in terms of determining the amount of the dividend or distribution,"},{"Start":"03:16.300 ","End":"03:20.230","Text":"it is limited to the cumulative retained profit,"},{"Start":"03:20.230 ","End":"03:22.775","Text":"and retain profit is a cumulative number"},{"Start":"03:22.775 ","End":"03:27.430","Text":"not necessarily the profit for the specific year."},{"Start":"03:27.430 ","End":"03:33.800","Text":"To illustrate this, assume a company has a positive retained earnings and it"},{"Start":"03:33.800 ","End":"03:41.030","Text":"declares and subsequently pays a dividend of 5,000."},{"Start":"03:41.030 ","End":"03:46.070","Text":"Continuing with the example from the previous slide,"},{"Start":"03:46.070 ","End":"03:49.745","Text":"where we had said that this company declares"},{"Start":"03:49.745 ","End":"03:54.460","Text":"and then subsequently pays a dividend of 5,000."},{"Start":"03:54.460 ","End":"03:58.020","Text":"You\u0027ll see here some assumed opening balances."},{"Start":"03:58.020 ","End":"04:00.775","Text":"The balance in cash was 16,000."},{"Start":"04:00.775 ","End":"04:03.110","Text":"Some other assets, non-cash assets,"},{"Start":"04:03.110 ","End":"04:05.580","Text":"21,000, liabilities;"},{"Start":"04:05.580 ","End":"04:07.555","Text":"accounts payable of 7,000,"},{"Start":"04:07.555 ","End":"04:09.065","Text":"and with an equity;"},{"Start":"04:09.065 ","End":"04:17.530","Text":"a share capital contributed capital of 20,000 and a retained profit of 10,000."},{"Start":"04:17.530 ","End":"04:21.855","Text":"Let\u0027s just put in the accounting equation."},{"Start":"04:21.855 ","End":"04:28.370","Text":"Assets equals liabilities plus owner\u0027s equity."},{"Start":"04:28.370 ","End":"04:33.515","Text":"Now the company declares a dividend of 5,000."},{"Start":"04:33.515 ","End":"04:38.750","Text":"Dividends we know decrease equity and we"},{"Start":"04:38.750 ","End":"04:45.005","Text":"therefore put a negative 5,000 within the retained profit column of equity."},{"Start":"04:45.005 ","End":"04:48.500","Text":"I will label this a D for distribution and"},{"Start":"04:48.500 ","End":"04:53.180","Text":"remember that that distribution decreases equity,"},{"Start":"04:53.180 ","End":"04:58.110","Text":"1 of the 4 types of transactions that decrease equity."},{"Start":"04:58.110 ","End":"04:59.770","Text":"It is not yet paid,"},{"Start":"04:59.770 ","End":"05:01.370","Text":"it is simply declared,"},{"Start":"05:01.370 ","End":"05:08.960","Text":"and therefore a liability of 5,000 as a dividends payable must increase."},{"Start":"05:08.960 ","End":"05:16.580","Text":"Note the accounting equation balances because we have a increase in liabilities on"},{"Start":"05:16.580 ","End":"05:19.370","Text":"the right side of the equation and"},{"Start":"05:19.370 ","End":"05:24.755","Text":"a decrease in equity also on the right side of the equation."},{"Start":"05:24.755 ","End":"05:27.365","Text":"When the dividend is paid,"},{"Start":"05:27.365 ","End":"05:35.270","Text":"this will result in liability being decreased because we now no longer owe the 5,000,"},{"Start":"05:35.270 ","End":"05:37.775","Text":"and clearly that will affect cash,"},{"Start":"05:37.775 ","End":"05:43.455","Text":"and the asset cash will decrease by 5,000 as well."},{"Start":"05:43.455 ","End":"05:51.320","Text":"Note, there is no effect on equity when the dividend is actually paid."},{"Start":"05:51.320 ","End":"05:57.090","Text":"Effective equity came about on declaration of the dividend."}],"ID":27997},{"Watched":false,"Name":"Exercise 1 Introduction","Duration":"2m 43s","ChapterTopicVideoID":25186,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.740 ","End":"00:05.155","Text":"With these transactions were required to do 2 things."},{"Start":"00:05.155 ","End":"00:10.420","Text":"First, we\u0027re required to record the transactions in an accounting equation worksheet."},{"Start":"00:10.420 ","End":"00:13.270","Text":"Then using the accounting equation worksheet,"},{"Start":"00:13.270 ","End":"00:17.440","Text":"prepare the income statement and balance sheet at the end of the year."},{"Start":"00:17.440 ","End":"00:19.060","Text":"Now before we continue,"},{"Start":"00:19.060 ","End":"00:22.960","Text":"let\u0027s have a quick revision of the accounting equation."},{"Start":"00:22.960 ","End":"00:25.885","Text":"The accounting equation, if you recall,"},{"Start":"00:25.885 ","End":"00:30.370","Text":"is assets equals liabilities plus owner\u0027s equity."},{"Start":"00:30.370 ","End":"00:34.230","Text":"Now, these are 3 elements and we know there are actually 5."},{"Start":"00:34.230 ","End":"00:37.390","Text":"The other 2 elements are income and expenses."},{"Start":"00:37.390 ","End":"00:41.740","Text":"Now how come this accounting equation balances"},{"Start":"00:41.740 ","End":"00:46.655","Text":"without the remaining 2 elements of income and expenses?"},{"Start":"00:46.655 ","End":"00:50.665","Text":"Well, that is because they are actually included in your owner\u0027s equity."},{"Start":"00:50.665 ","End":"00:55.730","Text":"Well, owner\u0027s equity is actually affected by 4 different types of transactions,"},{"Start":"00:55.730 ","End":"00:58.610","Text":"2 are direct adjustments to the owner\u0027s equity and"},{"Start":"00:58.610 ","End":"01:03.830","Text":"the other 2 adjustments are the income and expenses."},{"Start":"01:03.830 ","End":"01:10.580","Text":"Let\u0027s have a look. Owner\u0027s equity is affected by contributions from earners,"},{"Start":"01:10.580 ","End":"01:13.430","Text":"in other words, investors and that would increase your owner\u0027s equity."},{"Start":"01:13.430 ","End":"01:16.190","Text":"So this is a direct adjustment to owners equity."},{"Start":"01:16.190 ","End":"01:17.300","Text":"It\u0027s not a different element,"},{"Start":"01:17.300 ","End":"01:20.660","Text":"it\u0027s just a direct adjustment to the owner\u0027s equity"},{"Start":"01:20.660 ","End":"01:25.010","Text":"when owners actually give the business a contribution."},{"Start":"01:25.010 ","End":"01:28.745","Text":"Then the second part is also a direct adjustment,"},{"Start":"01:28.745 ","End":"01:30.821","Text":"and this is going in the opposite direction."},{"Start":"01:30.821 ","End":"01:33.925","Text":"Here we have distributions to owners,"},{"Start":"01:33.925 ","End":"01:36.905","Text":"investors, in other words, and that decreases owner\u0027s equity."},{"Start":"01:36.905 ","End":"01:41.725","Text":"This occurs where the business is now giving some of the assets back to the owners."},{"Start":"01:41.725 ","End":"01:44.439","Text":"For example, your dividends."},{"Start":"01:44.439 ","End":"01:47.975","Text":"Then we have the fourth element, income."},{"Start":"01:47.975 ","End":"01:52.250","Text":"If we get ourselves involved in a transaction which is"},{"Start":"01:52.250 ","End":"01:56.300","Text":"classified as income that is actually going to ultimately affect the owner\u0027s equity."},{"Start":"01:56.300 ","End":"01:58.520","Text":"It increases owner\u0027s equity."},{"Start":"01:58.520 ","End":"02:02.914","Text":"Then we have the fifth element, which is expenses."},{"Start":"02:02.914 ","End":"02:05.960","Text":"If we have a transaction which is classified as an expense,"},{"Start":"02:05.960 ","End":"02:08.930","Text":"that would then ultimately affect owner\u0027s equity as well,"},{"Start":"02:08.930 ","End":"02:12.770","Text":"but in this case, it would decrease our owner\u0027s equity."},{"Start":"02:12.770 ","End":"02:16.880","Text":"Now, what is interesting here is that income and"},{"Start":"02:16.880 ","End":"02:21.637","Text":"expenses make up what is referred to as profit."},{"Start":"02:21.637 ","End":"02:25.823","Text":"If your income is greater than your expenses, you have profit."},{"Start":"02:25.823 ","End":"02:28.085","Text":"If you\u0027re told that you\u0027ve made a profit,"},{"Start":"02:28.085 ","End":"02:30.590","Text":"that would increase your owner\u0027s equity if"},{"Start":"02:30.590 ","End":"02:33.425","Text":"your expenses in a one-period exceed your income,"},{"Start":"02:33.425 ","End":"02:34.895","Text":"you would make a loss."},{"Start":"02:34.895 ","End":"02:38.900","Text":"So that would therefore decrease your owner\u0027s equity."},{"Start":"02:38.900 ","End":"02:43.710","Text":"I think we\u0027re now ready to begin the question."}],"ID":26004},{"Watched":false,"Name":"Exercise 1 Transactions 1-3","Duration":"11m 44s","ChapterTopicVideoID":25162,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:01.725","Text":"Transaction number 1,"},{"Start":"00:01.725 ","End":"00:03.390","Text":"James and his brother Tom,"},{"Start":"00:03.390 ","End":"00:07.290","Text":"invested 80,000 in cash and 20,000 worth of"},{"Start":"00:07.290 ","End":"00:12.945","Text":"inventory to start a shop adjacent to a golf course to sell golf-related merchandise."},{"Start":"00:12.945 ","End":"00:17.590","Text":"In return, the business issues shares to the brothers."},{"Start":"00:17.590 ","End":"00:21.705","Text":"Now, this is the accounting equation worksheet."},{"Start":"00:21.705 ","End":"00:24.000","Text":"But before we look at the amounts that have"},{"Start":"00:24.000 ","End":"00:26.850","Text":"already been filled in for Transaction number 1,"},{"Start":"00:26.850 ","End":"00:31.365","Text":"I want to look at the structure of this accounting equation worksheet."},{"Start":"00:31.365 ","End":"00:34.530","Text":"We have assets, liabilities,"},{"Start":"00:34.530 ","End":"00:36.765","Text":"and equity as our main headings."},{"Start":"00:36.765 ","End":"00:45.110","Text":"Now you may recall that assets equals liabilities plus equity."},{"Start":"00:45.110 ","End":"00:51.970","Text":"Now, this is the accounting equation and this is how come our balance sheet balances."},{"Start":"00:51.970 ","End":"00:55.910","Text":"This thing means that everything that I do on the left-hand side of"},{"Start":"00:55.910 ","End":"01:00.360","Text":"this vertical line must equal what I do on the right-hand side of that line."},{"Start":"01:00.360 ","End":"01:01.940","Text":"Everything on the left-hand side,"},{"Start":"01:01.940 ","End":"01:05.090","Text":"everything I do to the assets must equal"},{"Start":"01:05.090 ","End":"01:09.020","Text":"what I do to the liabilities and equity combined because otherwise,"},{"Start":"01:09.020 ","End":"01:12.000","Text":"our accounting equation won\u0027t balance."},{"Start":"01:12.280 ","End":"01:14.900","Text":"Now, let us look at the assets."},{"Start":"01:14.900 ","End":"01:17.570","Text":"We\u0027ve been given a few headings here for our assets,"},{"Start":"01:17.570 ","End":"01:22.160","Text":"and this indicates all of the assets that this business is involved with."},{"Start":"01:22.160 ","End":"01:26.214","Text":"We have cash, accounts receivable,"},{"Start":"01:26.214 ","End":"01:29.425","Text":"inventory, buildings, and equipment."},{"Start":"01:29.425 ","End":"01:31.300","Text":"In terms of liabilities,"},{"Start":"01:31.300 ","End":"01:34.360","Text":"we\u0027ve only got accounts payable and a loan."},{"Start":"01:34.360 ","End":"01:36.310","Text":"Then in terms of equity,"},{"Start":"01:36.310 ","End":"01:40.660","Text":"we\u0027ve got share capital retained profits and then profits."},{"Start":"01:40.660 ","End":"01:46.460","Text":"Now just remember that this profit column here includes our income,"},{"Start":"01:46.460 ","End":"01:50.055","Text":"less our expense items."},{"Start":"01:50.055 ","End":"01:57.280","Text":"That then means that we\u0027ve got all 5 elements included in our accounting equation,"},{"Start":"01:57.280 ","End":"01:58.825","Text":"which you\u0027ve got our assets."},{"Start":"01:58.825 ","End":"02:00.460","Text":"We have our liabilities,"},{"Start":"02:00.460 ","End":"02:01.854","Text":"we have our equity,"},{"Start":"02:01.854 ","End":"02:06.500","Text":"which includes also our income less our expenses."},{"Start":"02:06.590 ","End":"02:10.900","Text":"Okay, let\u0027s read the information that we\u0027ve been given again then."},{"Start":"02:10.900 ","End":"02:16.164","Text":"James and his brother Tom invested 80,000 cash and 20,000 worth of inventory."},{"Start":"02:16.164 ","End":"02:21.930","Text":"Now both the cash and the inventory are assets."},{"Start":"02:21.930 ","End":"02:24.265","Text":"Now, why do I say they\u0027re assets?"},{"Start":"02:24.265 ","End":"02:27.580","Text":"Well, we have to go back to the asset definition."},{"Start":"02:27.580 ","End":"02:30.805","Text":"The asset definition, if you recall,"},{"Start":"02:30.805 ","End":"02:36.280","Text":"is a present economic resource controlled by the entity as a result of past events."},{"Start":"02:36.280 ","End":"02:40.600","Text":"Now, an economic resource in turn is also defined and"},{"Start":"02:40.600 ","End":"02:45.535","Text":"an economic resource is a right that has the potential to produce economic benefits."},{"Start":"02:45.535 ","End":"02:49.095","Text":"Now, both cash and inventory, obviously,"},{"Start":"02:49.095 ","End":"02:52.670","Text":"give us the right to do something with"},{"Start":"02:52.670 ","End":"02:57.125","Text":"them that has the potential to bring us economic benefits."},{"Start":"02:57.125 ","End":"03:02.285","Text":"If we use our cash carefully or if we sell our inventory at an appropriate selling price,"},{"Start":"03:02.285 ","End":"03:05.765","Text":"we should be able to bring in economic benefits."},{"Start":"03:05.765 ","End":"03:09.110","Text":"But it just has to have the potential to bring in economic benefits."},{"Start":"03:09.110 ","End":"03:10.865","Text":"There\u0027s no need for even certainty."},{"Start":"03:10.865 ","End":"03:15.065","Text":"Here we have economic resources that have been given to the business."},{"Start":"03:15.065 ","End":"03:18.920","Text":"That is why we put 80,000 under the cash column,"},{"Start":"03:18.920 ","End":"03:20.885","Text":"which is in the asset side."},{"Start":"03:20.885 ","End":"03:23.405","Text":"We\u0027ve got 20 thousand under the inventory column,"},{"Start":"03:23.405 ","End":"03:25.970","Text":"again, under the assets column."},{"Start":"03:25.970 ","End":"03:29.180","Text":"The next question we need to ask ourselves is,"},{"Start":"03:29.180 ","End":"03:30.710","Text":"do we have a liability here?"},{"Start":"03:30.710 ","End":"03:33.995","Text":"Do we have to give this money back to James and his brother Tom?"},{"Start":"03:33.995 ","End":"03:35.310","Text":"Well, the answer here is no,"},{"Start":"03:35.310 ","End":"03:36.680","Text":"and why do I know that?"},{"Start":"03:36.680 ","End":"03:39.980","Text":"It\u0027s because it says James and his brother Tom invested."},{"Start":"03:39.980 ","End":"03:41.750","Text":"They did not lend."},{"Start":"03:41.750 ","End":"03:45.905","Text":"They invested the 80,000 cash and the 20,000 inventory."},{"Start":"03:45.905 ","End":"03:51.680","Text":"This is what we call a contribution from an owner."},{"Start":"03:51.680 ","End":"03:55.340","Text":"This is equity. Why do I say it\u0027s equity?"},{"Start":"03:55.340 ","End":"03:59.225","Text":"I said it\u0027s equity because of the definition of equity."},{"Start":"03:59.225 ","End":"04:02.660","Text":"The equity definition is"},{"Start":"04:02.660 ","End":"04:07.665","Text":"the residual interest in the assets after deducting the liabilities."},{"Start":"04:07.665 ","End":"04:12.200","Text":"What we have done here is we have increased our assets by 80,000 and 20,000."},{"Start":"04:12.200 ","End":"04:14.645","Text":"We\u0027ve increased our assets by 100,000."},{"Start":"04:14.645 ","End":"04:18.170","Text":"We\u0027ve established that there\u0027s no liability because James and Tom did not"},{"Start":"04:18.170 ","End":"04:22.130","Text":"lend the money or the inventory but invested them so there\u0027s no liability."},{"Start":"04:22.130 ","End":"04:24.230","Text":"There was another way to no obligation to refund"},{"Start":"04:24.230 ","End":"04:27.680","Text":"this money because we\u0027ve got assets going up by"},{"Start":"04:27.680 ","End":"04:37.200","Text":"100,000 and liabilities remaining unchanged."},{"Start":"04:37.200 ","End":"04:44.465","Text":"That then means that assets of 100,000 less liabilities of let me just make this a 0."},{"Start":"04:44.465 ","End":"04:49.775","Text":"Assets of 100,000 minus liabilities of 0."},{"Start":"04:49.775 ","End":"04:57.530","Text":"That means we\u0027ve got equity of 100,000 equity has gone up by 100,000."},{"Start":"04:57.530 ","End":"04:59.255","Text":"Now then the question is,"},{"Start":"04:59.255 ","End":"05:02.645","Text":"which of these columns should we put the 100,000 in?"},{"Start":"05:02.645 ","End":"05:04.760","Text":"Well, you can see we\u0027ve put it under share capital,"},{"Start":"05:04.760 ","End":"05:09.260","Text":"but just remember there are 4 different ways in which equity can change."},{"Start":"05:09.260 ","End":"05:14.255","Text":"It could change because of a contribution from an owner,"},{"Start":"05:14.255 ","End":"05:18.110","Text":"which is typically referred to as a holder of an equity claim."},{"Start":"05:18.110 ","End":"05:23.525","Text":"That\u0027s The definition refers to an owner as or it could be a distribution to an owner."},{"Start":"05:23.525 ","End":"05:27.620","Text":"Now that would appear under the retained profits column as, for example,"},{"Start":"05:27.620 ","End":"05:33.320","Text":"the dividend declared or it could change as a result of making income,"},{"Start":"05:33.320 ","End":"05:39.370","Text":"in which case the equity goes up or it could be decreased if you incur an expense."},{"Start":"05:39.370 ","End":"05:41.210","Text":"Alright, so in this case, as you can see,"},{"Start":"05:41.210 ","End":"05:43.610","Text":"we\u0027ve got an investment from James and his brother Tom."},{"Start":"05:43.610 ","End":"05:45.980","Text":"They\u0027re the owners, so this is a contribution from"},{"Start":"05:45.980 ","End":"05:49.190","Text":"an owner and that is why it\u0027s going under the share capital."},{"Start":"05:49.190 ","End":"05:51.095","Text":"They were given shares in return."},{"Start":"05:51.095 ","End":"05:53.090","Text":"It\u0027s going under share capital."},{"Start":"05:53.090 ","End":"05:55.850","Text":"It wasn\u0027t income. It wasn\u0027t an expense."},{"Start":"05:55.850 ","End":"05:59.360","Text":"It wasn\u0027t a distribution to the owners,"},{"Start":"05:59.360 ","End":"06:02.780","Text":"but instead, it was a contribution from the owners."},{"Start":"06:02.780 ","End":"06:04.640","Text":"Therefore, it\u0027s under share capital."},{"Start":"06:04.640 ","End":"06:06.690","Text":"Transaction number 2,"},{"Start":"06:06.690 ","End":"06:12.590","Text":"a building costing 45,000 is acquired at the beginning of the year by paying"},{"Start":"06:12.590 ","End":"06:19.150","Text":"12,500 cash and assuming a 10-year mortgage loan at an 8 percent interest rate."},{"Start":"06:19.150 ","End":"06:23.750","Text":"A building is an asset because it is"},{"Start":"06:23.750 ","End":"06:28.650","Text":"a present economic resource controlled by the entity as a result of a past event."},{"Start":"06:28.650 ","End":"06:31.070","Text":"That economic resource refers to"},{"Start":"06:31.070 ","End":"06:34.625","Text":"a right which has the potential to produce economic benefits."},{"Start":"06:34.625 ","End":"06:38.480","Text":"Clearly, a building gives us a right to use it."},{"Start":"06:38.480 ","End":"06:43.025","Text":"By having this building we have a potential to produce economic benefits."},{"Start":"06:43.025 ","End":"06:47.405","Text":"Alright, so the building is an asset and we acquired at the beginning of the year."},{"Start":"06:47.405 ","End":"06:48.710","Text":"Now how do we do this?"},{"Start":"06:48.710 ","End":"06:51.290","Text":"We paid 12,500 in cash."},{"Start":"06:51.290 ","End":"06:57.870","Text":"Now cash, as we explained in Transaction number 1, is an asset."