[{"Name":"Introduction to End of Year Adjustments","TopicPlaylistFirstVideoID":0,"Duration":null,"Videos":[{"Watched":false,"Name":"Overview","Duration":"4m 54s","ChapterTopicVideoID":26489,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":"https://www.proprep.uk/Images/Videos_Thumbnails/26489.jpeg","UploadDate":"2021-09-28T08:47:59.8730000","DurationForVideoObject":"PT4M54S","Description":null,"MetaTitle":"Overview: Video + Workbook | Proprep","MetaDescription":"End of Year Adjustments - Introduction to End of Year Adjustments. 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/end-of-year-adjustments/introduction-to-end-of-year-adjustments/vid28540","VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.590","Text":"My name is Dave Collards and by the end of this section,"},{"Start":"00:04.590 ","End":"00:08.730","Text":"you\u0027ll be able to record the end-of-year adjusting journal entries"},{"Start":"00:08.730 ","End":"00:13.140","Text":"relating to the accrual scenarios of firstly;"},{"Start":"00:13.140 ","End":"00:18.875","Text":"income recognized in the period different than when the cash is received,"},{"Start":"00:18.875 ","End":"00:22.560","Text":"and secondly, expenses recognized in"},{"Start":"00:22.560 ","End":"00:26.580","Text":"the period different than when the cash is paid out."},{"Start":"00:26.580 ","End":"00:33.210","Text":"In this video, we will focus on an overview of the end-of-year adjustments."},{"Start":"00:33.210 ","End":"00:38.115","Text":"Recall the accrual concept from previous video presentations."},{"Start":"00:38.115 ","End":"00:43.730","Text":"Transactions recorded in the accounting system allocate past,"},{"Start":"00:43.730 ","End":"00:50.720","Text":"present, and future cashflows to the profit of different periods."},{"Start":"00:50.720 ","End":"00:58.465","Text":"You learnt in those previous videos that cash may be received either before,"},{"Start":"00:58.465 ","End":"01:00.945","Text":"or at the same time,"},{"Start":"01:00.945 ","End":"01:06.190","Text":"or after the income is recognized as earned."},{"Start":"01:06.190 ","End":"01:08.550","Text":"In the same way,"},{"Start":"01:08.550 ","End":"01:12.995","Text":"cash may be paid either before,"},{"Start":"01:12.995 ","End":"01:14.990","Text":"at the same time,"},{"Start":"01:14.990 ","End":"01:20.814","Text":"or after the expense is recognized as incurred."},{"Start":"01:20.814 ","End":"01:26.255","Text":"Now, students often struggle with this concept of end-of-year adjustments,"},{"Start":"01:26.255 ","End":"01:29.950","Text":"but I can assure you it is actually quite simple."},{"Start":"01:29.950 ","End":"01:32.050","Text":"The way to think about it,"},{"Start":"01:32.050 ","End":"01:37.295","Text":"is that we are looking at the adjustments relating to the income statement."},{"Start":"01:37.295 ","End":"01:43.055","Text":"Therefore, we\u0027re looking at adjustments relating to income and to expenses."},{"Start":"01:43.055 ","End":"01:45.397","Text":"When looking at any transaction,"},{"Start":"01:45.397 ","End":"01:48.545","Text":"the first step to identify is,"},{"Start":"01:48.545 ","End":"01:56.045","Text":"are we looking at an income item or are we looking at an expense item?"},{"Start":"01:56.045 ","End":"01:59.790","Text":"That should be pretty easy to determine."},{"Start":"01:59.860 ","End":"02:03.710","Text":"Then if we\u0027re looking at an income item,"},{"Start":"02:03.710 ","End":"02:08.540","Text":"there are only 3 possible scenarios that could take place."},{"Start":"02:08.540 ","End":"02:14.300","Text":"These are the 3 accrual scenarios discussed in previous presentations;"},{"Start":"02:14.300 ","End":"02:20.555","Text":"the cash relating to the income may be received, as we were saying,"},{"Start":"02:20.555 ","End":"02:24.670","Text":"before the income is recognized as earned,"},{"Start":"02:24.670 ","End":"02:29.660","Text":"at the same time as the income is recognized as earned,"},{"Start":"02:29.660 ","End":"02:35.870","Text":"or the cash may be received after the income is recognized as earned."},{"Start":"02:35.870 ","End":"02:39.425","Text":"Again, by examining the transaction,"},{"Start":"02:39.425 ","End":"02:44.285","Text":"it should be reasonably clear whether we\u0027re looking at the first,"},{"Start":"02:44.285 ","End":"02:48.245","Text":"the second, or the third of those scenarios."},{"Start":"02:48.245 ","End":"02:50.975","Text":"The same happens with expenses."},{"Start":"02:50.975 ","End":"02:57.150","Text":"Only 3 possible scenarios could take place relating to the cashflow,"},{"Start":"02:57.150 ","End":"02:59.300","Text":"in this case, the cash outflow."},{"Start":"02:59.300 ","End":"03:06.690","Text":"The cash outflow, the cash paid could be paid before expense is incurred,"},{"Start":"03:06.690 ","End":"03:10.980","Text":"at the same time as the expense is incurred,"},{"Start":"03:10.980 ","End":"03:15.600","Text":"or again, after the expense is incurred."},{"Start":"03:15.600 ","End":"03:18.800","Text":"By examining the transaction, it, again,"},{"Start":"03:18.800 ","End":"03:24.395","Text":"should be reasonably obvious whether we\u0027re looking at the cash being paid before,"},{"Start":"03:24.395 ","End":"03:27.485","Text":"at the same time, or after."},{"Start":"03:27.485 ","End":"03:31.609","Text":"It is an understanding of that structure"},{"Start":"03:31.609 ","End":"03:36.280","Text":"that leads you to solve the problems of end-of-year adjustments."},{"Start":"03:36.280 ","End":"03:39.810","Text":"One further point before we continue,"},{"Start":"03:39.810 ","End":"03:47.240","Text":"remember that if the cash is received at the same time as when the income is earned,"},{"Start":"03:47.240 ","End":"03:53.600","Text":"or if the cash is paid at the same time as when the expense is incurred,"},{"Start":"03:53.600 ","End":"03:57.605","Text":"there are no adjustments required."},{"Start":"03:57.605 ","End":"04:02.000","Text":"This is clearly because the cash outflow equals"},{"Start":"04:02.000 ","End":"04:08.900","Text":"the expense incurred or the cash inflow equals the income earned."},{"Start":"04:08.900 ","End":"04:13.310","Text":"When we are accounting for income and expenses"},{"Start":"04:13.310 ","End":"04:17.675","Text":"recognized in a different period to when the cash flow takes place,"},{"Start":"04:17.675 ","End":"04:25.670","Text":"this will result in the creation of 4 independent and separate balance sheet accounts."},{"