},{"Start":"06:58.270 ","End":"07:03.170","Text":"Our essays in this case are going down because we\u0027re giving them away."},{"Start":"07:03.170 ","End":"07:07.745","Text":"Then we are assuming a 10-year mortgage loan at an 8 percent interest rate,"},{"Start":"07:07.745 ","End":"07:10.765","Text":"and a mortgage loan is a liability."},{"Start":"07:10.765 ","End":"07:13.770","Text":"Now, why do I say it\u0027s a liability?"},{"Start":"07:13.770 ","End":"07:16.850","Text":"That\u0027s because it meets the definition of a liability,"},{"Start":"07:16.850 ","End":"07:20.300","Text":"which is a present obligation of the entity to"},{"Start":"07:20.300 ","End":"07:24.470","Text":"transfer an economic resource as a result of a past event."},{"Start":"07:24.470 ","End":"07:27.520","Text":"The past event here is signing a mortgage loan agreement."},{"Start":"07:27.520 ","End":"07:29.750","Text":"We now have an obligation, we,"},{"Start":"07:29.750 ","End":"07:32.570","Text":"the entity have an obligation to transfer"},{"Start":"07:32.570 ","End":"07:36.785","Text":"economic resources to repay this loan in the future."},{"Start":"07:36.785 ","End":"07:41.390","Text":"Okay, so the building causing 45,000 that we\u0027ve acquired,"},{"Start":"07:41.390 ","End":"07:45.890","Text":"we put under the building column, which is an asset."},{"Start":"07:45.890 ","End":"07:49.549","Text":"Then the 12,500 that we pay in cash,"},{"Start":"07:49.549 ","End":"07:51.260","Text":"we put under the cash column."},{"Start":"07:51.260 ","End":"07:55.160","Text":"But notice we\u0027ve put it in as a negative amount minus"},{"Start":"07:55.160 ","End":"08:00.265","Text":"12,500 because our assets are being depleted by that amount,"},{"Start":"08:00.265 ","End":"08:03.500","Text":"and then the mortgage loan is the difference."},{"Start":"08:03.500 ","End":"08:06.095","Text":"We bought a building at 45,000,"},{"Start":"08:06.095 ","End":"08:08.600","Text":"we only use 12,500 cash."},{"Start":"08:08.600 ","End":"08:12.015","Text":"The balance of 32,500 was a loan."},{"Start":"08:12.015 ","End":"08:13.910","Text":"We put that under liabilities,"},{"Start":"08:13.910 ","End":"08:16.325","Text":"the loan of 32,500."},{"Start":"08:16.325 ","End":"08:18.970","Text":"Our liabilities have gone up."},{"Start":"08:18.970 ","End":"08:22.159","Text":"Before we move on from this transaction,"},{"Start":"08:22.159 ","End":"08:25.100","Text":"we must double-check that what we\u0027ve done to"},{"Start":"08:25.100 ","End":"08:28.850","Text":"the left-hand side of this red line is what we\u0027ve done to"},{"Start":"08:28.850 ","End":"08:36.915","Text":"the right-hand side of the red line because assets equal liabilities plus equity."},{"Start":"08:36.915 ","End":"08:38.855","Text":"What have we done to the left-hand side?"},{"Start":"08:38.855 ","End":"08:41.510","Text":"We\u0027ve increased our buildings by 45,000,"},{"Start":"08:41.510 ","End":"08:44.780","Text":"we\u0027ve decreased our cash by 32,500 so"},{"Start":"08:44.780 ","End":"08:50.820","Text":"the net effect is that our assets have gone up by 32,500."},{"Start":"08:51.070 ","End":"08:56.750","Text":"It has gone up by 32,500 and our liabilities have gone up by 32,500."},{"Start":"08:56.750 ","End":"09:00.640","Text":"Our accounting equation does indeed balance."},{"Start":"09:00.640 ","End":"09:03.780","Text":"That\u0027s all there is to Transaction 2."},{"Start":"09:03.780 ","End":"09:06.285","Text":"Transaction number 3."},{"Start":"09:06.285 ","End":"09:14.450","Text":"Inventory costing 36,000 currency units is purchased on account from the suppliers."},{"Start":"09:14.450 ","End":"09:19.205","Text":"Now we know that inventory is an asset."},{"Start":"09:19.205 ","End":"09:23.720","Text":"The reason we say it is an asset is that it meets the definition of an asset,"},{"Start":"09:23.720 ","End":"09:25.939","Text":"it\u0027s a present economic resource."},{"Start":"09:25.939 ","End":"09:31.120","Text":"It\u0027s controlled by the entity as a result of a past event which was as purchasing it."},{"Start":"09:31.120 ","End":"09:33.530","Text":"The economic resource is right,"},{"Start":"09:33.530 ","End":"09:36.470","Text":"that has the potential to produce economic benefits."},{"Start":"09:36.470 ","End":"09:39.185","Text":"We did mention that in a previous transaction."},{"Start":"09:39.185 ","End":"09:40.760","Text":"Inventory is an asset."},{"Start":"09:40.760 ","End":"09:47.455","Text":"We know that so we\u0027re going to put this under assets inventory."},{"Start":"09:47.455 ","End":"09:50.839","Text":"Then we put the 36,000 that we\u0027ve just purchased."},{"Start":"09:50.839 ","End":"09:54.710","Text":"On the other side of the equation is the fact that we\u0027ve purchased on account."},{"Start":"09:54.710 ","End":"09:56.650","Text":"Now this means we have not paid cash,"},{"Start":"09:56.650 ","End":"09:58.640","Text":"so that means we have an obligation,"},{"Start":"09:58.640 ","End":"10:01.320","Text":"which means we have a liability."},{"Start":"10:02.170 ","End":"10:07.550","Text":"A liability is defined as a present obligation of"},{"Start":"10:07.550 ","End":"10:12.610","Text":"the entity to transfer an economic resource as a result of a past event."},{"Start":"10:12.610 ","End":"10:17.525","Text":"We have a past event which is the purchasing of inventory on account,"},{"Start":"10:17.525 ","End":"10:19.385","Text":"which means we have not paid cash."},{"Start":"10:19.385 ","End":"10:22.460","Text":"Now we have a present obligation to"},{"Start":"10:22.460 ","End":"10:26.765","Text":"transfer an economic resource such as cash in the future."},{"Start":"10:26.765 ","End":"10:28.890","Text":"We\u0027re going to have to pay this off in the future."},{"Start":"10:28.890 ","End":"10:32.920","Text":"Therefore, we clearly have a liability, it\u0027s an obligation."},{"Start":"10:32.920 ","End":"10:38.360","Text":"We put it under liabilities and it\u0027s an account payable,36,000."},{"Start":"10:42.020 ","End":"10:45.770","Text":"It is not a loan. It is very similar to a loan."},{"Start":"10:45.770 ","End":"10:48.550","Text":"An account payable is simply when you\u0027re purchasing,"},{"Start":"10:48.550 ","End":"10:50.410","Text":"is it regular little transactions and"},{"Start":"10:50.410 ","End":"10:53.185","Text":"you\u0027re simply not paying for them in cash immediately."},{"Start":"10:53.185 ","End":"10:59.575","Text":"Now what I want you to notice here is that on the left-hand side of this dividing line,"},{"Start":"10:59.575 ","End":"11:01.405","Text":"we have our assets."},{"Start":"11:01.405 ","End":"11:04.045","Text":"On the right-hand side, we have our liabilities,"},{"Start":"11:04.045 ","End":"11:07.705","Text":"we have our liabilities and equity, and the assets."},{"Start":"11:07.705 ","End":"11:11.590","Text":"What we do to the assets must equal what we do to the liabilities and the equity."},{"Start":"11:11.590 ","End":"11:12.730","Text":"As you can see,"},{"Start":"11:12.730 ","End":"11:18.345","Text":"we have debited the assets with the left-hand side of this red line with 36,000."},{"Start":"11:18.345 ","End":"11:19.590","Text":"On the right-hand side,"},{"Start":"11:19.590 ","End":"11:23.030","Text":"we\u0027ve put 36,000 under liabilities."},{"Start":"11:23.030 ","End":"11:25.190","Text":"By the way, there\u0027ll be no equity. Why is that?"},{"Start":"11:25.190 ","End":"11:31.340","Text":"Because equity is defined as the residual interest in the assets minus the liabilities."},{"Start":"11:31.340 ","End":"11:34.100","Text":"Well, we\u0027ve just increased the assets by 36,000"},{"Start":"11:34.100 ","End":"11:37.610","Text":"and we\u0027ve increased the liabilities by 36,000."},{"Start":"11:37.610 ","End":"11:41.270","Text":"Therefore, there is no equity."},{"Start":"11:41.270 ","End":"11:45.510","Text":"Equity, is a no."}],"ID":25980},{"Watched":false,"Name":"Exercise 1 Transactions 4-6","Duration":"10m 26s","ChapterTopicVideoID":25163,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.700","Text":"Transaction number 4."},{"Start":"00:02.700 ","End":"00:09.225","Text":"Here we have a payment of 200 currency units for insurance for the period."},{"Start":"00:09.225 ","End":"00:11.669","Text":"When we have a payment,"},{"Start":"00:11.669 ","End":"00:14.969","Text":"what that means is that our cash has depleted."},{"Start":"00:14.969 ","End":"00:17.475","Text":"As we know from the previous transactions,"},{"Start":"00:17.475 ","End":"00:18.990","Text":"cash is an asset."},{"Start":"00:18.990 ","End":"00:21.360","Text":"Therefore, we\u0027re going to put this under our assets."},{"Start":"00:21.360 ","End":"00:24.930","Text":"We\u0027re putting it under assets, under cash."},{"Start":"00:24.930 ","End":"00:26.925","Text":"But what we\u0027re going to be doing,"},{"Start":"00:26.925 ","End":"00:30.345","Text":"is we\u0027re going to be subtracting 200"},{"Start":"00:30.345 ","End":"00:34.335","Text":"so as to show that our assets are actually being depleted."},{"Start":"00:34.335 ","End":"00:36.780","Text":"That accounts for the payment,"},{"Start":"00:36.780 ","End":"00:40.050","Text":"but what about the other side of this transaction?"},{"Start":"00:40.050 ","End":"00:43.280","Text":"The insurance. What does insurance represent to us."},{"Start":"00:43.280 ","End":"00:44.705","Text":"Well, it isn\u0027t an asset."},{"Start":"00:44.705 ","End":"00:48.740","Text":"The reason it isn\u0027t an asset is that it doesn\u0027t meet the definition."},{"Start":"00:48.740 ","End":"00:50.270","Text":"Definition of an asset is"},{"Start":"00:50.270 ","End":"00:56.375","Text":"a present economic resource controlled by the entity resulting from a past event."},{"Start":"00:56.375 ","End":"00:59.930","Text":"Importantly, the economic resource is defined as"},{"Start":"00:59.930 ","End":"01:03.395","Text":"a right that has the potential to produce economic benefits."},{"Start":"01:03.395 ","End":"01:08.810","Text":"In other words, we\u0027re going to get potentially economic benefits from this in the future."},{"Start":"01:08.810 ","End":"01:11.480","Text":"Now, insurance doesn\u0027t meet that definition."},{"Start":"01:11.480 ","End":"01:14.735","Text":"What happens with insurance is as you\u0027re paying for it,"},{"Start":"01:14.735 ","End":"01:17.420","Text":"you are being covered for that particular period."},{"Start":"01:17.420 ","End":"01:20.755","Text":"You\u0027re not going to get any benefits from it in the future."},{"Start":"01:20.755 ","End":"01:23.795","Text":"It isn\u0027t an asset that you\u0027ve acquired here."},{"Start":"01:23.795 ","End":"01:27.350","Text":"Then could it potentially be a liability?"},{"Start":"01:27.350 ","End":"01:31.265","Text":"Well, there\u0027s no obligation to pay anything further."},{"Start":"01:31.265 ","End":"01:34.730","Text":"Remember, a liability is a present obligation of"},{"Start":"01:34.730 ","End":"01:38.645","Text":"the entity to transfer an economic resource as a result of a past event,"},{"Start":"01:38.645 ","End":"01:40.340","Text":"but we don\u0027t have any obligation here."},{"Start":"01:40.340 ","End":"01:42.740","Text":"We\u0027re paying for insurance as a false deuces."},{"Start":"01:42.740 ","End":"01:44.570","Text":"Clearly no obligation."},{"Start":"01:44.570 ","End":"01:46.760","Text":"That then means it must be equity."},{"Start":"01:46.760 ","End":"01:50.926","Text":"I say it must be equity because we know by definition,"},{"Start":"01:50.926 ","End":"01:52.520","Text":"through our accounting equation,"},{"Start":"01:52.520 ","End":"01:57.445","Text":"assets minus liabilities equals owner\u0027s equity."},{"Start":"01:57.445 ","End":"02:00.840","Text":"Our assets have gone down by 200,"},{"Start":"02:00.840 ","End":"02:04.155","Text":"our liabilities have remained unchanged,"},{"Start":"02:04.155 ","End":"02:07.924","Text":"therefore our owner\u0027s equity must have gone down by 200."},{"Start":"02:07.924 ","End":"02:13.040","Text":"Let us look at the 3 equity accounts that we have here."},{"Start":"02:13.040 ","End":"02:14.480","Text":"We\u0027ve got share capital,"},{"Start":"02:14.480 ","End":"02:15.950","Text":"retained profit, and profit."},{"Start":"02:15.950 ","End":"02:17.960","Text":"Now, bear that in mind for a moment."},{"Start":"02:17.960 ","End":"02:24.035","Text":"Now let\u0027s remember there are 4 different ways in which equity could change."},{"Start":"02:24.035 ","End":"02:28.745","Text":"Equity can change if we receive a contribution,"},{"Start":"02:28.745 ","End":"02:30.365","Text":"from our owners,"},{"Start":"02:30.365 ","End":"02:34.445","Text":"that would increase our equity."},{"Start":"02:34.445 ","End":"02:39.845","Text":"It also changes if we have a distribution to the owners,"},{"Start":"02:39.845 ","End":"02:44.645","Text":"for example, dividends declared by the business to the owners."},{"Start":"02:44.645 ","End":"02:47.720","Text":"That would decrease our equity."},{"Start":"02:47.720 ","End":"02:51.200","Text":"Equity could also increase if you made income,"},{"Start":"02:51.200 ","End":"02:55.760","Text":"and it would decrease if you incurred an expense."},{"Start":"02:55.760 ","End":"03:00.245","Text":"These are the 4 ways in which equity could change."},{"Start":"03:00.245 ","End":"03:05.480","Text":"Now, we can see that our equity has decreased by 200."},{"Start":"03:05.480 ","End":"03:09.200","Text":"It\u0027s either a distribution or it is an expense."},{"Start":"03:09.200 ","End":"03:14.590","Text":"Now a distribution would appear in retained profit as a negative amount."},{"Start":"03:14.590 ","End":"03:17.785","Text":"In other words, if we declared a dividend to our owners,"},{"Start":"03:17.785 ","End":"03:19.865","Text":"in other words we wanted to pay them a dividend,"},{"Start":"03:19.865 ","End":"03:22.370","Text":"it will come out of our retained profit column."},{"Start":"03:22.370 ","End":"03:24.875","Text":"But we\u0027ve clearly not paid an owner."},{"Start":"03:24.875 ","End":"03:28.340","Text":"What we\u0027re paying here are the insurance providers."},{"Start":"03:28.340 ","End":"03:34.039","Text":"It\u0027s not a distribution to an owner and must be an expense."},{"Start":"03:34.039 ","End":"03:37.759","Text":"I can also prove this by going directly to the expense definition."},{"Start":"03:37.759 ","End":"03:47.570","Text":"An expense is defined as a decrease in an asset or an increase in a liability that leads"},{"Start":"03:47.570 ","End":"03:51.200","Text":"to a decrease in equity that is"},{"Start":"03:51.200 ","End":"03:57.905","Text":"not a distribution to the holder of an equity claim,"},{"Start":"03:57.905 ","End":"04:02.825","Text":"which we can simplify as not a distribution to an owner."},{"Start":"04:02.825 ","End":"04:08.095","Text":"The definition actually refers to an owner as a holder of an equity claim."},{"Start":"04:08.095 ","End":"04:12.320","Text":"Do we have a decrease in an asset or an increase in a liability?"},{"Start":"04:12.320 ","End":"04:14.705","Text":"Well, we do have a decrease in an asset,"},{"Start":"04:14.705 ","End":"04:16.480","Text":"we don\u0027t have an increase in a liability."},{"Start":"04:16.480 ","End":"04:18.815","Text":"But yes, we have a decrease in an asset."},{"Start":"04:18.815 ","End":"04:20.750","Text":"Does it lead to a decrease in equity?"},{"Start":"04:20.750 ","End":"04:24.590","Text":"Yes, it does because the asset went down by 200,"},{"Start":"04:24.590 ","End":"04:26.900","Text":"but the liability remained unchanged,"},{"Start":"04:26.900 ","End":"04:30.080","Text":"therefore equity did go down, that is met."},{"Start":"04:30.080 ","End":"04:32.230","Text":"It\u0027s not a distribution to an owner,"},{"Start":"04:32.230 ","End":"04:35.195","Text":"we know that, we\u0027re paying insurance provider."},{"Start":"04:35.195 ","End":"04:39.365","Text":"That\u0027s met. That\u0027s how I know that it is indeed an expense."},{"Start":"04:39.365 ","End":"04:41.690","Text":"Expense is going to profit because remember,"},{"Start":"04:41.690 ","End":"04:44.710","Text":"profit is income less expenses."},{"Start":"04:44.710 ","End":"04:46.625","Text":"If you have income or an expense,"},{"Start":"04:46.625 ","End":"04:49.115","Text":"you\u0027re going to put it in the profit column."},{"Start":"04:49.115 ","End":"04:51.535","Text":"We\u0027re going to put it under profit,"},{"Start":"04:51.535 ","End":"04:58.680","Text":"this minus 200 and it\u0027s going to be recorded as an insurance expense."},{"Start":"04:58.760 ","End":"05:01.380","Text":"Transaction number 5."},{"Start":"05:01.380 ","End":"05:06.410","Text":"We have equipment costing 16,000 currency units purchased for cash."},{"Start":"05:06.410 ","End":"05:08.765","Text":"The equipment. What is equipment?"},{"Start":"05:08.765 ","End":"05:11.345","Text":"Equipment must be an asset,"},{"Start":"05:11.345 ","End":"05:15.140","Text":"and the reason I say it must be an asset is because it meets the definition thereof;"},{"Start":"05:15.140 ","End":"05:19.040","Text":"it\u0027s a present economic resource controlled by the entity"},{"Start":"05:19.040 ","End":"05:22.849","Text":"as a result of the past event being the purchase of the equipment we now control,"},{"Start":"05:22.849 ","End":"05:25.340","Text":"the past event is the actual purchase transaction,"},{"Start":"05:25.340 ","End":"05:28.910","Text":"and we have now presently an economic resource."},{"Start":"05:28.910 ","End":"05:31.610","Text":"Now an economic resource was defined as a right"},{"Start":"05:31.610 ","End":"05:34.295","Text":"that has the potential to produce economic benefits."},{"Start":"05:34.295 ","End":"05:37.150","Text":"Equipment is that it does provide us with that right."},{"Start":"05:37.150 ","End":"05:39.800","Text":"Once we own the equipment,"},{"Start":"05:39.800 ","End":"05:45.630","Text":"we have a right to use it and hopefully make some economic benefits in the future."},{"Start":"05:45.630 ","End":"05:47.205","Text":"It\u0027s clearly an asset,"},{"Start":"05:47.205 ","End":"05:50.615","Text":"and on the other side of things, we\u0027re dealing with cash."},{"Start":"05:50.615 ","End":"05:52.250","Text":"We know cash is an asset,"},{"Start":"05:52.250 ","End":"05:55.340","Text":"but in this case our asset is going down"},{"Start":"05:55.340 ","End":"05:58.905","Text":"because we\u0027re paying for this equipment with the cash."},{"Start":"05:58.905 ","End":"06:01.730","Text":"Our cash is going down and the equipment,"},{"Start":"06:01.730 ","End":"06:03.620","Text":"which is an asset, is going up."},{"Start":"06:03.620 ","End":"06:06.275","Text":"In the accounting equation worksheet,"},{"Start":"06:06.275 ","End":"06:11.120","Text":"you\u0027ll see we\u0027re only going to involve assets here."},{"Start":"06:11.120 ","End":"06:14.930","Text":"Liabilities and equity are going to remain unchanged."},{"Start":"06:14.930 ","End":"06:22.325","Text":"Our cash is going down by 16,000 and our equipment is going up by 16,000."},{"Start":"06:22.325 ","End":"06:26.495","Text":"On the left-hand side of that account after the red line,"},{"Start":"06:26.495 ","End":"06:30.560","Text":"we\u0027ve got a minus 16,000 and a positive 16,000."},{"Start":"06:30.560 ","End":"06:35.510","Text":"Assets went down by 16,000 and it went up by 16,000,"},{"Start":"06:35.510 ","End":"06:39.045","Text":"so our assets remain unchanged overall."},{"Start":"06:39.045 ","End":"06:41.945","Text":"Our liabilities on the right-hand side of this red line,"},{"Start":"06:41.945 ","End":"06:44.180","Text":"our liabilities are unchanged,"},{"Start":"06:44.180 ","End":"06:46.145","Text":"so I\u0027m going to put in here not applicable."},{"Start":"06:46.145 ","End":"06:50.720","Text":"The equity here is also unchanged, not applicable."},{"Start":"06:50.720 ","End":"06:52.800","Text":"In the accounting equation here,"},{"Start":"06:52.800 ","End":"06:57.755","Text":"assets equals liabilities plus equity,"},{"Start":"06:57.755 ","End":"07:01.040","Text":"we\u0027ve effectively got assets of nothing is equal to"},{"Start":"07:01.040 ","End":"07:04.645","Text":"liabilities of nothing plus equity of nothing."},{"Start":"07:04.645 ","End":"07:10.175","Text":"It balances. Let\u0027s move on to Transaction number 6."},{"Start":"07:10.175 ","End":"07:19.475","Text":"Payment of 200 currency units to DHL service for delivering the equipment."},{"Start":"07:19.475 ","End":"07:23.180","Text":"Now this is an interesting question because it brings into"},{"Start":"07:23.180 ","End":"07:26.870","Text":"play the measurement of property, plant, and equipment."},{"Start":"07:26.870 ","End":"07:32.435","Text":"You needed to know what costs get included in the cost of equipment."},{"Start":"07:32.435 ","End":"07:36.245","Text":"Let me explain to you what costs get included in the cost of equipment."},{"Start":"07:36.245 ","End":"07:40.140","Text":"It\u0027s a measurement of property plant and equipment."},{"Start":"07:40.390 ","End":"07:45.224","Text":"Property, plant, and equipment."},{"Start":"07:45.224 ","End":"07:47.580","Text":"We have to include,"},{"Start":"07:47.580 ","End":"07:49.800","Text":"in the cost of that asset,"},{"Start":"07:49.800 ","End":"07:53.000","Text":"any asset that falls within that category of property, plant and equipment."},{"Start":"07:53.000 ","End":"08:01.715","Text":"We need to include all costs that are necessary to get"},{"Start":"08:01.715 ","End":"08:08.360","Text":"the asset to a location and"},{"Start":"08:08.360 ","End":"08:16.715","Text":"condition necessary to operate the asset in the manner intended by management."},{"Start":"08:16.715 ","End":"08:20.600","Text":"I\u0027ll run through that again. This question"},{"Start":"08:20.600 ","End":"08:24.830","Text":"brings into play the measurement of property, plant, and equipment."},{"Start":"08:24.830 ","End":"08:30.815","Text":"You needed to know that the cost that get included in the asset,"},{"Start":"08:30.815 ","End":"08:32.060","Text":"if it falls into the property,"},{"Start":"08:32.060 ","End":"08:33.740","Text":"plant, and equipment category,"},{"Start":"08:33.740 ","End":"08:36.170","Text":"you would need to include all the costs that are"},{"Start":"08:36.170 ","End":"08:39.170","Text":"necessary to get the asset to a location and put"},{"Start":"08:39.170 ","End":"08:41.630","Text":"it in the condition that are necessary to operate"},{"Start":"08:41.630 ","End":"08:45.069","Text":"the asset in the manner intended by management."},{"Start":"08:45.069 ","End":"08:49.035","Text":"Coming back here then, we\u0027ve got a payment of 200."},{"Start":"08:49.035 ","End":"08:52.460","Text":"What we know a payment means that our cash,"},{"Start":"08:52.460 ","End":"08:56.685","Text":"which is an asset, has gone down."},{"Start":"08:56.685 ","End":"08:59.175","Text":"The delivery of the equipment,"},{"Start":"08:59.175 ","End":"09:02.180","Text":"this is actually going to be part of property,"},{"Start":"09:02.180 ","End":"09:04.120","Text":"plant, and equipment, which is an asset."},{"Start":"09:04.120 ","End":"09:11.525","Text":"Asset, the equipment, is going to go up."},{"Start":"09:11.525 ","End":"09:17.510","Text":"Because the delivery cost falls into the cost that was necessary to get the asset to"},{"Start":"09:17.510 ","End":"09:20.240","Text":"the location necessary to"},{"Start":"09:20.240 ","End":"09:23.180","Text":"be able to operate the asset in the manner intended by management."},{"Start":"09:23.180 ","End":"09:25.640","Text":"Unless we had the equipment delivered to us,"},{"Start":"09:25.640 ","End":"09:27.520","Text":"we obviously couldn\u0027t use it."},{"Start":"09:27.520 ","End":"09:30.095","Text":"It\u0027s going to go into the cost of our asset."},{"Start":"09:30.095 ","End":"09:35.690","Text":"Under assets, we\u0027re going to show the cash being depleted by 200"},{"Start":"09:35.690 ","End":"09:39.350","Text":"and under equipment we\u0027re going to see the"},{"Start":"09:39.350 ","End":"09:43.865","Text":"200 being an addition to the cost of the equipment."},{"Start":"09:43.865 ","End":"09:48.695","Text":"So far, the equipment has cost us 16,000 plus the 200."},{"Start":"09:48.695 ","End":"09:52.540","Text":"Equipment effectively cost us 16,200."},{"Start":"09:52.540 ","End":"09:55.280","Text":"Just remember to check,"},{"Start":"09:55.280 ","End":"09:57.380","Text":"does our equation balance?"},{"Start":"09:57.380 ","End":"10:00.230","Text":"We have assets on the left-hand side equals"},{"Start":"10:00.230 ","End":"10:04.055","Text":"liabilities plus the equity on the right-hand side."},{"Start":"10:04.055 ","End":"10:08.345","Text":"You can see our assets have gone down by 200,"},{"Start":"10:08.345 ","End":"10:10.503","Text":"and they\u0027ve gone up by 200."},{"Start":"10:10.503 ","End":"10:14.350","Text":"So our asset have effectively remained unchanged."},{"Start":"10:14.350 ","End":"10:18.297","Text":"Assets have remained unchanged,"},{"Start":"10:18.297 ","End":"10:21.100","Text":"it hasn\u0027t had any impact on our liabilities,"},{"Start":"10:21.100 ","End":"10:24.320","Text":"and our equity has remained unchanged."},{"Start":"10:24.320 ","End":"10:27.590","Text":"Let\u0027s move on to Transaction number 7."}],"ID":25981},{"Watched":false,"Name":"Exercise 1 Transactions 7-8","Duration":"10m 46s","ChapterTopicVideoID":25164,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:01.995","Text":"Transaction number 8,"},{"Start":"00:01.995 ","End":"00:07.635","Text":"inventory costing 8,000 currency units is sold on credit for 18,000."},{"Start":"00:07.635 ","End":"00:09.855","Text":"Here we actually have 2 transactions."},{"Start":"00:09.855 ","End":"00:15.990","Text":"Let\u0027s read that again. Inventory costing 8,000 is sold."},{"Start":"00:15.990 ","End":"00:20.695","Text":"We\u0027ve got inventory with a cost of 8,000 is sold."},{"Start":"00:20.695 ","End":"00:27.845","Text":"This part of the sentence actually refers to the cost of the goods that were sold,"},{"Start":"00:27.845 ","End":"00:33.515","Text":"which we often just simply refer to as cost of sales."},{"Start":"00:33.515 ","End":"00:37.940","Text":"Some of our inventory no longer belongs to us because we\u0027ve sold it."},{"Start":"00:37.940 ","End":"00:40.460","Text":"So our inventory, which is an asset,"},{"Start":"00:40.460 ","End":"00:46.590","Text":"has to decrease so the asset decreases and it\u0027s going to be sold."},{"Start":"00:46.590 ","End":"00:51.030","Text":"So we\u0027re going to expense this and I\u0027ll explain why in a moment."},{"Start":"00:51.030 ","End":"00:54.120","Text":"Our expense is going to increase."},{"Start":"00:54.120 ","End":"00:56.950","Text":"The second part to the sentence is,"},{"Start":"00:56.950 ","End":"01:04.390","Text":"inventory is sold on credit for 18,000."},{"Start":"01:04.390 ","End":"01:09.320","Text":"So here we have a sale on credit for 18,000."},{"Start":"01:09.320 ","End":"01:11.465","Text":"We\u0027re going to call this sales."},{"Start":"01:11.465 ","End":"01:16.130","Text":"We have the cost of sales transaction and then we have the other side of things,"},{"Start":"01:16.130 ","End":"01:17.990","Text":"which is the sales transactions."},{"Start":"01:17.990 ","End":"01:20.510","Text":"So we have 2 transactions,"},{"Start":"01:20.510 ","End":"01:25.945","Text":"the sale and then the cost of the sale that we need to record."},{"Start":"01:25.945 ","End":"01:29.030","Text":"Now, this sale was on credit,"},{"Start":"01:29.030 ","End":"01:33.305","Text":"which means we did not receive the cash and if you don\u0027t receive the cash,"},{"Start":"01:33.305 ","End":"01:37.715","Text":"then we recognize another asset which is called the account receivable,"},{"Start":"01:37.715 ","End":"01:39.615","Text":"which means a data."},{"Start":"01:39.615 ","End":"01:42.590","Text":"So you\u0027re recording the fact that there is a debtor,"},{"Start":"01:42.590 ","End":"01:44.675","Text":"being somebody who owes you money."},{"Start":"01:44.675 ","End":"01:47.170","Text":"We\u0027re going to do this in 2 steps,"},{"Start":"01:47.170 ","End":"01:51.350","Text":"we\u0027re going to record the sales transaction first as Transaction"},{"Start":"01:51.350 ","End":"01:58.180","Text":"8.1 and we\u0027re going to record the cost of sales transaction as 8.2."},{"Start":"01:58.180 ","End":"02:04.970","Text":"Sales then cost of sales."},{"Start":"02:04.970 ","End":"02:07.385","Text":"Now, in terms of the sale,"},{"Start":"02:07.385 ","End":"02:09.197","Text":"we sold on credit,"},{"Start":"02:09.197 ","End":"02:11.845","Text":"so as I say to you we have an asset,"},{"Start":"02:11.845 ","End":"02:17.975","Text":"it\u0027s an account receivable for 18,000 and that\u0027s because we did not receive the cash."},{"Start":"02:17.975 ","End":"02:21.875","Text":"Instead of the cash column being filled in,"},{"Start":"02:21.875 ","End":"02:26.665","Text":"we fill in the accounts receivable column instead that\u0027s another name for debtor."},{"Start":"02:26.665 ","End":"02:30.980","Text":"An account receivable is an asset because it is"},{"Start":"02:30.980 ","End":"02:33.240","Text":"a present economic resource that\u0027s controlled by"},{"Start":"02:33.240 ","End":"02:37.560","Text":"this entity as a result of the past event being the sale on credit."},{"Start":"02:37.560 ","End":"02:40.490","Text":"Why do I say it is a present economic resource?"},{"Start":"02:40.490 ","End":"02:43.790","Text":"Because an economic resource means that we have"},{"Start":"02:43.790 ","End":"02:47.825","Text":"a right which has a potential to produce economic benefits."},{"Start":"02:47.825 ","End":"02:53.030","Text":"Well, here we clearly have a right to receive the 18,000 in cash,"},{"Start":"02:53.030 ","End":"02:57.145","Text":"so that would be the economic benefit that we have the potential of receiving."},{"Start":"02:57.145 ","End":"03:01.265","Text":"Now, the other side of this entry is, we have income."},{"Start":"03:01.265 ","End":"03:03.889","Text":"Now, income belongs in profit."},{"Start":"03:03.889 ","End":"03:07.430","Text":"So we\u0027re going to put this under the profit column because remember,"},{"Start":"03:07.430 ","End":"03:14.670","Text":"profit is income less expenses and sales is clearly an income."},{"Start":"03:14.670 ","End":"03:20.200","Text":"So we will put the sale under the profit column, 18,000."},{"Start":"03:20.200 ","End":"03:22.225","Text":"If you have a look here,"},{"Start":"03:22.225 ","End":"03:26.490","Text":"remember we\u0027ve got the red line down the center,"},{"Start":"03:26.490 ","End":"03:31.270","Text":"we have assets equals liabilities plus"},{"Start":"03:31.270 ","End":"03:37.520","Text":"equity and what we\u0027ve done here is we\u0027ve increased our assets by 18,000."},{"Start":"03:38.160 ","End":"03:41.910","Text":"Our liabilities have remained unchanged,"},{"Start":"03:41.910 ","End":"03:46.029","Text":"so you can see there\u0027s nothing gone through in the 2 liability columns."},{"Start":"03:46.029 ","End":"03:51.765","Text":"So liabilities are unchanged and the equity has gone up by 18,000."},{"Start":"03:51.765 ","End":"03:54.065","Text":"Now, just by the way,"},{"Start":"03:54.065 ","End":"04:00.260","Text":"this 18,000 under profit column is equity and the reason it is equity is"},{"Start":"04:00.260 ","End":"04:02.750","Text":"because equity is defined as"},{"Start":"04:02.750 ","End":"04:07.640","Text":"the residual interest in the assets after deducting the liabilities."},{"Start":"04:07.640 ","End":"04:13.580","Text":"As you can see, we\u0027ve increased our assets by 18,000 and we can see by selling on credit,"},{"Start":"04:13.580 ","End":"04:15.395","Text":"we don\u0027t have any obligation,"},{"Start":"04:15.395 ","End":"04:17.300","Text":"so we don\u0027t recognize a liability,"},{"Start":"04:17.300 ","End":"04:20.570","Text":"and that is why our equity goes up by"},{"Start":"04:20.570 ","End":"04:25.550","Text":"18,000 and we simply had to decide which kind of equity does it go up by?"},{"Start":"04:25.550 ","End":"04:29.735","Text":"Remember there are 4 ways in which equity can change."},{"Start":"04:29.735 ","End":"04:34.810","Text":"We have contributions from our owners and that would increase our equity,"},{"Start":"04:34.810 ","End":"04:39.530","Text":"the other way equity increases is through income and then we have equity"},{"Start":"04:39.530 ","End":"04:44.605","Text":"could decrease through distributions to our owners or through expenses."},{"Start":"04:44.605 ","End":"04:47.900","Text":"These are the 4 ways in which equity could change."},{"Start":"04:47.900 ","End":"04:49.730","Text":"As you could see here,"},{"Start":"04:49.730 ","End":"04:52.820","Text":"equity is going up by 18,000"},{"Start":"04:52.820 ","End":"04:56.425","Text":"because our assets went up by 18 and our liabilities remained unchanged."},{"Start":"04:56.425 ","End":"05:00.290","Text":"So it had to be either a contribution from an owner or income."},{"Start":"05:00.290 ","End":"05:03.050","Text":"Now, this was clearly not a contribution from an owner,"},{"Start":"05:03.050 ","End":"05:04.370","Text":"this was a sale on credit."},{"Start":"05:04.370 ","End":"05:08.750","Text":"So it\u0027s something that we are getting from our debtors,"},{"Start":"05:08.750 ","End":"05:12.110","Text":"our customers, that\u0027s why it\u0027s income and if it\u0027s income,"},{"Start":"05:12.110 ","End":"05:14.470","Text":"it goes under the profit column."},{"Start":"05:14.470 ","End":"05:19.340","Text":"Now, let us look at the other side of this sale transaction."},{"Start":"05:19.340 ","End":"05:23.600","Text":"For every sale, that has to be a cost of the sale that is recorded."},{"Start":"05:23.600 ","End":"05:26.180","Text":"Now, when you sell something,"},{"Start":"05:26.180 ","End":"05:28.834","Text":"it means your inventory is depleting."},{"Start":"05:28.834 ","End":"05:33.560","Text":"So the inventory column is going to decrease"},{"Start":"05:33.560 ","End":"05:35.720","Text":"by the cost of the inventory that no longer"},{"Start":"05:35.720 ","End":"05:38.630","Text":"belongs to us because we\u0027ve now sold it to someone else."},{"Start":"05:38.630 ","End":"05:40.250","Text":"What we\u0027re going do is,"},{"Start":"05:40.250 ","End":"05:42.155","Text":"we\u0027re going to expense that inventory."},{"Start":"05:42.155 ","End":"05:48.800","Text":"We will sit that cost of against the income that we have made from the sale at 18,000."},{"Start":"05:48.800 ","End":"05:52.130","Text":"That means we\u0027re going to record it as an expense under"},{"Start":"05:52.130 ","End":"05:57.660","Text":"the profit column because profit is income less expenses."},{"Start":"05:57.660 ","End":"05:59.845","Text":"You can see on this transaction,"},{"Start":"05:59.845 ","End":"06:02.995","Text":"we had originally bought this inventory for 8,000,"},{"Start":"06:02.995 ","End":"06:04.660","Text":"we sold it for 18,000,"},{"Start":"06:04.660 ","End":"06:07.160","Text":"and therefore we\u0027ve made a profit of 10,000."},{"Start":"06:07.160 ","End":"06:11.325","Text":"As you can see on the left-hand side of this red vertical line,"},{"Start":"06:11.325 ","End":"06:14.590","Text":"we\u0027ve decreased our assets by 8,000."},{"Start":"06:14.590 ","End":"06:24.460","Text":"In this case, we\u0027ve got assets have gone down by 8,000 equals liabilities are unchanged,"},{"Start":"06:24.460 ","End":"06:30.260","Text":"and our equity went down because of the expense."},{"Start":"06:30.260 ","End":"06:34.370","Text":"You can see our accounting equation balances here again."},{"Start":"06:34.370 ","End":"06:39.895","Text":"The first transaction has an accounting equation that looks like this,"},{"Start":"06:39.895 ","End":"06:42.095","Text":"your assets go up by 18,000,"},{"Start":"06:42.095 ","End":"06:45.170","Text":"liabilities unchanged and the equity goes up by"},{"Start":"06:45.170 ","End":"06:51.350","Text":"18,000 and the second part to the sales transaction was the cost of the sale."},{"Start":"06:51.350 ","End":"06:55.040","Text":"Here you can see the assets go down by the 8,000,"},{"Start":"06:55.040 ","End":"06:58.430","Text":"liabilities unchanged, and the equity decreases."},{"Start":"06:58.430 ","End":"07:03.650","Text":"Just to remember, why did we say that this was an expense of 8,000?"},{"Start":"07:03.650 ","End":"07:06.185","Text":"Well, it\u0027s because equity,"},{"Start":"07:06.185 ","End":"07:09.080","Text":"lets put little q in there as I did up here,"},{"Start":"07:09.080 ","End":"07:13.270","Text":"equity equals assets minus liabilities."},{"Start":"07:13.270 ","End":"07:18.844","Text":"If your assets go down by 8,000 and your liabilities don\u0027t change,"},{"Start":"07:18.844 ","End":"07:22.180","Text":"it means that your equity goes down by 8,000."},{"Start":"07:22.180 ","End":"07:24.950","Text":"You can see the first transaction,"},{"Start":"07:24.950 ","End":"07:27.530","Text":"the equity went up by 18,000,"},{"Start":"07:27.530 ","End":"07:31.340","Text":"so this was the sale transaction and"},{"Start":"07:31.340 ","End":"07:37.770","Text":"the second part of the transaction is the cost of the sale."},{"Start":"07:37.770 ","End":"07:40.950","Text":"You can see that decreased equity and remember,"},{"Start":"07:40.950 ","End":"07:46.245","Text":"there are 4 ways in which equity can change,"},{"Start":"07:46.245 ","End":"07:50.060","Text":"it can change upwards because of a contribution from an owner,"},{"Start":"07:50.060 ","End":"07:52.315","Text":"it can change upwards because of income,"},{"Start":"07:52.315 ","End":"07:55.325","Text":"it could decrease because of distributions to owners,"},{"Start":"07:55.325 ","End":"07:57.290","Text":"and it could decrease through expenses."},{"Start":"07:57.290 ","End":"08:02.030","Text":"This decrease here, that minus 8,000 has to be an expense"},{"Start":"08:02.030 ","End":"08:04.580","Text":"because there are only 2 ways equity can change"},{"Start":"08:04.580 ","End":"08:07.220","Text":"through a distribution to an owner and an expense."},{"Start":"08:07.220 ","End":"08:10.130","Text":"Well, this is clearly not a distribution to an owner."},{"Start":"08:10.130 ","End":"08:11.905","Text":"We didn\u0027t pay the owner anything,"},{"Start":"08:11.905 ","End":"08:14.310","Text":"we didn\u0027t promise the owner anything,"},{"Start":"08:14.310 ","End":"08:20.720","Text":"all we\u0027ve done is we have lost one of our assets because we sold it."},{"Start":"08:20.720 ","End":"08:22.865","Text":"So our assets went down and therefore our equity went down,"},{"Start":"08:22.865 ","End":"08:24.710","Text":"so that means it must be an expense. It\u0027s the only other item it could have decreased by."},{"Start":"08:24.710 ","End":"08:32.960","Text":"So that minus 8,000 is going to be treated as an expense."},{"Start":"08:32.960 ","End":"08:39.155","Text":"Incidentally, that 18,000 will appear in your statement or income statement as sales"},{"Start":"08:39.155 ","End":"08:41.630","Text":"and this minus 8,000 is going to appear in"},{"Start":"08:41.630 ","End":"08:45.685","Text":"your income statement as a cost of sales expense."},{"Start":"08:45.685 ","End":"08:51.237","Text":"Let\u0027s move on to Transaction number 7."},{"Start":"08:51.237 ","End":"08:55.355","Text":"Here we have a payment of 24,000 currency units"},{"Start":"08:55.355 ","End":"09:01.010","Text":"to the suppliers of the merchandise acquired in Transaction number 3."},{"Start":"09:01.010 ","End":"09:03.980","Text":"The payment means that our cash,"},{"Start":"09:03.980 ","End":"09:06.250","Text":"which is an asset,"},{"Start":"09:06.250 ","End":"09:11.490","Text":"has decreased by 24,000 and on the right-hand side,"},{"Start":"09:11.490 ","End":"09:13.245","Text":"what are we paying for?"},{"Start":"09:13.245 ","End":"09:16.350","Text":"Well, we\u0027re paying the suppliers of the merchandise."},{"Start":"09:16.350 ","End":"09:20.820","Text":"Now, merchandise is another name for inventory."},{"Start":"09:20.820 ","End":"09:24.110","Text":"If you go back to Transaction number 3,"},{"Start":"09:24.110 ","End":"09:27.560","Text":"you will see that we purchased inventory on credit."},{"Start":"09:27.560 ","End":"09:31.325","Text":"Let\u0027s have a look at what we did back in Transaction 3."},{"Start":"09:31.325 ","End":"09:33.515","Text":"In Transaction number 3,"},{"Start":"09:33.515 ","End":"09:38.960","Text":"we purchased inventory for 36,000 and we recognize the fact that we"},{"Start":"09:38.960 ","End":"09:44.810","Text":"hadn\u0027t paid in cash by putting the 36,000 under our accounts payable."},{"Start":"09:44.810 ","End":"09:47.330","Text":"Now, in Transaction number 7,"},{"Start":"09:47.330 ","End":"09:48.710","Text":"which is the one we\u0027re dealing with,"},{"Start":"09:48.710 ","End":"09:50.924","Text":"we\u0027re paying the supplier."},{"Start":"09:50.924 ","End":"09:52.350","Text":"We\u0027re not buying more inventory,"},{"Start":"09:52.350 ","End":"09:55.895","Text":"we\u0027re paying the supplier of the inventory."},{"Start":"09:55.895 ","End":"09:59.010","Text":"So under assets, we\u0027ve got cash,"},{"Start":"09:59.010 ","End":"10:02.720","Text":"we put our 24,000 under the cash column showing"},{"Start":"10:02.720 ","End":"10:07.865","Text":"a negative sign indicating that our cash has been depleted by 24,000."},{"Start":"10:07.865 ","End":"10:09.971","Text":"Under accounts payable,"},{"Start":"10:09.971 ","End":"10:12.650","Text":"we\u0027re now showing that we are now paying off"},{"Start":"10:12.650 ","End":"10:17.000","Text":"a portion of what we owed in terms of our accounts payable."},{"Start":"10:17.000 ","End":"10:20.120","Text":"You can see that on the left-hand side of our red line,"},{"Start":"10:20.120 ","End":"10:25.230","Text":"our assets have gone down by 24,000"},{"Start":"10:27.340 ","End":"10:37.325","Text":"and our liabilities have gone down by 24,000 and our equity has remained unchanged."},{"Start":"10:37.325 ","End":"10:42.220","Text":"Our accounting equation balances."},{"Start":"10:42.650 ","End":"10:46.680","Text":"Let\u0027s move on to Transaction number 8."}],"ID":25982},{"Watched":false,"Name":"Exercise 1 Transactions 9-10","Duration":"7m 12s","ChapterTopicVideoID":25165,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.100","Text":"Transaction number 9,"},{"Start":"00:02.100 ","End":"00:07.259","Text":"we have salaries of 4,000 currency units are paid to employees."},{"Start":"00:07.259 ","End":"00:11.340","Text":"The payment to the employees is cash."},{"Start":"00:11.340 ","End":"00:13.770","Text":"That is a depletion of cash,"},{"Start":"00:13.770 ","End":"00:15.480","Text":"cash in bank,"},{"Start":"00:15.480 ","End":"00:18.389","Text":"if you like, and that is an asset."},{"Start":"00:18.389 ","End":"00:21.880","Text":"So our assets are going to decrease."},{"Start":"00:21.950 ","End":"00:27.690","Text":"If you\u0027ve paid salaries to your employees,"},{"Start":"00:27.690 ","End":"00:31.275","Text":"is there anything here that suggests a liability?"},{"Start":"00:31.275 ","End":"00:34.410","Text":"Well, no, because a liability would suggest that we have"},{"Start":"00:34.410 ","End":"00:37.950","Text":"a present obligation as a result of this transaction."},{"Start":"00:37.950 ","End":"00:40.650","Text":"A present obligation of the entity to transfer"},{"Start":"00:40.650 ","End":"00:43.970","Text":"an economic resource as a result of a past event."},{"Start":"00:43.970 ","End":"00:45.649","Text":"No, there\u0027s clearly no obligation,"},{"Start":"00:45.649 ","End":"00:48.430","Text":"we\u0027ve actually paid these salaries."},{"Start":"00:48.430 ","End":"00:54.255","Text":"Therefore, we have no liability, no liability."},{"Start":"00:54.255 ","End":"00:57.610","Text":"On the basis that equity, by definition,"},{"Start":"00:57.610 ","End":"01:02.530","Text":"is the residual interest in the assets after deducting the liabilities,"},{"Start":"01:02.530 ","End":"01:08.420","Text":"it means that since our assets are going to go down by the 4,000 in cash,"},{"Start":"01:08.420 ","End":"01:10.910","Text":"so assets are going to go down by 4,000,"},{"Start":"01:10.910 ","End":"01:13.610","Text":"and our liabilities are going to remain the same."},{"Start":"01:13.610 ","End":"01:17.500","Text":"It means that equity is going to go down by 4,000."},{"Start":"01:17.500 ","End":"01:20.130","Text":"The next question is;"},{"Start":"01:20.130 ","End":"01:26.505","Text":"which of the 4 ways in which equity can change does this transaction relate to?"},{"Start":"01:26.505 ","End":"01:32.635","Text":"We have equity can change in 4 ways."},{"Start":"01:32.635 ","End":"01:38.095","Text":"Equity can change by receiving a contribution,"},{"Start":"01:38.095 ","End":"01:40.260","Text":"or making income,"},{"Start":"01:40.260 ","End":"01:44.690","Text":"or it can decrease through making a distribution to an owner,"},{"Start":"01:44.690 ","End":"01:48.660","Text":"or it could decrease through an expense."},{"Start":"01:52.760 ","End":"01:57.260","Text":"We can see here that our equity has decreased by 4,000,"},{"Start":"01:57.260 ","End":"01:59.135","Text":"so it\u0027s either a distribution to an owner,"},{"Start":"01:59.135 ","End":"02:00.350","Text":"or it is an expense."},{"Start":"02:00.350 ","End":"02:01.580","Text":"Well, we\u0027re not paying the owner,"},{"Start":"02:01.580 ","End":"02:03.200","Text":"we\u0027re paying our employees,"},{"Start":"02:03.200 ","End":"02:05.694","Text":"therefore, it must be an expense."},{"Start":"02:05.694 ","End":"02:07.485","Text":"Transaction number 9;"},{"Start":"02:07.485 ","End":"02:09.480","Text":"you could see under our assets,"},{"Start":"02:09.480 ","End":"02:12.870","Text":"our cash depletes by 4,000,"},{"Start":"02:12.870 ","End":"02:17.285","Text":"and then because we\u0027re dealing with an expense,"},{"Start":"02:17.285 ","End":"02:19.250","Text":"we\u0027re going to put it under profit,"},{"Start":"02:19.250 ","End":"02:24.935","Text":"and that\u0027s because profit is income less expenses,"},{"Start":"02:24.935 ","End":"02:27.320","Text":"and we\u0027re dealing with an expense."},{"Start":"02:27.320 ","End":"02:31.815","Text":"So this is going to go into the profit column, minus 4,000."},{"Start":"02:31.815 ","End":"02:34.165","Text":"This is going to, incidentally,"},{"Start":"02:34.165 ","End":"02:40.340","Text":"it\u0027ll be recorded as a salary expense in your income statement."},{"Start":"02:40.340 ","End":"02:43.525","Text":"Let\u0027s move on to transaction number 10."},{"Start":"02:43.525 ","End":"02:45.640","Text":"Transaction number 10."},{"Start":"02:45.640 ","End":"02:51.575","Text":"Here we have a payment of annual interest on the loan."},{"Start":"02:51.575 ","End":"02:53.210","Text":"Because we have a payment,"},{"Start":"02:53.210 ","End":"02:55.850","Text":"it means our cash is being depleted,"},{"Start":"02:55.850 ","End":"02:59.360","Text":"so that is an asset that\u0027s going to decrease."},{"Start":"02:59.360 ","End":"03:05.195","Text":"Then it\u0027s the annual interest that we need to determine how to record that. What is that?"},{"Start":"03:05.195 ","End":"03:07.265","Text":"Well, let\u0027s ask ourselves the question;"},{"Start":"03:07.265 ","End":"03:12.795","Text":"is paying annual interest as annual interest give us any rights?"},{"Start":"03:12.795 ","End":"03:15.085","Text":"It\u0027s not a liability here."},{"Start":"03:15.085 ","End":"03:18.905","Text":"We don\u0027t have an obligation because we\u0027re making a payment,"},{"Start":"03:18.905 ","End":"03:21.785","Text":"so the interest isn\u0027t creating a further asset."},{"Start":"03:21.785 ","End":"03:25.520","Text":"It doesn\u0027t result in a liability because it doesn\u0027t meet"},{"Start":"03:25.520 ","End":"03:29.270","Text":"the definition of a liability either because we don\u0027t suddenly have a present obligation,"},{"Start":"03:29.270 ","End":"03:30.530","Text":"we\u0027ve actually made a payment,"},{"Start":"03:30.530 ","End":"03:32.405","Text":"so we don\u0027t owe anybody anything."},{"Start":"03:32.405 ","End":"03:37.030","Text":"Therefore, we are dealing with a decrease in equity,"},{"Start":"03:37.030 ","End":"03:38.225","Text":"and why do I say that?"},{"Start":"03:38.225 ","End":"03:43.790","Text":"Because equity is the residual interest in the assets after deducting the liabilities."},{"Start":"03:43.790 ","End":"03:48.200","Text":"Here we\u0027re going to be making a payment in terms of interest."},{"Start":"03:48.200 ","End":"03:51.325","Text":"Let\u0027s first calculate how much this interest is going to be."},{"Start":"03:51.325 ","End":"03:53.665","Text":"In transaction number 2,"},{"Start":"03:53.665 ","End":"03:59.240","Text":"we were told that we taken out a mortgage loan and we worked it out to be 32,500."},{"Start":"03:59.240 ","End":"04:03.640","Text":"We were also told that the interest for 1 year was 8 percent."},{"Start":"04:03.640 ","End":"04:07.670","Text":"So that works out to interest of 2,600."},{"Start":"04:07.670 ","End":"04:12.755","Text":"That means that our cash is going to decrease by 2,600 when we pay it."},{"Start":"04:12.755 ","End":"04:16.010","Text":"We\u0027ve just determined that the interest itself doesn\u0027t give us"},{"Start":"04:16.010 ","End":"04:20.150","Text":"another asset and this transaction does not lead to any obligations,"},{"Start":"04:20.150 ","End":"04:21.750","Text":"so we don\u0027t have a liability."},{"Start":"04:21.750 ","End":"04:26.720","Text":"That, therefore, means that our equity decreases by 2,600."},{"Start":"04:26.720 ","End":"04:29.435","Text":"Now we need to determine which of the 4 ways in which"},{"Start":"04:29.435 ","End":"04:33.110","Text":"equity changes applies to this transaction."},{"Start":"04:33.110 ","End":"04:36.900","Text":"Equity can change in one of these 4 ways: it"},{"Start":"04:36.900 ","End":"04:41.295","Text":"can increase through a contribution from our owners,"},{"Start":"04:41.295 ","End":"04:44.175","Text":"it could increase through income,"},{"Start":"04:44.175 ","End":"04:48.760","Text":"it could decrease through a distribution to our owners,"},{"Start":"04:48.760 ","End":"04:52.765","Text":"or could decrease through an expense."},{"Start":"04:52.765 ","End":"04:56.200","Text":"Which of these would be applicable to this transaction?"},{"Start":"04:56.200 ","End":"05:02.030","Text":"Well, clearly, a contribution is not income because the equity is decreasing."},{"Start":"05:02.030 ","End":"05:03.420","Text":"So it\u0027s one of these 2;"},{"Start":"05:03.420 ","End":"05:06.075","Text":"it\u0027s either a distribution to our owners, or it\u0027s an expense."},{"Start":"05:06.075 ","End":"05:09.340","Text":"It\u0027s clearly not a distribution to our owners because we\u0027re not paying owners,"},{"Start":"05:09.340 ","End":"05:10.525","Text":"were paying the bank."},{"Start":"05:10.525 ","End":"05:12.130","Text":"That\u0027s who you pay the interest to."},{"Start":"05:12.130 ","End":"05:14.245","Text":"Therefore, it must be an expense."},{"Start":"05:14.245 ","End":"05:18.225","Text":"Transaction number 10; our asset,"},{"Start":"05:18.225 ","End":"05:23.125","Text":"cash, decreases by 2,600 because there was a payment."},{"Start":"05:23.125 ","End":"05:26.270","Text":"Then we determined that because there was no further asset,"},{"Start":"05:26.270 ","End":"05:27.320","Text":"there was no liability,"},{"Start":"05:27.320 ","End":"05:29.180","Text":"it must be a decrease in equity."},{"Start":"05:29.180 ","End":"05:30.890","Text":"Sorry, underneath all of the scribble,"},{"Start":"05:30.890 ","End":"05:32.360","Text":"you can see the word equity."},{"Start":"05:32.360 ","End":"05:36.980","Text":"We just simply had to determine which of those 3 columns the equity will decrease under,"},{"Start":"05:36.980 ","End":"05:39.230","Text":"share capital, retained profit, or profit."},{"Start":"05:39.230 ","End":"05:47.460","Text":"We put it under profit because profit is income less expenses,"},{"Start":"05:47.460 ","End":"05:49.475","Text":"and we\u0027re dealing with an expense."},{"Start":"05:49.475 ","End":"05:55.119","Text":"So profit is going to decrease by the 2,600 because of the expense."},{"Start":"05:55.119 ","End":"05:57.650","Text":"Incidentally, when you drop your income statement,"},{"Start":"05:57.650 ","End":"06:01.010","Text":"that expense will be called an interest expense,"},{"Start":"06:01.010 ","End":"06:03.455","Text":"or a finance charge expense."},{"Start":"06:03.455 ","End":"06:07.415","Text":"As part of the last step in our accounting equation worksheet,"},{"Start":"06:07.415 ","End":"06:12.890","Text":"I\u0027m going to look at these items in the profit column because we\u0027re going to close"},{"Start":"06:12.890 ","End":"06:19.150","Text":"these off ultimately from the profit column into our retained profit column."},{"Start":"06:19.150 ","End":"06:21.950","Text":"What we\u0027ll do in the next step is we\u0027re going to draw up"},{"Start":"06:21.950 ","End":"06:25.520","Text":"our income statement using the items that are in your profit column."},{"Start":"06:25.520 ","End":"06:28.160","Text":"Because remember, your profit column shows your income and expenses"},{"Start":"06:28.160 ","End":"06:31.130","Text":"and those are the 2 elements that were shown on our income statement,"},{"Start":"06:31.130 ","End":"06:33.169","Text":"then we\u0027re going to show how to finalize"},{"Start":"06:33.169 ","End":"06:36.950","Text":"your accounting equation worksheet so that everything still balances,"},{"Start":"06:36.950 ","End":"06:40.685","Text":"but we\u0027ve moved it out of the profit column into the retained profit column,"},{"Start":"06:40.685 ","End":"06:47.120","Text":"and then we\u0027ll use that to draw up our balance sheet using all of the remaining items."},{"Start":"06:47.120 ","End":"06:48.650","Text":"The cash, accounts receivable,"},{"Start":"06:48.650 ","End":"06:51.215","Text":"inventory, building, equipment, all the assets,"},{"Start":"06:51.215 ","End":"06:53.195","Text":"then the accounts payable, loan,"},{"Start":"06:53.195 ","End":"06:56.210","Text":"is the liabilities, and the share capital, and the retained profit."},{"Start":"06:56.210 ","End":"07:01.820","Text":"Those items here are then going to form part of the balance sheet."},{"Start":"07:01.820 ","End":"07:05.030","Text":"This little block here is for our income statement."},{"Start":"07:05.030 ","End":"07:08.435","Text":"Once you\u0027ve moved everything from the income statement into our retained profit,"},{"Start":"07:08.435 ","End":"07:12.780","Text":"we then have everything we need to draw up our balance sheet."}],"ID":25983},{"Watched":false,"Name":"Exercise 1 - Closing Entries","Duration":"2m 51s","ChapterTopicVideoID":27442,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.290 ","End":"00:04.095","Text":"To finalize your accounting equation worksheets,"},{"Start":"00:04.095 ","End":"00:06.555","Text":"you have to take what\u0027s sitting in the profit column and add it up."},{"Start":"00:06.555 ","End":"00:09.060","Text":"If you take your income of 18,000 and"},{"Start":"00:09.060 ","End":"00:12.525","Text":"subtract all of these negative items, which are expenses,"},{"Start":"00:12.525 ","End":"00:16.020","Text":"you get to an amount of 3,200,"},{"Start":"00:16.020 ","End":"00:19.440","Text":"which we\u0027re going to take out of there to clear it out,"},{"Start":"00:19.440 ","End":"00:21.270","Text":"because it was a profit of 3,200."},{"Start":"00:21.270 ","End":"00:24.060","Text":"I\u0027m going to subtract it. If you now add everything up,"},{"Start":"00:24.060 ","End":"00:27.330","Text":"including the minus 3,200, you get nothing."},{"Start":"00:27.330 ","End":"00:30.150","Text":"That 3,200, we taking it out of"},{"Start":"00:30.150 ","End":"00:34.860","Text":"the profit column and we\u0027re putting it into the retained profit column."},{"Start":"00:34.860 ","End":"00:37.500","Text":"This is what was referred to as a closing entry."},{"Start":"00:37.500 ","End":"00:40.950","Text":"Transferred to the retained profit is a closing entry."},{"Start":"00:40.950 ","End":"00:48.875","Text":"It is coming out of the profit column and going in the retained profit column."},{"Start":"00:48.875 ","End":"00:51.695","Text":"After processing this closing entry,"},{"Start":"00:51.695 ","End":"00:55.780","Text":"you will have the final balances that you need to draw up your balance sheet."},{"Start":"00:55.780 ","End":"00:57.890","Text":"Here is the final balances that you\u0027ll use to"},{"Start":"00:57.890 ","End":"01:00.570","Text":"draw your balance sheet, will look like this."},{"Start":"01:00.570 ","End":"01:02.765","Text":"As I say, under the profit column,"},{"Start":"01:02.765 ","End":"01:04.280","Text":"you now have nothing."},{"Start":"01:04.280 ","End":"01:08.010","Text":"All of your income and expense accounts effectively will have no balances,"},{"Start":"01:08.010 ","End":"01:09.815","Text":"so you\u0027ve got nothing in the profit column,"},{"Start":"01:09.815 ","End":"01:14.075","Text":"and everything is now sitting in either an asset column,"},{"Start":"01:14.075 ","End":"01:15.566","Text":"a liability column,"},{"Start":"01:15.566 ","End":"01:18.080","Text":"or 1 of the other 2 equity columns,"},{"Start":"01:18.080 ","End":"01:20.555","Text":"the share capital or the retained profit."},{"Start":"01:20.555 ","End":"01:25.110","Text":"Remember the profit column gets recorded in your income statement."},{"Start":"01:25.110 ","End":"01:30.635","Text":"These final balances are used to draw up the balance sheet."},{"Start":"01:30.635 ","End":"01:36.635","Text":"What you\u0027re seeing here is a completed accounting equation worksheet."},{"Start":"01:36.635 ","End":"01:38.930","Text":"Nothing in the profit column any longer,"},{"Start":"01:38.930 ","End":"01:43.130","Text":"and everything else in balance sheets columns."},{"Start":"01:43.130 ","End":"01:45.080","Text":"If you add up all your assets,"},{"Start":"01:45.080 ","End":"01:47.685","Text":"and then you add up your liabilities,"},{"Start":"01:47.685 ","End":"01:50.685","Text":"and you add up your 2 equity accounts,"},{"Start":"01:50.685 ","End":"01:54.050","Text":"you should have an accounting equation that balances."},{"Start":"01:54.050 ","End":"01:55.940","Text":"If you add up your assets,"},{"Start":"01:55.940 ","End":"02:00.410","Text":"20,500,18,000, 48,000, 45,000,"},{"Start":"02:00.410 ","End":"02:08.075","Text":"and 16,200, you get to 147,700."},{"Start":"02:08.075 ","End":"02:13.250","Text":"Your liabilities, is 44,500,"},{"Start":"02:13.250 ","End":"02:18.390","Text":"and your equity is 103,200."},{"Start":"02:19.010 ","End":"02:25.565","Text":"Let\u0027s check, because our assets must equal our liabilities plus equity."},{"Start":"02:25.565 ","End":"02:31.865","Text":"44,500 are liabilities,"},{"Start":"02:31.865 ","End":"02:35.015","Text":"and our equities are 103,200."},{"Start":"02:35.015 ","End":"02:39.425","Text":"That does indeed give us 147,700,"},{"Start":"02:39.425 ","End":"02:40.820","Text":"which is our asset."},{"Start":"02:40.820 ","End":"02:44.510","Text":"That does indeed give us 147,700,"},{"Start":"02:44.510 ","End":"02:46.250","Text":"which is our total assets."},{"Start":"02:46.250 ","End":"02:47.960","Text":"Everything works."},{"Start":"02:47.960 ","End":"02:52.049","Text":"That\u0027s the completed accounting equation worksheet."}],"ID":28637},{"Watched":false,"Name":"Exercise 1 - Income Statement","Duration":"2m 47s","ChapterTopicVideoID":27441,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.140 ","End":"00:06.090","Text":"This is from our accounting equation worksheets and all I\u0027ve done"},{"Start":"00:06.090 ","End":"00:12.190","Text":"is I\u0027ve highlighted the section or the column that\u0027s headed up as profits."},{"Start":"00:12.190 ","End":"00:16.550","Text":"These are the only items that we actually had in the profit column."},{"Start":"00:16.550 ","End":"00:18.110","Text":"To drop your income statement,"},{"Start":"00:18.110 ","End":"00:26.095","Text":"we simply reorganize these into a structure that makes it more usable for our users."},{"Start":"00:26.095 ","End":"00:30.980","Text":"Our income statement is going to be made up of just income and expenses,"},{"Start":"00:30.980 ","End":"00:32.555","Text":"but we start with sales."},{"Start":"00:32.555 ","End":"00:38.705","Text":"The sales amount gets put up here in your income statement, sales of 18,000."},{"Start":"00:38.705 ","End":"00:43.460","Text":"Then the next logical item is to sit off against the sales,"},{"Start":"00:43.460 ","End":"00:48.035","Text":"your cost of your sales so that\u0027s the next item, cost of sales."},{"Start":"00:48.035 ","End":"00:51.410","Text":"Then typically we show our gross profit,"},{"Start":"00:51.410 ","End":"00:55.400","Text":"the needs because that\u0027s useful information for our users."},{"Start":"00:55.400 ","End":"00:58.265","Text":"Then we put in the salaries."},{"Start":"00:58.265 ","End":"01:02.600","Text":"Our salaries get put into our income statement and there\u0027s"},{"Start":"01:02.600 ","End":"01:06.755","Text":"no particular order except that salaries are generally more significant"},{"Start":"01:06.755 ","End":"01:12.120","Text":"than other expenses so it\u0027s very often the next item in your income statement"},{"Start":"01:12.120 ","End":"01:17.380","Text":"and you can see here our salaries were most certainly a higher amount than the insurance."},{"Start":"01:17.380 ","End":"01:21.210","Text":"It makes sense to our users to show the salaries first,"},{"Start":"01:21.650 ","End":"01:24.425","Text":"then we would put the insurance."},{"Start":"01:24.425 ","End":"01:27.260","Text":"Now the reason I left the finance cost out is because"},{"Start":"01:27.260 ","End":"01:30.665","Text":"we want to separate the finance costs from the operating costs."},{"Start":"01:30.665 ","End":"01:33.790","Text":"The insurance expense is the next 1 I\u0027m going to put in,"},{"Start":"01:33.790 ","End":"01:37.175","Text":"so we\u0027ve got our salaries expense and our insurance expense."},{"Start":"01:37.175 ","End":"01:40.670","Text":"Both of these are operating expenses."},{"Start":"01:40.670 ","End":"01:45.560","Text":"I\u0027m just going to put this in here as a little subheading, operating expenses."},{"Start":"01:45.560 ","End":"01:50.480","Text":"Now, you do not need to put that in but those are the 2 operating expenses."},{"Start":"01:50.480 ","End":"01:54.095","Text":"If you then take your gross profit and you subtract your operating expenses,"},{"Start":"01:54.095 ","End":"01:57.260","Text":"we get another bit of useful information for"},{"Start":"01:57.260 ","End":"02:00.840","Text":"our users and that\u0027s showing them our operating profit."},{"Start":"02:00.840 ","End":"02:04.430","Text":"We call it operating profit simply because this is before taking into"},{"Start":"02:04.430 ","End":"02:10.075","Text":"account the cost of how we decided to fund or finance our business."},{"Start":"02:10.075 ","End":"02:14.690","Text":"In this instance, we\u0027ve borrowed money so we do have an interest expense,"},{"Start":"02:14.690 ","End":"02:17.110","Text":"which we quite often refer to as a finance cost,"},{"Start":"02:17.110 ","End":"02:19.325","Text":"you can also call it interest expense."},{"Start":"02:19.325 ","End":"02:21.421","Text":"So minus 2,600,"},{"Start":"02:21.421 ","End":"02:23.515","Text":"that\u0027s the next item."},{"Start":"02:23.515 ","End":"02:27.350","Text":"Once you\u0027ve taken the operating profit and subtracted your finance costs,"},{"Start":"02:27.350 ","End":"02:29.780","Text":"you get your profit for the period."},{"Start":"02:29.780 ","End":"02:32.165","Text":"That is your income statement."},{"Start":"02:32.165 ","End":"02:34.670","Text":"Starts with sales less the cost of"},{"Start":"02:34.670 ","End":"02:37.925","Text":"sales and you work your way down through the operating expenses,"},{"Start":"02:37.925 ","End":"02:39.920","Text":"get little subtotal of your operating profit,"},{"Start":"02:39.920 ","End":"02:43.510","Text":"then subtract your finance cost and if you have any finance income"},{"Start":"02:43.510 ","End":"02:48.150","Text":"you might want to add it there as well and you\u0027ll end up with your profit for the period."}],"ID":28636},{"Watched":false,"Name":"Exercise 1 - Balance Sheet","Duration":"10m 47s","ChapterTopicVideoID":25166,"CourseChapterTopicPlaylistID":145489,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.620 ","End":"00:03.390","Text":"Now we\u0027re doing the balance sheet,"},{"Start":"00:03.390 ","End":"00:06.270","Text":"and what I have here are just the balances that I\u0027ve"},{"Start":"00:06.270 ","End":"00:09.630","Text":"extracted from the accounting equation worksheet."},{"Start":"00:09.630 ","End":"00:10.980","Text":"We have our assets,"},{"Start":"00:10.980 ","End":"00:12.330","Text":"we have our liabilities."},{"Start":"00:12.330 ","End":"00:14.415","Text":"They were just 2 and we have our equity."},{"Start":"00:14.415 ","End":"00:17.640","Text":"We actually only have 2 because the profit you can see here,"},{"Start":"00:17.640 ","End":"00:18.900","Text":"has a balance of nil in it,"},{"Start":"00:18.900 ","End":"00:20.730","Text":"so we can ignore that 1."},{"Start":"00:20.730 ","End":"00:24.210","Text":"The profit column was used to draw up our income statement and"},{"Start":"00:24.210 ","End":"00:28.320","Text":"everything that was in that profit column is now sitting in our retained profit column,"},{"Start":"00:28.320 ","End":"00:30.105","Text":"which we will show in the balance sheet."},{"Start":"00:30.105 ","End":"00:32.070","Text":"That\u0027s why it still balances because"},{"Start":"00:32.070 ","End":"00:34.415","Text":"everything that was in the profit column doesn\u0027t disappear,"},{"Start":"00:34.415 ","End":"00:37.220","Text":"it just gets moved into this account here now."},{"Start":"00:37.220 ","End":"00:38.870","Text":"Now, what we\u0027re doing here,"},{"Start":"00:38.870 ","End":"00:41.405","Text":"is we\u0027re simply reorganizing things in here."},{"Start":"00:41.405 ","End":"00:51.380","Text":"This is the balance sheet using the horizontal approach or horizontal format."},{"Start":"00:51.380 ","End":"00:56.540","Text":"We\u0027ve put the assets on the left-hand side and we simply list them."},{"Start":"00:56.540 ","End":"00:59.600","Text":"We typically start with the non-current assets first and we"},{"Start":"00:59.600 ","End":"01:02.360","Text":"put a heading in and then we have current assets second,"},{"Start":"01:02.360 ","End":"01:04.580","Text":"and then that gives us total assets."},{"Start":"01:04.580 ","End":"01:07.130","Text":"We\u0027re putting them in order of liquidity."},{"Start":"01:07.130 ","End":"01:08.510","Text":"The non-current assets,"},{"Start":"01:08.510 ","End":"01:14.350","Text":"we\u0027ve got buildings as probably the most illiquid asset that we have."},{"Start":"01:14.350 ","End":"01:16.830","Text":"There is our buildings, 45,000."},{"Start":"01:16.830 ","End":"01:22.495","Text":"Then we take our equipment and put that under non-current assets at 16,200,"},{"Start":"01:22.495 ","End":"01:30.065","Text":"and the 2 together give us 61,200 sets the total non-current assets that we own."},{"Start":"01:30.065 ","End":"01:35.350","Text":"Then we put in our current assets in order of liquidity again."},{"Start":"01:35.350 ","End":"01:39.140","Text":"Inventory is the most illiquid because it first has to be"},{"Start":"01:39.140 ","End":"01:43.625","Text":"converted into accounts receivable before then can be converted into cash."},{"Start":"01:43.625 ","End":"01:45.140","Text":"We start with the inventory,"},{"Start":"01:45.140 ","End":"01:47.330","Text":"we put the 48,000 in here."},{"Start":"01:47.330 ","End":"01:53.805","Text":"The next 1 is the accounts receivable because that\u0027s the next stage in becoming cash."},{"Start":"01:53.805 ","End":"01:55.355","Text":"We start with inventory."},{"Start":"01:55.355 ","End":"01:56.510","Text":"We then sell it to somebody,"},{"Start":"01:56.510 ","End":"01:58.163","Text":"owes us the money, and then they pay us,"},{"Start":"01:58.163 ","End":"02:02.950","Text":"and then finally becomes cash and that is the most liquid you can have."},{"Start":"02:02.950 ","End":"02:07.305","Text":"Our accounts receivable of 18,000 is the next 1 popping here,"},{"Start":"02:07.305 ","End":"02:11.580","Text":"and then our cash of 20,500 pops in there."},{"Start":"02:11.580 ","End":"02:16.070","Text":"If you add these 3 up, you get 86,500."},{"Start":"02:16.070 ","End":"02:21.740","Text":"If you take a total non-current assets and total current assets,"},{"Start":"02:21.740 ","End":"02:25.910","Text":"you get your total assets of 147,700,"},{"Start":"02:25.910 ","End":"02:28.700","Text":"which you might recall from the accounting equation worksheet,"},{"Start":"02:28.700 ","End":"02:30.605","Text":"that was a total of our assets."},{"Start":"02:30.605 ","End":"02:32.750","Text":"Then we do the liabilities."},{"Start":"02:32.750 ","End":"02:36.440","Text":"We have accounts payable and a loan."},{"Start":"02:36.720 ","End":"02:39.460","Text":"On the right-hand side,"},{"Start":"02:39.460 ","End":"02:40.940","Text":"because we\u0027re using the horizontal format,"},{"Start":"02:40.940 ","End":"02:42.710","Text":"we\u0027ve got our liabilities."},{"Start":"02:42.710 ","End":"02:47.480","Text":"We\u0027re going to separate them again into non-current liabilities and current liabilities."},{"Start":"02:47.480 ","End":"02:50.540","Text":"Now the loan is something we\u0027re going to pay off over a number of years because it\u0027s"},{"Start":"02:50.540 ","End":"02:53.600","Text":"a mortgage loan that\u0027s often very many years,"},{"Start":"02:53.600 ","End":"02:56.225","Text":"so that\u0027s steady 2,500."},{"Start":"02:56.225 ","End":"03:02.195","Text":"Then we get our accounts payable of 12,000 and that is a current liability."},{"Start":"03:02.195 ","End":"03:05.630","Text":"We typically have to pay that within a few days or months,"},{"Start":"03:05.630 ","End":"03:07.750","Text":"maybe 2 months, if we\u0027re lucky."},{"Start":"03:07.750 ","End":"03:11.710","Text":"We only have 1 non-current liability and 1 current liability,"},{"Start":"03:11.710 ","End":"03:13.145","Text":"so we don\u0027t need subtotals."},{"Start":"03:13.145 ","End":"03:14.690","Text":"We add those 2 together,"},{"Start":"03:14.690 ","End":"03:20.325","Text":"and we get total liabilities of 44,500."},{"Start":"03:20.325 ","End":"03:24.210","Text":"Then we get the shareholders\u0027 equity side of things."},{"Start":"03:24.210 ","End":"03:27.195","Text":"We have a heading here for shareholders\u0027 equity,"},{"Start":"03:27.195 ","End":"03:28.920","Text":"and that\u0027s made up of only 2 accounts."},{"Start":"03:28.920 ","End":"03:31.665","Text":"In this case, we\u0027ve got share capital of 100,000,"},{"Start":"03:31.665 ","End":"03:35.575","Text":"so we put that in under capital or share capital 100,000."},{"Start":"03:35.575 ","End":"03:37.340","Text":"Then we have retained profits,"},{"Start":"03:37.340 ","End":"03:38.990","Text":"sometimes called retained earnings."},{"Start":"03:38.990 ","End":"03:43.820","Text":"That\u0027s 3,200, and we pop that in 3,200."},{"Start":"03:43.820 ","End":"03:48.320","Text":"The total of equity is 103,200,"},{"Start":"03:48.320 ","End":"03:49.970","Text":"and if you add these 2 together,"},{"Start":"03:49.970 ","End":"03:54.745","Text":"you get total liabilities and equity of 147,700."},{"Start":"03:54.745 ","End":"04:00.815","Text":"That adds up to 147,700 and that adds up to 147,700, so it balances."},{"Start":"04:00.815 ","End":"04:04.475","Text":"This can also be shown in a vertical format."},{"Start":"04:04.475 ","End":"04:09.176","Text":"Here we have our assets first, non-current assets,"},{"Start":"04:09.176 ","End":"04:11.285","Text":"and current assets together,"},{"Start":"04:11.285 ","End":"04:14.915","Text":"giving us 147,700 total assets."},{"Start":"04:14.915 ","End":"04:19.640","Text":"Then we have our non-current liabilities and current liabilities,"},{"Start":"04:19.640 ","End":"04:25.390","Text":"which together give us a total liabilities of 44,500."},{"Start":"04:25.390 ","End":"04:28.570","Text":"Then we have our shareholders\u0027 equity,"},{"Start":"04:28.570 ","End":"04:30.830","Text":"being the capital and retained profit,"},{"Start":"04:30.830 ","End":"04:34.580","Text":"and that gives us 103,200."},{"Start":"04:34.580 ","End":"04:41.710","Text":"If you take your total liabilities and your total equity and you add them together,"},{"Start":"04:42.280 ","End":"04:50.180","Text":"you get 147,700, which equals your total assets."},{"Start":"04:50.180 ","End":"04:56.550","Text":"You\u0027ve got your assets equals your liabilities plus equity."},{"Start":"05:01.510 ","End":"05:07.980","Text":"That is the end of this exercise on GNT Golf Shop."},{"Start":"05:08.530 ","End":"05:13.540","Text":"This is from our accounting equation worksheet,"},{"Start":"05:13.540 ","End":"05:15.895","Text":"and all I\u0027ve done is I\u0027ve highlighted"},{"Start":"05:15.895 ","End":"05:20.555","Text":"the section or the column that\u0027s headed up as profit."},{"Start":"05:20.555 ","End":"05:24.920","Text":"These are the only items that we actually had in the profit column."},{"Start":"05:24.920 ","End":"05:26.480","Text":"To drop your income statement,"},{"Start":"05:26.480 ","End":"05:34.450","Text":"we simply reorganize these into a structure that makes it more usable for our users."},{"Start":"05:34.450 ","End":"05:39.350","Text":"Our income statement is going to be made up of just income and expenses,"},{"Start":"05:39.350 ","End":"05:40.640","Text":"but we start with sales."},{"Start":"05:40.640 ","End":"05:44.900","Text":"The sales amount gets put up here in your income statement."},{"Start":"05:44.900 ","End":"05:47.075","Text":"Sales of 18,000."},{"Start":"05:47.075 ","End":"05:51.830","Text":"Then the next logical item is to sit off against the sales,"},{"Start":"05:51.830 ","End":"05:53.210","Text":"your cost of your sales."},{"Start":"05:53.210 ","End":"05:54.725","Text":"That\u0027s the next item."},{"Start":"05:54.725 ","End":"05:57.840","Text":"Cost of sales. Then typically,"},{"Start":"05:57.840 ","End":"05:59.775","Text":"we show our gross profit."},{"Start":"05:59.775 ","End":"06:03.760","Text":"The net, because that\u0027s useful information for our users."},{"Start":"06:03.760 ","End":"06:06.600","Text":"Then we put in the salaries."},{"Start":"06:06.600 ","End":"06:10.520","Text":"Our salaries get put into our income statement."},{"Start":"06:10.520 ","End":"06:13.130","Text":"There\u0027s no particular order except that salaries are"},{"Start":"06:13.130 ","End":"06:16.380","Text":"generally more significant than other expenses,"},{"Start":"06:16.380 ","End":"06:20.490","Text":"so it\u0027s very often the next item in your income statement,"},{"Start":"06:20.490 ","End":"06:25.700","Text":"and you can see here our salaries will most certainly a higher amount than the insurance."},{"Start":"06:25.700 ","End":"06:29.550","Text":"So it makes sense to our users to share the salaries first."},{"Start":"06:30.010 ","End":"06:32.795","Text":"Then we will put the insurance."},{"Start":"06:32.795 ","End":"06:35.630","Text":"Now the reason I left the finance cost out is because"},{"Start":"06:35.630 ","End":"06:39.005","Text":"we want to separate the finance cost from the operating cost."},{"Start":"06:39.005 ","End":"06:40.640","Text":"The insurance expenses,"},{"Start":"06:40.640 ","End":"06:42.220","Text":"the next 1 I\u0027m going to put in."},{"Start":"06:42.220 ","End":"06:45.545","Text":"We\u0027ve got our salaries expense and our insurance expense."},{"Start":"06:45.545 ","End":"06:49.040","Text":"Both of these are operating expenses."},{"Start":"06:49.040 ","End":"06:52.430","Text":"I\u0027m just going to put this in here as a little subheading."},{"Start":"06:52.430 ","End":"06:54.050","Text":"Our operating expenses. Now,"},{"Start":"06:54.050 ","End":"06:55.985","Text":"you do not need to put that in."},{"Start":"06:55.985 ","End":"06:58.835","Text":"But those are the 2 operating expenses."},{"Start":"06:58.835 ","End":"07:02.450","Text":"If you then take your gross profit and you subtract your operating expenses,"},{"Start":"07:02.450 ","End":"07:05.630","Text":"we get another bit of useful information for"},{"Start":"07:05.630 ","End":"07:09.200","Text":"our users and that\u0027s showing them our operating profit."},{"Start":"07:09.200 ","End":"07:12.800","Text":"We call it operating profit simply because this is before taking into"},{"Start":"07:12.800 ","End":"07:18.430","Text":"account the cost of how we decided to fund or finance our business."},{"Start":"07:18.430 ","End":"07:21.230","Text":"In this instance, we\u0027ve borrowed money,"},{"Start":"07:21.230 ","End":"07:23.060","Text":"so we do have an interest expense,"},{"Start":"07:23.060 ","End":"07:25.580","Text":"which we quite often refer to as a finance cost."},{"Start":"07:25.580 ","End":"07:27.730","Text":"You can also call it interest expense,"},{"Start":"07:27.730 ","End":"07:30.165","Text":"so minus 2,600,"},{"Start":"07:30.165 ","End":"07:31.875","Text":"that\u0027s the next item."},{"Start":"07:31.875 ","End":"07:35.705","Text":"Once you\u0027ve taken operating profit and subtracted your finance costs,"},{"Start":"07:35.705 ","End":"07:38.135","Text":"you get your profit for the period."},{"Start":"07:38.135 ","End":"07:40.550","Text":"That is your income statement."},{"Start":"07:40.550 ","End":"07:43.595","Text":"Start with sales, list the cost of sales,"},{"Start":"07:43.595 ","End":"07:46.324","Text":"and you work your way down through the operating expenses."},{"Start":"07:46.324 ","End":"07:48.290","Text":"Get a little subtotal for your operating profit,"},{"Start":"07:48.290 ","End":"07:50.300","Text":"then subtract your finance cost."},{"Start":"07:50.300 ","End":"07:51.890","Text":"If you have any finance income,"},{"Start":"07:51.890 ","End":"07:53.465","Text":"you might want to add it there as well,"},{"Start":"07:53.465 ","End":"07:56.330","Text":"and you\u0027ll end up with your profit for the period."},{"Start":"07:56.330 ","End":"07:59.960","Text":"To finalize your accounting equation worksheet,"},{"Start":"07:59.960 ","End":"08:02.390","Text":"you have to take what is sitting in the profit column and add it up."},{"Start":"08:02.390 ","End":"08:04.940","Text":"If you take your income of 18,000 and"},{"Start":"08:04.940 ","End":"08:08.405","Text":"subtract all of these negative items which are expenses,"},{"Start":"08:08.405 ","End":"08:11.885","Text":"you get to an amount of 3,200,"},{"Start":"08:11.885 ","End":"08:14.730","Text":"which we\u0027re going to take out of there to clear it"},{"Start":"08:14.730 ","End":"08:18.155","Text":"out because it was a profit of 3,200 so I\u0027m going to subtract it."},{"Start":"08:18.155 ","End":"08:19.940","Text":"If you now add everything up,"},{"Start":"08:19.940 ","End":"08:23.480","Text":"including the minus 3,200, you get nothing."},{"Start":"08:23.480 ","End":"08:27.230","Text":"That 3,200, we\u0027re taking it out of the profit column and"},{"Start":"08:27.230 ","End":"08:30.740","Text":"we\u0027re putting it into the retained profit column."},{"Start":"08:30.740 ","End":"08:34.220","Text":"This is what was referred to as a closing entry transferred"},{"Start":"08:34.220 ","End":"08:37.520","Text":"to the retained profit as a closing entry is coming out"},{"Start":"08:37.520 ","End":"08:44.735","Text":"of the profit column and going into the plus in the retained profit column."},{"Start":"08:44.735 ","End":"08:47.540","Text":"After processing this closing entry,"},{"Start":"08:47.540 ","End":"08:51.850","Text":"you\u0027ll have the final balances that you need to draw up your balance sheet."},{"Start":"08:51.850 ","End":"08:55.000","Text":"Here\u0027s the final balances that you\u0027ll use to draw your balance sheet,"},{"Start":"08:55.000 ","End":"08:56.445","Text":"will look like this."},{"Start":"08:56.445 ","End":"08:58.625","Text":"As I say, under the profit column,"},{"Start":"08:58.625 ","End":"09:00.020","Text":"you now have nothing."},{"Start":"09:00.020 ","End":"09:03.890","Text":"All of your income and expense accounts effectively will have nil balances."},{"Start":"09:03.890 ","End":"09:05.675","Text":"You\u0027ve got nothing in the profit column,"},{"Start":"09:05.675 ","End":"09:09.940","Text":"and everything is now sitting in either an asset column,"},{"Start":"09:09.940 ","End":"09:13.920","Text":"a liability column, or 1 of the other 2 equity columns,"},{"Start":"09:13.920 ","End":"09:16.435","Text":"the share capital or the retained profit."},{"Start":"09:16.435 ","End":"09:20.955","Text":"Remember the profit column gets recorded in your income statement."},{"Start":"09:20.955 ","End":"09:26.500","Text":"These final balances are used to draw up the balance sheet."},{"Start":"09:26.500 ","End":"09:32.525","Text":"What you\u0027re seeing here is a completed accounting equation worksheet."},{"Start":"09:32.525 ","End":"09:34.790","Text":"Nothing in the profit column any longer,"},{"Start":"09:34.790 ","End":"09:38.975","Text":"and everything else in balance sheet columns."},{"Start":"09:38.975 ","End":"09:41.810","Text":"If you add up all your assets and then you add up"},{"Start":"09:41.810 ","End":"09:46.525","Text":"your liabilities and you add up your 2 equity accounts,"},{"Start":"09:46.525 ","End":"09:49.910","Text":"you should have an accounting equation that balances."},{"Start":"09:49.910 ","End":"09:53.870","Text":"If you add up your assets 20,500, 18,000,"},{"Start":"09:53.870 ","End":"09:58.340","Text":"48,000, 45,000 and 16,200,"},{"Start":"09:58.340 ","End":"10:03.750","Text":"you get to 147,700,"},{"Start":"10:03.750 ","End":"10:09.120","Text":"and your liabilities is 44,500,"},{"Start":"10:09.120 ","End":"10:14.260","Text":"and your equity is 103,200."},{"Start":"10:14.870 ","End":"10:22.130","Text":"Let\u0027s check because our assets must equal our liabilities plus equity."},{"Start":"10:22.130 ","End":"10:30.825","Text":"44,500 are our liabilities and our equity is 103,200,"},{"Start":"10:30.825 ","End":"10:35.290","Text":"and that does indeed give us 147,700,"},{"Start":"10:35.290 ","End":"10:43.820","Text":"which is our assets so everything works."},{"Start":"10:43.820 ","End":"10:47.940","Text":"That\u0027s the completed accounting equation worksheet."}],"ID":25984}],"Thumbnail":null,"ID":145489},{"Name":"Short Exercises","TopicPlaylistFirstVideoID":0,"Duration":null,"Videos":[{"Watched":false,"Name":"Exercise 1","Duration":"2m 50s","ChapterTopicVideoID":27323,"CourseChapterTopicPlaylistID":271504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.660","Text":"Hello, this is a series of short exercises"},{"Start":"00:03.660 ","End":"00:08.265","Text":"related to the accounting equation brought to you by Proprep."},{"Start":"00:08.265 ","End":"00:12.570","Text":"Exercise 1, you\u0027re given a simple statement of"},{"Start":"00:12.570 ","End":"00:16.575","Text":"financial position where you see the familiar headings"},{"Start":"00:16.575 ","End":"00:21.540","Text":"of assets as well as equity and liabilities."},{"Start":"00:21.540 ","End":"00:26.490","Text":"You\u0027re required to think of the accounting equation and say,"},{"Start":"00:26.490 ","End":"00:31.605","Text":"what do you notice about the structure of the statement of financial position?"},{"Start":"00:31.605 ","End":"00:35.850","Text":"Before looking at the solution, just go back."},{"Start":"00:35.850 ","End":"00:41.830","Text":"As we\u0027ve said, there\u0027s the familiar structure of assets on the 1 side,"},{"Start":"00:41.830 ","End":"00:45.110","Text":"and equity and liabilities on the other side."},{"Start":"00:45.110 ","End":"00:47.599","Text":"Within equity and liabilities,"},{"Start":"00:47.599 ","End":"00:53.990","Text":"you see the familiar subheadings of equity itself and obviously liabilities."},{"Start":"00:53.990 ","End":"00:57.020","Text":"The balance sheet balances with total assets of"},{"Start":"00:57.020 ","End":"01:02.120","Text":"10 million and the total equity nobility is also of 10 million."},{"Start":"01:02.120 ","End":"01:06.545","Text":"What do we notice about the structure of the statement of financial position?"},{"Start":"01:06.545 ","End":"01:09.155","Text":"The statement of financial position, as a whole,"},{"Start":"01:09.155 ","End":"01:15.170","Text":"shows the assets of 10 million and, in addition,"},{"Start":"01:15.170 ","End":"01:18.320","Text":"it shows the equity, called owner\u0027s,"},{"Start":"01:18.320 ","End":"01:24.485","Text":"equity plus liabilities also of 10 million."},{"Start":"01:24.485 ","End":"01:29.030","Text":"That is clearly why the balance sheet balances in the first place."},{"Start":"01:29.030 ","End":"01:33.155","Text":"The accounting equation, which I\u0027ll right at the top here,"},{"Start":"01:33.155 ","End":"01:36.545","Text":"of A equals L, liabilities,"},{"Start":"01:36.545 ","End":"01:39.245","Text":"plus OE, owner\u0027s equity,"},{"Start":"01:39.245 ","End":"01:42.110","Text":"holds for every transaction."},{"Start":"01:42.110 ","End":"01:48.845","Text":"If every transaction has been recorded in accordance with the accounting equation,"},{"Start":"01:48.845 ","End":"01:52.205","Text":"the ultimate balance sheet is going to balance."},{"Start":"01:52.205 ","End":"01:53.765","Text":"Here, as we said,"},{"Start":"01:53.765 ","End":"01:57.005","Text":"we see the 10 million of total assets,"},{"Start":"01:57.005 ","End":"02:01.505","Text":"and the 10 million of total equity and liabilities."},{"Start":"02:01.505 ","End":"02:05.975","Text":"Focusing on the equity and liabilities parts of the balance sheet,"},{"Start":"02:05.975 ","End":"02:11.510","Text":"we see owner\u0027s equity with a total of 6 million"},{"Start":"02:11.510 ","End":"02:18.740","Text":"and we also see the liabilities with a total of 4 million."},{"Start":"02:18.740 ","End":"02:25.760","Text":"The 6 million and 4 million clearly comprise the 10 million of equity and liabilities."},{"Start":"02:25.760 ","End":"02:27.485","Text":"In other words, therefore,"},{"Start":"02:27.485 ","End":"02:32.792","Text":"the statement of financial position portrays the accounting equation,"},{"Start":"02:32.792 ","End":"02:38.125","Text":"assets equals liabilities plus owner\u0027s equity,"},{"Start":"02:38.125 ","End":"02:43.100","Text":"or as it\u0027s set out in a traditional statement of financial position,"},{"Start":"02:43.100 ","End":"02:50.310","Text":"assets equals owner\u0027s equity plus liabilities."}],"ID":28433},{"Watched":false,"Name":"Exercise 2","Duration":"3m 58s","ChapterTopicVideoID":27324,"CourseChapterTopicPlaylistID":271504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.620","Text":"Exercise 2, test your knowledge of the definition"},{"Start":"00:04.620 ","End":"00:09.330","Text":"of an asset in terms of the 2018 conceptual framework."},{"Start":"00:09.330 ","End":"00:15.795","Text":"You are given 4 choices as to what the definition of an asset may be."},{"Start":"00:15.795 ","End":"00:20.970","Text":"You are required to choose the correct option explaining your answer."},{"Start":"00:20.970 ","End":"00:25.050","Text":"Let\u0027s go through each option in turn and we\u0027ll soon"},{"Start":"00:25.050 ","End":"00:29.654","Text":"see which of the answers or which of the options are incorrect,"},{"Start":"00:29.654 ","End":"00:32.600","Text":"and which is going to be the correct option."},{"Start":"00:32.600 ","End":"00:38.870","Text":"Option a says that an asset is a resource controlled by the entity as"},{"Start":"00:38.870 ","End":"00:41.720","Text":"a result of past events and from"},{"Start":"00:41.720 ","End":"00:45.905","Text":"which economic benefits are expected to flow to the entity."},{"Start":"00:45.905 ","End":"00:49.135","Text":"That definition may appear to be correct,"},{"Start":"00:49.135 ","End":"00:56.210","Text":"but in fact that is the definition of an asset in terms of the old conceptual framework."},{"Start":"00:56.210 ","End":"00:59.105","Text":"When we finally come upon the correct answer,"},{"Start":"00:59.105 ","End":"01:03.030","Text":"we will see why number a is in fact incorrect,"},{"Start":"01:03.030 ","End":"01:06.000","Text":"so put a little cross here in the meantime just to"},{"Start":"01:06.000 ","End":"01:09.500","Text":"remind us there\u0027s a problem with number a or option a."},{"Start":"01:09.500 ","End":"01:13.440","Text":"Option b says a present obligation of the entity."},{"Start":"01:13.440 ","End":"01:17.410","Text":"Now the present obligation is the problem here because"},{"Start":"01:17.410 ","End":"01:22.280","Text":"a present obligation relates to a liability and not an asset."},{"Start":"01:22.280 ","End":"01:28.075","Text":"Therefore, we know b is incorrect even without reading the rest of the information given."},{"Start":"01:28.075 ","End":"01:34.865","Text":"It also refers to an option b to transfer an economic resource."},{"Start":"01:34.865 ","End":"01:40.510","Text":"Again, the transferring of an economic resource is incorrect for an asset,"},{"Start":"01:40.510 ","End":"01:43.225","Text":"because it also relates to a liability."},{"Start":"01:43.225 ","End":"01:46.450","Text":"Carrying on the words in brackets say,"},{"Start":"01:46.450 ","End":"01:50.860","Text":"a right that has the potential to produce economic benefits."},{"Start":"01:50.860 ","End":"01:55.845","Text":"That sentence or that part of the sentence in itself is correct."},{"Start":"01:55.845 ","End":"02:01.595","Text":"If it does relate to the asset definition and also as a result of past events,"},{"Start":"02:01.595 ","End":"02:03.410","Text":"that part is correct,"},{"Start":"02:03.410 ","End":"02:07.189","Text":"but option b is clearly not an asset definition."},{"Start":"02:07.189 ","End":"02:11.510","Text":"Option c says a present economic resource."},{"Start":"02:11.510 ","End":"02:13.025","Text":"That is correct."},{"Start":"02:13.025 ","End":"02:16.790","Text":"The present economic resource defined as a right"},{"Start":"02:16.790 ","End":"02:21.020","Text":"that has the potential to produce economic benefits as number b,"},{"Start":"02:21.020 ","End":"02:25.885","Text":"that is correct, controlled by the entity,"},{"Start":"02:25.885 ","End":"02:32.095","Text":"also correct, and as a result of past events, also correct."},{"Start":"02:32.095 ","End":"02:35.045","Text":"It looks like number c is a correct answer,"},{"Start":"02:35.045 ","End":"02:38.360","Text":"but let\u0027s look at number d before we make up our minds."},{"Start":"02:38.360 ","End":"02:44.320","Text":"Number d says a present economic resource and that part is correct."},{"Start":"02:44.320 ","End":"02:49.580","Text":"Now in number d, the present economic resource is defined as"},{"Start":"02:49.580 ","End":"02:55.850","Text":"a duty or responsibility that the entity has no practicability to avoid."},{"Start":"02:55.850 ","End":"02:58.970","Text":"That is incorrect because that duty or"},{"Start":"02:58.970 ","End":"03:03.275","Text":"responsibility relates to the liability definition."},{"Start":"03:03.275 ","End":"03:10.130","Text":"Control by the entity is correct and as a result of past events is correct."},{"Start":"03:10.130 ","End":"03:14.900","Text":"We see here option c must be the correct answer."},{"Start":"03:14.900 ","End":"03:16.505","Text":"Now before we move on,"},{"Start":"03:16.505 ","End":"03:22.970","Text":"just compare a and c. The prior to 2018 which is"},{"Start":"03:22.970 ","End":"03:26.600","Text":"the current conceptual framework refer to an asset as"},{"Start":"03:26.600 ","End":"03:30.905","Text":"a resource controlled by the entity as opposed to a present economic resource,"},{"Start":"03:30.905 ","End":"03:36.805","Text":"and referred to from which economic benefits are expected to flow."},{"Start":"03:36.805 ","End":"03:40.610","Text":"The current definition simply refers to"},{"Start":"03:40.610 ","End":"03:44.730","Text":"a present economic resource which is then defined"},{"Start":"03:44.730 ","End":"03:49.445","Text":"as a right that has the potential to produce economic benefits."},{"Start":"03:49.445 ","End":"03:51.560","Text":"So 2 definitions are similar,"},{"Start":"03:51.560 ","End":"03:54.430","Text":"but the wording is somewhat different."},{"Start":"03:54.430 ","End":"03:58.440","Text":"There you see the correct answer set out for you."}],"ID":28434},{"Watched":false,"Name":"Exercise 3","Duration":"2m 39s","ChapterTopicVideoID":27325,"CourseChapterTopicPlaylistID":271504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.550","Text":"Exercise 3."},{"Start":"00:02.550 ","End":"00:07.920","Text":"Exercise 3 looks at the impact"},{"Start":"00:07.920 ","End":"00:13.710","Text":"that settling liability has on the components of the accounting equation."},{"Start":"00:13.710 ","End":"00:18.210","Text":"You are given 5 options and you\u0027re asked to choose"},{"Start":"00:18.210 ","End":"00:23.685","Text":"which option relates to the settlement of liability, explaining your answer."},{"Start":"00:23.685 ","End":"00:27.030","Text":"The best way to understand and get"},{"Start":"00:27.030 ","End":"00:31.094","Text":"the correct answer here is to consider the accounting equation."},{"Start":"00:31.094 ","End":"00:36.670","Text":"Assets equals liabilities plus owner\u0027s equity."},{"Start":"00:36.670 ","End":"00:41.240","Text":"We\u0027re saying if we set a liability point a says,"},{"Start":"00:41.240 ","End":"00:44.055","Text":"increases assets and liabilities."},{"Start":"00:44.055 ","End":"00:48.245","Text":"Increase in assets and increase liabilities"},{"Start":"00:48.245 ","End":"00:53.275","Text":"certainly can\u0027t result in a settlement of a liability."},{"Start":"00:53.275 ","End":"01:00.085","Text":"Point b says increases in assets or decreases in liabilities."},{"Start":"01:00.085 ","End":"01:05.240","Text":"While the decrease in liability part is correct but the accounting equation is not going"},{"Start":"01:05.240 ","End":"01:07.640","Text":"to balance because you have an increase over here in"},{"Start":"01:07.640 ","End":"01:10.250","Text":"assets and a decrease in liabilities."},{"Start":"01:10.250 ","End":"01:14.350","Text":"The equation of a balance of part b can\u0027t be correct either."},{"Start":"01:14.350 ","End":"01:18.820","Text":"Part c says,"},{"Start":"01:18.820 ","End":"01:22.505","Text":"a decrease in assets and a decrease in equity."},{"Start":"01:22.505 ","End":"01:24.980","Text":"The accounting equation balances."},{"Start":"01:24.980 ","End":"01:30.499","Text":"But this is clearly incorrect because there is no impact on liabilities"},{"Start":"01:30.499 ","End":"01:35.875","Text":"and liabilities are being paid off or settled so part c also can\u0027t be correct."},{"Start":"01:35.875 ","End":"01:41.120","Text":"Part d says decreases in both assets and liabilities,"},{"Start":"01:41.120 ","End":"01:45.455","Text":"say decrease in assets and a decrease in liabilities."},{"Start":"01:45.455 ","End":"01:48.590","Text":"Now here we see the accounting equation is balancing,"},{"Start":"01:48.590 ","End":"01:51.784","Text":"decrease in assets from the left side of the equation"},{"Start":"01:51.784 ","End":"01:55.430","Text":"and also a decrease in liabilities in the right side of"},{"Start":"01:55.430 ","End":"01:58.460","Text":"the equation and that makes sense in terms of"},{"Start":"01:58.460 ","End":"02:03.410","Text":"the scenario because we are settling a liability, they will decrease."},{"Start":"02:03.410 ","End":"02:10.235","Text":"The decrease in assets is presumably the payment of cash to settle the liability."},{"Start":"02:10.235 ","End":"02:15.500","Text":"Let\u0027s look at number e. E says decreases both liabilities and equity."},{"Start":"02:15.500 ","End":"02:19.055","Text":"Liabilities decrease, equity decreases."},{"Start":"02:19.055 ","End":"02:23.060","Text":"Now here again there\u0027s a problem because the accounting equation won\u0027t balance."},{"Start":"02:23.060 ","End":"02:28.400","Text":"We\u0027ve got a decrease and a decrease both on the right side of the accounting equation."},{"Start":"02:28.400 ","End":"02:32.435","Text":"Even though the liability decrease in itself is correct,"},{"Start":"02:32.435 ","End":"02:35.960","Text":"the decrease in equity is incorrect."},{"Start":"02:35.960 ","End":"02:40.210","Text":"Then you see option d is the correct answer."}],"ID":28435},{"Watched":false,"Name":"Exercise 4","Duration":"4m 51s","ChapterTopicVideoID":27318,"CourseChapterTopicPlaylistID":271504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.190","Text":"Exercise 4."},{"Start":"00:02.190 ","End":"00:10.560","Text":"Exercise 4 focuses on the definition of income in terms of the 2018 conceptual framework."},{"Start":"00:10.560 ","End":"00:14.130","Text":"Now, this multiple choice question is slightly more"},{"Start":"00:14.130 ","End":"00:19.005","Text":"complicated because as you see in the question,"},{"Start":"00:19.005 ","End":"00:22.155","Text":"you\u0027re given 6 options, 1-6."},{"Start":"00:22.155 ","End":"00:24.240","Text":"But then the a, b, c, d,"},{"Start":"00:24.240 ","End":"00:28.440","Text":"e ask you to choose amongst the various options,"},{"Start":"00:28.440 ","End":"00:29.940","Text":"1, 3, and 5, 1, 3,"},{"Start":"00:29.940 ","End":"00:31.590","Text":"and 6, and so on."},{"Start":"00:31.590 ","End":"00:34.860","Text":"In order to choose the correct option from a, b, c, d,"},{"Start":"00:34.860 ","End":"00:38.830","Text":"or e, we need to therefore look at each of the 1,"},{"Start":"00:38.830 ","End":"00:40.795","Text":"2, 3, 4, 5, and 6."},{"Start":"00:40.795 ","End":"00:43.910","Text":"If we know which ones of those are correct or incorrect,"},{"Start":"00:43.910 ","End":"00:46.070","Text":"we can come to the correct answer."},{"Start":"00:46.070 ","End":"00:51.590","Text":"The starting point must clearly be looking at the accounting equation again."},{"Start":"00:51.590 ","End":"00:53.480","Text":"We\u0027ll write the accounting equation;"},{"Start":"00:53.480 ","End":"00:58.520","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"00:58.520 ","End":"01:01.505","Text":"Now importantly here, remember we are looking at income."},{"Start":"01:01.505 ","End":"01:05.050","Text":"Remember, considering owner\u0027s equity,"},{"Start":"01:05.050 ","End":"01:11.505","Text":"owner\u0027s equity is impacted by both income and by expenses."},{"Start":"01:11.505 ","End":"01:18.605","Text":"Income we know increases equity and expenses we know decrease equity."},{"Start":"01:18.605 ","End":"01:21.495","Text":"Our focus here is on income."},{"Start":"01:21.495 ","End":"01:23.530","Text":"Let us now look at each of the options,"},{"Start":"01:23.530 ","End":"01:25.705","Text":"1, 2, 3, 4, 5, and 6,"},{"Start":"01:25.705 ","End":"01:29.350","Text":"and see if that fits in or which of those of 1,"},{"Start":"01:29.350 ","End":"01:33.175","Text":"2, 3, 4, 5, and 6 fits in with the income definition."},{"Start":"01:33.175 ","End":"01:38.120","Text":"Point 1 says income is defined as or part of the income definition is"},{"Start":"01:38.120 ","End":"01:43.185","Text":"defined as an increase in assets or a decrease in liabilities."},{"Start":"01:43.185 ","End":"01:49.730","Text":"Assets increase, that\u0027ll certainly make sense in terms of income increasing because"},{"Start":"01:49.730 ","End":"01:52.370","Text":"income increases equity and we see"},{"Start":"01:52.370 ","End":"01:55.310","Text":"the accounting equation balances with an increase in"},{"Start":"01:55.310 ","End":"01:58.520","Text":"the left and also an increase on the right."},{"Start":"01:58.520 ","End":"02:05.135","Text":"But point 1 also refers to a decrease in liabilities."},{"Start":"02:05.135 ","End":"02:08.555","Text":"Let\u0027s think about it as a separate part of number 1."},{"Start":"02:08.555 ","End":"02:10.790","Text":"If liability is decreased,"},{"Start":"02:10.790 ","End":"02:12.440","Text":"can we earn income?"},{"Start":"02:12.440 ","End":"02:14.020","Text":"Can income go up?"},{"Start":"02:14.020 ","End":"02:16.270","Text":"On Thomas, the accounting equation,"},{"Start":"02:16.270 ","End":"02:20.660","Text":"this is fine because we have a decrease and we have an increase"},{"Start":"02:20.660 ","End":"02:25.250","Text":"both on the right-hand side of the accounting equation."},{"Start":"02:25.250 ","End":"02:29.480","Text":"That\u0027s not a problem. Also, we know from our definition of income"},{"Start":"02:29.480 ","End":"02:34.825","Text":"that income can be earned through a decrease in liabilities."},{"Start":"02:34.825 ","End":"02:38.200","Text":"That specific scenario, as you\u0027ve learned previously,"},{"Start":"02:38.200 ","End":"02:41.025","Text":"a liability called deferred income."},{"Start":"02:41.025 ","End":"02:45.020","Text":"Remember, deferred income can also be called unearned income."},{"Start":"02:45.020 ","End":"02:51.450","Text":"It is created when cash is received in advance of a service being performed,"},{"Start":"02:51.450 ","End":"02:53.825","Text":"and when the services performed,"},{"Start":"02:53.825 ","End":"02:58.910","Text":"the entity decreases liability and recognizes income."},{"Start":"02:58.910 ","End":"03:02.605","Text":"Certainly number 1 on its own is correct."},{"Start":"03:02.605 ","End":"03:09.750","Text":"Number 2 looks at and says a decrease in assets or increase in liabilities."},{"Start":"03:09.750 ","End":"03:12.405","Text":"If we decrease assets,"},{"Start":"03:12.405 ","End":"03:15.935","Text":"remember here we want to recognize income as being earned,"},{"Start":"03:15.935 ","End":"03:18.395","Text":"the accounting equation is not going to balance."},{"Start":"03:18.395 ","End":"03:20.380","Text":"That\u0027s not going to work."},{"Start":"03:20.380 ","End":"03:23.870","Text":"Also, if we think of an increase in"},{"Start":"03:23.870 ","End":"03:29.390","Text":"liabilities and we want to increase income at the same time,"},{"Start":"03:29.390 ","End":"03:33.830","Text":"that also is not going to work because we\u0027ll have 2 increases on"},{"Start":"03:33.830 ","End":"03:38.650","Text":"the right-hand side of the accounting equation so number 2 can\u0027t be correct."},{"Start":"03:38.650 ","End":"03:40.695","Text":"Number 3 says,"},{"Start":"03:40.695 ","End":"03:43.399","Text":"it results in an increase in equity."},{"Start":"03:43.399 ","End":"03:48.350","Text":"That must be correct along with number 1 clearly,"},{"Start":"03:48.350 ","End":"03:51.646","Text":"because we know income increases equity,"},{"Start":"03:51.646 ","End":"03:53.590","Text":"so 3 is correct."},{"Start":"03:53.590 ","End":"03:56.910","Text":"4 says, decreases equity."},{"Start":"03:56.910 ","End":"04:00.935","Text":"That must be incorrect because expenses decrease equity,"},{"Start":"04:00.935 ","End":"04:04.885","Text":"income increases it so 4 can\u0027t be correct."},{"Start":"04:04.885 ","End":"04:11.570","Text":"Now, 5 and 6 refer to the contributions from owners and distributions to owners."},{"Start":"04:11.570 ","End":"04:15.200","Text":"So 4 says that income excludes"},{"Start":"04:15.200 ","End":"04:22.245","Text":"a contribution from an owner other than the contribution from an owner."},{"Start":"04:22.245 ","End":"04:27.919","Text":"We know that\u0027s correct because a contribution from an owner does increase"},{"Start":"04:27.919 ","End":"04:34.175","Text":"equity and a distribution to an owner,"},{"Start":"04:34.175 ","End":"04:38.805","Text":"decreases equity, which clearly can\u0027t be income."},{"Start":"04:38.805 ","End":"04:45.440","Text":"What we see here is the great options finally are number 1,"},{"Start":"04:45.440 ","End":"04:48.485","Text":"number 3, and number 5,"},{"Start":"04:48.485 ","End":"04:51.690","Text":"then you see a is the correct answer."}],"ID":28436},{"Watched":false,"Name":"Exercise 5","Duration":"3m 12s","ChapterTopicVideoID":27319,"CourseChapterTopicPlaylistID":271504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.845","Text":"Exercise 5 considers the expense definition."},{"Start":"00:04.845 ","End":"00:09.300","Text":"Again, you are given 4 possible combinations of"},{"Start":"00:09.300 ","End":"00:14.715","Text":"statements and the required asks us to choose which combination is correct."},{"Start":"00:14.715 ","End":"00:16.740","Text":"To choose the correct option,"},{"Start":"00:16.740 ","End":"00:20.339","Text":"again we have to consider the accounting equation."},{"Start":"00:20.339 ","End":"00:22.905","Text":"We write out the accounting equation,"},{"Start":"00:22.905 ","End":"00:27.915","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"00:27.915 ","End":"00:30.594","Text":"Remember, looking at owner\u0027s equity,"},{"Start":"00:30.594 ","End":"00:37.964","Text":"income increases owner\u0027s equity and expenses decrease owner\u0027s equity."},{"Start":"00:37.964 ","End":"00:44.190","Text":"Here we focusing on an expense which decreases owner\u0027s equity."},{"Start":"00:44.420 ","End":"00:48.120","Text":"Let\u0027s take a look at number 1."},{"Start":"00:48.120 ","End":"00:55.540","Text":"Number 1 says that an expense will result in a decrease in assets, so assets decreasing."},{"Start":"00:55.540 ","End":"00:57.979","Text":"Remember if there\u0027s an expense,"},{"Start":"00:57.979 ","End":"01:00.080","Text":"equity must decrease as well,"},{"Start":"01:00.080 ","End":"01:02.850","Text":"and this makes sense because A,"},{"Start":"01:02.850 ","End":"01:06.320","Text":"the accounting equation balances a decrease in assets on the left side of"},{"Start":"01:06.320 ","End":"01:12.485","Text":"the equation and a decrease in equity on the right side of the equation."},{"Start":"01:12.485 ","End":"01:20.635","Text":"The decrease in assets would presumably be the payment of cash for the expense."},{"Start":"01:20.635 ","End":"01:24.225","Text":"The decrease in asset certainly looks to be correct."},{"Start":"01:24.225 ","End":"01:27.380","Text":"With assets increase and remember,"},{"Start":"01:27.380 ","End":"01:30.335","Text":"expenses decrease equity,"},{"Start":"01:30.335 ","End":"01:32.855","Text":"the accounting equation will not balance."},{"Start":"01:32.855 ","End":"01:34.670","Text":"We have an increase on the left side of"},{"Start":"01:34.670 ","End":"01:38.195","Text":"the equation and a decrease in the right side of the equation,"},{"Start":"01:38.195 ","End":"01:44.495","Text":"so an increase in assets can never give rise to an expense being recognized."},{"Start":"01:44.495 ","End":"01:49.105","Text":"Number 3 refers to an increase in liabilities."},{"Start":"01:49.105 ","End":"01:54.750","Text":"Liabilities increase and expenses as we know, decrease equity."},{"Start":"01:54.750 ","End":"01:57.245","Text":"Here the accounting equation will balance."},{"Start":"01:57.245 ","End":"02:05.060","Text":"We have a increase and a decrease both on the right side of the accounting equation."},{"Start":"02:05.060 ","End":"02:08.540","Text":"We also know from the definition of an expense,"},{"Start":"02:08.540 ","End":"02:13.155","Text":"that expenses do come about through increases in liabilities"},{"Start":"02:13.155 ","End":"02:18.815","Text":"and thus we know and we refer to it as an accrued expense,"},{"Start":"02:18.815 ","End":"02:21.995","Text":"an expense incurred, but not yet paid."},{"Start":"02:21.995 ","End":"02:28.340","Text":"So it could also be called an unpaid expense or expenses paid rather."},{"Start":"02:28.340 ","End":"02:32.120","Text":"Therefore, number 3 is in fact correct."},{"Start":"02:32.120 ","End":"02:33.920","Text":"Look at number 4,"},{"Start":"02:33.920 ","End":"02:37.035","Text":"which refers to a decrease in liabilities."},{"Start":"02:37.035 ","End":"02:43.670","Text":"If we have a decrease in liabilities and we know expenses decrease equity,"},{"Start":"02:43.670 ","End":"02:48.485","Text":"here the accounting equation is not going to balance because we\u0027ll have a decrease."},{"Start":"02:48.485 ","End":"02:55.024","Text":"We\u0027ll have 2 decreases both on the right side of the accounting equation."},{"Start":"02:55.024 ","End":"02:58.720","Text":"Therefore, number 4 cannot be correct."},{"Start":"02:58.720 ","End":"03:04.145","Text":"The correct answer therefore is number 1 and number 3,"},{"Start":"03:04.145 ","End":"03:05.975","Text":"so c is the correct answer."},{"Start":"03:05.975 ","End":"03:08.420","Text":"Number 1 or 3,"},{"Start":"03:08.420 ","End":"03:12.090","Text":"both give rise to an expense being incurred."}],"ID":28437},{"Watched":false,"Name":"Exercise 6","Duration":"8m 46s","ChapterTopicVideoID":27320,"CourseChapterTopicPlaylistID":271504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.020 ","End":"00:05.740","Text":"Exercise 6 asks you to consider a list of"},{"Start":"00:05.740 ","End":"00:09.460","Text":"typical business transactions and to indicate"},{"Start":"00:09.460 ","End":"00:14.425","Text":"the effect of these transactions on the accounting equation."},{"Start":"00:14.425 ","End":"00:17.740","Text":"Let us start by looking at transaction a."},{"Start":"00:17.740 ","End":"00:21.025","Text":"When the owner invests funds in the business entity,"},{"Start":"00:21.025 ","End":"00:24.775","Text":"the assets of the business, must increase."},{"Start":"00:24.775 ","End":"00:27.865","Text":"What is the source of those business funds?"},{"Start":"00:27.865 ","End":"00:30.850","Text":"It\u0027s not the lenders brothers funds,"},{"Start":"00:30.850 ","End":"00:35.665","Text":"it\u0027s the owners and therefore owners equity will increase as well."},{"Start":"00:35.665 ","End":"00:40.510","Text":"Note the accounting equation balances and we can make a note here that this"},{"Start":"00:40.510 ","End":"00:45.830","Text":"represents a capital contribution by the owner into the business."},{"Start":"00:45.830 ","End":"00:47.995","Text":"In transaction b,"},{"Start":"00:47.995 ","End":"00:51.265","Text":"the entity borrows funds from a lender."},{"Start":"00:51.265 ","End":"00:55.160","Text":"Again, the asset cash will increase because the funds"},{"Start":"00:55.160 ","End":"00:59.165","Text":"of the entity are increasing and we again ask the question,"},{"Start":"00:59.165 ","End":"01:01.700","Text":"where is the source of those funds?"},{"Start":"01:01.700 ","End":"01:07.789","Text":"These funds really come from lenders or liability therefore, and liabilities increase."},{"Start":"01:07.789 ","End":"01:13.850","Text":"Note the accounting equation balances a plus in the left and a plus on the right."},{"Start":"01:13.850 ","End":"01:15.975","Text":"In transaction c,"},{"Start":"01:15.975 ","End":"01:18.680","Text":"the entity buys assets for cash."},{"Start":"01:18.680 ","End":"01:22.640","Text":"Or the asset purchased be it inventory or"},{"Start":"01:22.640 ","End":"01:27.935","Text":"equipment will increase and because the assets are purchased for cash,"},{"Start":"01:27.935 ","End":"01:32.180","Text":"another assets called cash will decrease."},{"Start":"01:32.180 ","End":"01:36.260","Text":"Now note again, the equation balances because we have"},{"Start":"01:36.260 ","End":"01:42.275","Text":"both a plus and a minus on the left side of the equal sign."},{"Start":"01:42.275 ","End":"01:47.855","Text":"In transaction d, the entity buys assets on credit."},{"Start":"01:47.855 ","End":"01:51.735","Text":"Again, the assets in inventory or equivalent,"},{"Start":"01:51.735 ","End":"01:56.405","Text":"for example, and because the assets are purchased on credit,"},{"Start":"01:56.405 ","End":"02:00.785","Text":"the entity owes an amount to a supplier,"},{"Start":"02:00.785 ","End":"02:06.380","Text":"accounts payable, and therefore liability will increase as well."},{"Start":"02:06.380 ","End":"02:09.200","Text":"Once again, the accounting equation balances,"},{"Start":"02:09.200 ","End":"02:11.960","Text":"a plus on the right side of"},{"Start":"02:11.960 ","End":"02:17.315","Text":"the accounting equation and a plus on the left side of the accounting equation."},{"Start":"02:17.315 ","End":"02:20.150","Text":"Note that transactions b, c,"},{"Start":"02:20.150 ","End":"02:24.454","Text":"and d had no effect on owner\u0027s equity."},{"Start":"02:24.454 ","End":"02:28.390","Text":"Because in transactions b, c, and d,"},{"Start":"02:28.390 ","End":"02:31.430","Text":"there was no contribution or distribution,"},{"Start":"02:31.430 ","End":"02:34.865","Text":"as well as no income or expense."},{"Start":"02:34.865 ","End":"02:37.115","Text":"In transaction e,"},{"Start":"02:37.115 ","End":"02:41.855","Text":"the entity sells goods or provides a service for cash."},{"Start":"02:41.855 ","End":"02:45.080","Text":"Here an asset called cash will increase and"},{"Start":"02:45.080 ","End":"02:50.060","Text":"because the goods have been provided or the service is being provided,"},{"Start":"02:50.060 ","End":"02:56.660","Text":"equity is going to increase in the form of income being earned and"},{"Start":"02:56.660 ","End":"02:59.420","Text":"here we can note that income is being"},{"Start":"02:59.420 ","End":"03:03.815","Text":"earned through the provision of the service for cash."},{"Start":"03:03.815 ","End":"03:06.650","Text":"I\u0027m going to make a note because it\u0027s going to be important in"},{"Start":"03:06.650 ","End":"03:09.980","Text":"a moment that the increase in"},{"Start":"03:09.980 ","End":"03:15.815","Text":"the asset that we see here in transaction number e,"},{"Start":"03:15.815 ","End":"03:19.145","Text":"those asset increasing is a cash asset."},{"Start":"03:19.145 ","End":"03:24.555","Text":"But now compare this to transaction number f. Where in transaction number f,"},{"Start":"03:24.555 ","End":"03:29.765","Text":"you see the entity sells goods or provides service on credit."},{"Start":"03:29.765 ","End":"03:32.800","Text":"Again, the service\u0027s being performed."},{"Start":"03:32.800 ","End":"03:37.055","Text":"Because the service\u0027s being performed or the goods have been provided,"},{"Start":"03:37.055 ","End":"03:40.375","Text":"income is going to increase."},{"Start":"03:40.375 ","End":"03:45.265","Text":"Again, we recognize income as the increase in equity,"},{"Start":"03:45.265 ","End":"03:48.055","Text":"but no cash is received this time,"},{"Start":"03:48.055 ","End":"03:52.824","Text":"but because the goods have been provided or the service\u0027s being performed,"},{"Start":"03:52.824 ","End":"03:56.095","Text":"we can recognize an increase in an asset."},{"Start":"03:56.095 ","End":"03:58.840","Text":"The asset has been recognized this time,"},{"Start":"03:58.840 ","End":"04:02.605","Text":"as you know, will be called the accounts receivable."},{"Start":"04:02.605 ","End":"04:05.665","Text":"Notes in both e and f,"},{"Start":"04:05.665 ","End":"04:09.880","Text":"income is recognized as being earned, in number e,"},{"Start":"04:09.880 ","End":"04:11.455","Text":"cash is received,"},{"Start":"04:11.455 ","End":"04:14.500","Text":"in number f, cash is not received,"},{"Start":"04:14.500 ","End":"04:20.585","Text":"and this is an example of the application of the accrual basis of accounting."},{"Start":"04:20.585 ","End":"04:26.420","Text":"Transaction g refers to the recognition of the cost of goods sold."},{"Start":"04:26.420 ","End":"04:29.330","Text":"In other transaction e or f,"},{"Start":"04:29.330 ","End":"04:31.895","Text":"if there were good which had been sold,"},{"Start":"04:31.895 ","End":"04:36.050","Text":"we need to recognize a cost of sales as well."},{"Start":"04:36.050 ","End":"04:44.270","Text":"Here assets, typically inventory would decrease and that recognition of the cost of"},{"Start":"04:44.270 ","End":"04:47.630","Text":"sales must be an expense that was"},{"Start":"04:47.630 ","End":"04:52.295","Text":"recognized which decreases equity and we can just note here,"},{"Start":"04:52.295 ","End":"04:54.350","Text":"that is an expense."},{"Start":"04:54.350 ","End":"04:57.440","Text":"Note again, the accounting equation balances"},{"Start":"04:57.440 ","End":"04:59.450","Text":"because we have a decrease in the left side of"},{"Start":"04:59.450 ","End":"05:05.960","Text":"the equation and also a decrease on the right side of the equation."},{"Start":"05:05.960 ","End":"05:08.630","Text":"Into on section h,"},{"Start":"05:08.630 ","End":"05:13.600","Text":"the entity receives cash from a customer for amounts owing."},{"Start":"05:13.600 ","End":"05:20.105","Text":"This transaction h will clearly then refer back to, for example,"},{"Start":"05:20.105 ","End":"05:27.980","Text":"transaction number f. H must relate back to transaction number f. In f,"},{"Start":"05:27.980 ","End":"05:34.370","Text":"the entity sold goods or provided a service on credit and now in transaction h,"},{"Start":"05:34.370 ","End":"05:38.630","Text":"the customer\u0027s paying the amount that is owed to the entity."},{"Start":"05:38.630 ","End":"05:41.170","Text":"The asset cash will increase,"},{"Start":"05:41.170 ","End":"05:45.920","Text":"no income is recognized as being earned over here because we"},{"Start":"05:45.920 ","End":"05:51.065","Text":"recognize the income at the time the transaction took place,"},{"Start":"05:51.065 ","End":"05:57.620","Text":"which was here in transaction number f. Therefore,"},{"Start":"05:57.620 ","End":"06:02.210","Text":"what happens in transaction number h is that another asset,"},{"Start":"06:02.210 ","End":"06:06.670","Text":"in this case, the asset accounts receivable will decrease."},{"Start":"06:06.670 ","End":"06:10.880","Text":"Note the counting equation balances because we have an increase in"},{"Start":"06:10.880 ","End":"06:18.050","Text":"an asset called cash and a decrease in the asset called accounts receivable,"},{"Start":"06:18.050 ","End":"06:19.505","Text":"a plus and a minus,"},{"Start":"06:19.505 ","End":"06:22.985","Text":"both on the left side of the accounting equation."},{"Start":"06:22.985 ","End":"06:25.505","Text":"In transaction i,"},{"Start":"06:25.505 ","End":"06:30.455","Text":"the entity pays for an expense in cash."},{"Start":"06:30.455 ","End":"06:36.785","Text":"You have the asset cash will decrease and as an expense is being recognized,"},{"Start":"06:36.785 ","End":"06:40.295","Text":"equity will come down as well."},{"Start":"06:40.295 ","End":"06:46.724","Text":"Lets just note this as an expense as before and also a again as before,"},{"Start":"06:46.724 ","End":"06:50.690","Text":"note that accounting equation balances a decrease on the left side of"},{"Start":"06:50.690 ","End":"06:56.384","Text":"the equation and a decrease also on the right side of the accounting equation."},{"Start":"06:56.384 ","End":"06:58.590","Text":"In transaction j,"},{"Start":"06:58.590 ","End":"07:03.465","Text":"the entity pays a lender or a supplier,"},{"Start":"07:03.465 ","End":"07:09.665","Text":"now both the lender and the supplier are clearly a liability."},{"Start":"07:09.665 ","End":"07:11.790","Text":"These are both a liability,"},{"Start":"07:11.790 ","End":"07:14.985","Text":"so the entity is paying off a liability."},{"Start":"07:14.985 ","End":"07:18.615","Text":"Paying must imply cash being paid out,"},{"Start":"07:18.615 ","End":"07:24.470","Text":"asset called cash decreases and the liability will decrease as well."},{"Start":"07:24.470 ","End":"07:28.870","Text":"Note that paying a supplier of a goods"},{"Start":"07:28.870 ","End":"07:34.380","Text":"purchased or paying a lender does not involve any impact on equity,"},{"Start":"07:34.380 ","End":"07:36.890","Text":"there\u0027s no expense being recognized."},{"Start":"07:36.890 ","End":"07:43.225","Text":"Transaction k, is the distribution of funds to an owner."},{"Start":"07:43.225 ","End":"07:45.400","Text":"Funds, an asset cash,"},{"Start":"07:45.400 ","End":"07:51.085","Text":"will decrease and because the entity is distributing an asset to the owner,"},{"Start":"07:51.085 ","End":"07:54.732","Text":"the owner\u0027s interests in the entity is decreasing."},{"Start":"07:54.732 ","End":"08:02.810","Text":"If owner\u0027s equity has to decrease and that we will refer to here as a distribution."},{"Start":"08:02.810 ","End":"08:06.785","Text":"Note, in transaction a,"},{"Start":"08:06.785 ","End":"08:11.605","Text":"the contribution and transaction k, the distribution,"},{"Start":"08:11.605 ","End":"08:14.810","Text":"transaction a increased equity,"},{"Start":"08:14.810 ","End":"08:18.135","Text":"transaction k decreased equity,"},{"Start":"08:18.135 ","End":"08:19.875","Text":"but in transaction a,"},{"Start":"08:19.875 ","End":"08:24.960","Text":"there\u0027s no income,"},{"Start":"08:24.960 ","End":"08:27.710","Text":"or write here, no income, and in transaction k,"},{"Start":"08:27.710 ","End":"08:30.230","Text":"there is no expense."},{"Start":"08:30.230 ","End":"08:32.900","Text":"This is a very important principle that"},{"Start":"08:32.900 ","End":"08:36.440","Text":"contributions bond owner increase equity but do not"},{"Start":"08:36.440 ","End":"08:43.265","Text":"comprise income and distributions by the entity to the owner decrease equity,"},{"Start":"08:43.265 ","End":"08:46.920","Text":"but do not comprise an expense."}],"ID":28438},{"Watched":false,"Name":"Exercise 7","Duration":"1m 50s","ChapterTopicVideoID":27321,"CourseChapterTopicPlaylistID":271504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:11.190","Text":"Exercise 7 test your understanding of the impact of various transactions on equity."},{"Start":"00:11.190 ","End":"00:17.940","Text":"You\u0027re given here information relating to a business for the year ending 30 April 20X4."},{"Start":"00:17.940 ","End":"00:21.750","Text":"You have the owner\u0027s equity at 01 May \u0027X3."},{"Start":"00:21.750 ","End":"00:26.490","Text":"Now 01 May \u0027X3 must clearly be the beginning of the year."},{"Start":"00:26.490 ","End":"00:30.270","Text":"You\u0027re given income for the year of 70,000,"},{"Start":"00:30.270 ","End":"00:33.655","Text":"expenses for the year of 58,000,"},{"Start":"00:33.655 ","End":"00:39.110","Text":"and distributions to the owner for the year of 15,000."},{"Start":"00:39.110 ","End":"00:46.225","Text":"You\u0027re required to compute what is the owner\u0027s equity at 30 April of 20X4."},{"Start":"00:46.225 ","End":"00:51.830","Text":"See here, all we have to do get into the correct answer and"},{"Start":"00:51.830 ","End":"00:54.080","Text":"you\u0027ll see I\u0027ve got an extract of"},{"Start":"00:54.080 ","End":"00:57.500","Text":"the question sitting at the top right-hand part of the screen."},{"Start":"00:57.500 ","End":"01:00.155","Text":"We take the beginning owner\u0027s equity,"},{"Start":"01:00.155 ","End":"01:03.155","Text":"which we know is 50,000."},{"Start":"01:03.155 ","End":"01:07.800","Text":"We know that income increases equity and therefore"},{"Start":"01:07.800 ","End":"01:12.875","Text":"the income earned of 70,000 must increase equity."},{"Start":"01:12.875 ","End":"01:19.130","Text":"We\u0027ll add that on. We know expenses decrease equity."},{"Start":"01:19.130 ","End":"01:26.675","Text":"Therefore the expenses of 58, we will subtract."},{"Start":"01:26.675 ","End":"01:29.480","Text":"There are distributions of 15."},{"Start":"01:29.480 ","End":"01:34.495","Text":"We know that distributions also decrease equity."},{"Start":"01:34.495 ","End":"01:42.630","Text":"Therefore we subtract the distributions also of 15,000 which gives"},{"Start":"01:42.630 ","End":"01:51.340","Text":"us a total equity at the end of the period of 47,000."}],"ID":28439},{"Watched":false,"Name":"Exercise 8","Duration":"12m 34s","ChapterTopicVideoID":27322,"CourseChapterTopicPlaylistID":271504,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.460","Text":"Exercise 8."},{"Start":"00:02.460 ","End":"00:05.010","Text":"In Exercise 8,"},{"Start":"00:05.010 ","End":"00:09.593","Text":"which also focuses on an understanding of the accounting equation,"},{"Start":"00:09.593 ","End":"00:12.900","Text":"you are given here a business entity that has"},{"Start":"00:12.900 ","End":"00:19.545","Text":"the following assets and liabilities at the beginning and end of a particular year."},{"Start":"00:19.545 ","End":"00:22.245","Text":"You are told at the beginning of the year,"},{"Start":"00:22.245 ","End":"00:27.510","Text":"the business has assets of 650,000 and liabilities of"},{"Start":"00:27.510 ","End":"00:34.215","Text":"200,000 compared to the end of the year where the assets are now at 700,000,"},{"Start":"00:34.215 ","End":"00:38.560","Text":"and the abilities are 100,000."},{"Start":"00:38.560 ","End":"00:45.305","Text":"You are then asked determine the profit or loss of the business during the year and"},{"Start":"00:45.305 ","End":"00:52.210","Text":"each of 4 importantly unrelated assumptions."},{"Start":"00:52.210 ","End":"00:55.520","Text":"Now in assumption a,"},{"Start":"00:55.520 ","End":"01:02.845","Text":"there were no capital contributions by the owner and also no distributions to the owner."},{"Start":"01:02.845 ","End":"01:05.070","Text":"In assumption b,"},{"Start":"01:05.070 ","End":"01:07.725","Text":"again the capital distributions,"},{"Start":"01:07.725 ","End":"01:09.585","Text":"I\u0027ll say this again."},{"Start":"01:09.585 ","End":"01:11.250","Text":"In assumption b,"},{"Start":"01:11.250 ","End":"01:14.285","Text":"again no capital contributions,"},{"Start":"01:14.285 ","End":"01:19.030","Text":"but distribution to the owner of 15,000 per month."},{"Start":"01:19.030 ","End":"01:21.500","Text":"In Transaction c,"},{"Start":"01:21.500 ","End":"01:24.355","Text":"no distributions to the owner,"},{"Start":"01:24.355 ","End":"01:29.065","Text":"but a capital contribution of 200,000."},{"Start":"01:29.065 ","End":"01:31.730","Text":"Then in assumption d,"},{"Start":"01:31.730 ","End":"01:36.670","Text":"a capital contribution of 200,000 as well"},{"Start":"01:36.670 ","End":"01:42.205","Text":"as distribution to the owner of 15,000 per month."},{"Start":"01:42.205 ","End":"01:44.305","Text":"Remember in each case,"},{"Start":"01:44.305 ","End":"01:50.690","Text":"we are asked to determine what is the profit or loss of the business for the year."},{"Start":"01:50.960 ","End":"01:55.605","Text":"The key to solving this exercise for parts,"},{"Start":"01:55.605 ","End":"01:56.700","Text":"a, b, c,"},{"Start":"01:56.700 ","End":"02:04.520","Text":"and d, is to go back to your understanding of what affects owner\u0027s equity."},{"Start":"02:05.630 ","End":"02:12.880","Text":"Remember owner\u0027s equity is affected by 4 types of transactions only."},{"Start":"02:12.880 ","End":"02:14.665","Text":"Those transactions are,"},{"Start":"02:14.665 ","End":"02:19.165","Text":"a capital contribution which increases equity,"},{"Start":"02:19.165 ","End":"02:26.740","Text":"and also a distribution to the owner which decreases equity."},{"Start":"02:26.740 ","End":"02:32.110","Text":"Then we have the income which is earned by the entity which increases"},{"Start":"02:32.110 ","End":"02:39.200","Text":"equity and we have the expenses incurred by the entity which decreases equity."},{"Start":"02:39.200 ","End":"02:45.265","Text":"Those are the only 4 types of transactions that can ever affect equity."},{"Start":"02:45.265 ","End":"02:51.430","Text":"Therefore, in order to determine the amount of profit for the period."},{"Start":"02:51.430 ","End":"02:58.240","Text":"Remember we know that profit is income less expenses."},{"Start":"03:00.140 ","End":"03:05.300","Text":"If we can compare the ending equity and beginning equity,"},{"Start":"03:05.300 ","End":"03:09.010","Text":"we can determine profit as long as we know"},{"Start":"03:09.010 ","End":"03:13.115","Text":"the amounts of the contributions and distributions."},{"Start":"03:13.115 ","End":"03:15.455","Text":"In scenario a,"},{"Start":"03:15.455 ","End":"03:21.295","Text":"there are no contributions and no distributions to the owner during the period."},{"Start":"03:21.295 ","End":"03:25.135","Text":"What is the ending owner\u0027s equity?"},{"Start":"03:25.135 ","End":"03:29.650","Text":"The ending owner\u0027s equity is the assets"},{"Start":"03:29.650 ","End":"03:38.250","Text":"of 700 less the liabilities of 100,"},{"Start":"03:38.250 ","End":"03:44.845","Text":"therefore, ending owner\u0027s equity is an amount of 600 or 600,000."},{"Start":"03:44.845 ","End":"03:50.720","Text":"The opening owner\u0027s equity is an amount of"},{"Start":"03:51.260 ","End":"04:00.760","Text":"650 assets less 200 liabilities and therefore opening owner\u0027s equity is 450."},{"Start":"04:00.760 ","End":"04:06.940","Text":"Therefore, equity has moved by an amount of 150 during the period."},{"Start":"04:06.940 ","End":"04:10.825","Text":"Because there\u0027re no contributions, note,"},{"Start":"04:10.825 ","End":"04:15.170","Text":"no contributions and also no distributions."},{"Start":"04:15.170 ","End":"04:19.880","Text":"This entire 150 move to equity must"},{"Start":"04:19.880 ","End":"04:24.950","Text":"entirely be attributable to the income less the expenses,"},{"Start":"04:24.950 ","End":"04:27.520","Text":"in other words, to the profit."},{"Start":"04:27.520 ","End":"04:33.325","Text":"Therefore, we can say the profit for the period must have been 150."},{"Start":"04:33.325 ","End":"04:35.640","Text":"Looking at scenario b,"},{"Start":"04:35.640 ","End":"04:37.365","Text":"we know in scenario b,"},{"Start":"04:37.365 ","End":"04:40.590","Text":"there\u0027re distributions of 15,000 per month."},{"Start":"04:40.590 ","End":"04:45.000","Text":"This we will need to take into account in determining profit."},{"Start":"04:45.770 ","End":"04:48.405","Text":"The same as scenario a,"},{"Start":"04:48.405 ","End":"04:51.350","Text":"we started by looking at the ending owner\u0027s equity,"},{"Start":"04:51.350 ","End":"04:55.900","Text":"which we now know is equal to 600,000."},{"Start":"04:55.900 ","End":"04:59.950","Text":"Let\u0027s remind ourselves that\u0027s the assets less liabilities."},{"Start":"04:59.950 ","End":"05:02.965","Text":"The same for the opening owner\u0027s equity,"},{"Start":"05:02.965 ","End":"05:11.670","Text":"assets less liabilities is the 650 less to 200 which is the amount of 450,000."},{"Start":"05:11.670 ","End":"05:19.840","Text":"Therefore, the move to the equity is 150,000 but that movement in equity"},{"Start":"05:19.840 ","End":"05:24.025","Text":"can\u0027t entirely be attributable to profit"},{"Start":"05:24.025 ","End":"05:29.550","Text":"because in this case we know there\u0027re distributions of 15,000 per month."},{"Start":"05:29.550 ","End":"05:33.500","Text":"Therefore distributions of 15,000 per month."},{"Start":"05:33.500 ","End":"05:35.525","Text":"Again, I\u0027ll leave out the 0s,"},{"Start":"05:35.525 ","End":"05:40.715","Text":"15,000 multiplied by 12 months."},{"Start":"05:40.715 ","End":"05:47.690","Text":"We know the distributions amount to 180,000 during the period."},{"Start":"05:47.690 ","End":"05:52.310","Text":"Now think back as to what impact distributions have on equity."},{"Start":"05:52.310 ","End":"05:54.800","Text":"Let\u0027s just remind ourselves."},{"Start":"05:54.800 ","End":"06:01.210","Text":"The owner\u0027s equity, remember was affected by 4 types of transactions."},{"Start":"06:01.210 ","End":"06:05.505","Text":"Remember contributions increase equity,"},{"Start":"06:05.505 ","End":"06:10.760","Text":"distributions decrease equity, income,"},{"Start":"06:10.760 ","End":"06:16.185","Text":"increase equity, and expenses decrease equity."},{"Start":"06:16.185 ","End":"06:22.015","Text":"So what\u0027s important here is distributions decrease the equity."},{"Start":"06:22.015 ","End":"06:33.475","Text":"These distributions of 180,000 had the effect of decreasing the amount of closing equity."},{"Start":"06:33.475 ","End":"06:36.400","Text":"But those distributions, remember,"},{"Start":"06:36.400 ","End":"06:38.725","Text":"are not an expense."},{"Start":"06:38.725 ","End":"06:42.195","Text":"They are not an expense."},{"Start":"06:42.195 ","End":"06:45.895","Text":"Therefore, to determine the profit for the period,"},{"Start":"06:45.895 ","End":"06:53.529","Text":"we need to add back the amount of the distributions which decrease the equity,"},{"Start":"06:53.529 ","End":"06:57.605","Text":"but did not comprise an expense, therefore,"},{"Start":"06:57.605 ","End":"07:01.740","Text":"we arrive at a amount of 330,000,"},{"Start":"07:01.740 ","End":"07:07.040","Text":"which can be attributable to the profit for the period."},{"Start":"07:07.040 ","End":"07:12.095","Text":"That is the amount of the income less the expenses."},{"Start":"07:12.095 ","End":"07:16.970","Text":"Note here, we don\u0027t know the absolute amount of"},{"Start":"07:16.970 ","End":"07:21.830","Text":"the income and we don\u0027t know the absolute amount of the expenses,"},{"Start":"07:21.830 ","End":"07:27.570","Text":"but we do know the profit is 330,000."},{"Start":"07:27.980 ","End":"07:31.650","Text":"Looking at scenario number c,"},{"Start":"07:31.650 ","End":"07:40.355","Text":"there\u0027s a contribution of 200,000 but there\u0027s no distribution during the period."},{"Start":"07:40.355 ","End":"07:45.950","Text":"Again, the ending owner\u0027s equity, assets less liabilities."},{"Start":"07:45.950 ","End":"07:50.880","Text":"At the end of the year, owner\u0027s equity amounts to 600,000,"},{"Start":"07:50.880 ","End":"07:52.880","Text":"again living out the 0s."},{"Start":"07:52.880 ","End":"07:55.170","Text":"An opening owner\u0027s equity,"},{"Start":"07:55.170 ","End":"07:57.695","Text":"also assets minus liabilities,"},{"Start":"07:57.695 ","End":"08:01.855","Text":"equals the same amount of 450,000."},{"Start":"08:01.855 ","End":"08:04.305","Text":"Therefore, the move to the equity,"},{"Start":"08:04.305 ","End":"08:10.400","Text":"which in fact is an increase is 150,000 but now again,"},{"Start":"08:10.400 ","End":"08:12.350","Text":"as in situation number b,"},{"Start":"08:12.350 ","End":"08:17.480","Text":"the 150,000 is not going to be the profit for the period because of"},{"Start":"08:17.480 ","End":"08:23.665","Text":"this contribution of 200,000 that was made during the year."},{"Start":"08:23.665 ","End":"08:27.325","Text":"So again, we\u0027re going to remind ourselves this is very important."},{"Start":"08:27.325 ","End":"08:30.035","Text":"What affects owner\u0027s equity?"},{"Start":"08:30.035 ","End":"08:33.120","Text":"4 types of transactions."},{"Start":"08:33.120 ","End":"08:37.725","Text":"Remember, contributions increase equity,"},{"Start":"08:37.725 ","End":"08:46.254","Text":"distributions decrease equity, income increases equity,"},{"Start":"08:46.254 ","End":"08:49.480","Text":"and expenses decrease equity."},{"Start":"08:49.480 ","End":"08:55.450","Text":"The important part here is that the contributions increase equity."},{"Start":"08:55.450 ","End":"09:00.430","Text":"We are told the contributions during the period of"},{"Start":"09:00.430 ","End":"09:04.900","Text":"an amount of 200,000 but what I do with the 200,000,"},{"Start":"09:04.900 ","End":"09:06.950","Text":"do I add it or subtract it?"},{"Start":"09:06.950 ","End":"09:13.350","Text":"Now think of the impact this 200,000 has had on the equity number."},{"Start":"09:13.350 ","End":"09:21.460","Text":"That 200,000 has increased the ending equity because contributions increase equity."},{"Start":"09:21.460 ","End":"09:28.195","Text":"But that increase in equity of 200,000 has not comprised income."},{"Start":"09:28.195 ","End":"09:34.025","Text":"Therefore equity is being increased without income being earned and therefore,"},{"Start":"09:34.025 ","End":"09:35.905","Text":"and I\u0027ll put it in red to emphasize it."},{"Start":"09:35.905 ","End":"09:40.360","Text":"I need to take out or subtract that"},{"Start":"09:40.360 ","End":"09:47.345","Text":"200,000 contribution which increased equity but did not comprise income."},{"Start":"09:47.345 ","End":"09:49.200","Text":"Therefore, in this case,"},{"Start":"09:49.200 ","End":"09:55.150","Text":"we end up with a loss for the period of 50,000."},{"Start":"09:55.150 ","End":"09:58.760","Text":"In the final scenario in scenario number d,"},{"Start":"09:58.760 ","End":"10:06.425","Text":"there\u0027s the contribution of 200,000 and there\u0027s distribution of 15,000 per month."},{"Start":"10:06.425 ","End":"10:08.510","Text":"The same starting point,"},{"Start":"10:08.510 ","End":"10:12.590","Text":"the ending owner\u0027s equity, assets less liabilities."},{"Start":"10:12.590 ","End":"10:18.790","Text":"The ending equity is 600,000 that\u0027s 700 less 100."},{"Start":"10:18.790 ","End":"10:27.945","Text":"The opening owner\u0027s equity also assets less liabilities is the amount of 450,000."},{"Start":"10:27.945 ","End":"10:32.175","Text":"That\u0027s the 650 less to 200."},{"Start":"10:32.175 ","End":"10:37.865","Text":"Subtract the 1 from the other to get the movement in equity and now we know as before,"},{"Start":"10:37.865 ","End":"10:41.960","Text":"equity has changed by 150,0000,"},{"Start":"10:41.960 ","End":"10:46.415","Text":"what affects the change in equity?"},{"Start":"10:46.415 ","End":"10:49.160","Text":"I\u0027ll put it over here this time."},{"Start":"10:49.160 ","End":"10:58.875","Text":"This 150,000 change has been impacted by a contribution and by a distribution."},{"Start":"10:58.875 ","End":"11:01.995","Text":"The contribution has increased the equity,"},{"Start":"11:01.995 ","End":"11:04.905","Text":"distribution has decreased the equity."},{"Start":"11:04.905 ","End":"11:10.910","Text":"The 150,000 movement has also been affected by income which has"},{"Start":"11:10.910 ","End":"11:17.570","Text":"increased equity and by expenses which have decreased equity."},{"Start":"11:17.570 ","End":"11:23.910","Text":"Remember again, it\u0027s only income and expenses that determine profit."},{"Start":"11:23.910 ","End":"11:30.185","Text":"I\u0027ll need to reverse out the effect of both the contribution and the distribution."},{"Start":"11:30.185 ","End":"11:40.625","Text":"The distribution as before is the 15,000 per month multiplied by the 12 months,"},{"Start":"11:40.625 ","End":"11:44.800","Text":"which gives us an amount of 180,000,"},{"Start":"11:44.800 ","End":"11:54.555","Text":"and remember because the distributions decrease equity but did not comprise an expense."},{"Start":"11:54.555 ","End":"12:01.930","Text":"To reverse them, I need to add back the effect of the distributions."},{"Start":"12:01.930 ","End":"12:05.715","Text":"The contribution of 200,000."},{"Start":"12:05.715 ","End":"12:09.089","Text":"The contributions we know increased"},{"Start":"12:09.089 ","End":"12:13.935","Text":"the equity but the contributions did not comprise income."},{"Start":"12:13.935 ","End":"12:17.855","Text":"Therefore I need to reverse it or subtract it."},{"Start":"12:17.855 ","End":"12:20.180","Text":"Again, I\u0027ll put it in red, emphasize it,"},{"Start":"12:20.180 ","End":"12:29.015","Text":"subtract it and we therefore arrive at the profit for the period of 130,000,"},{"Start":"12:29.015 ","End":"12:35.400","Text":"and that equals the profit for the period 130."}],"ID":28440}],"Thumbnail":null,"ID":271504}]

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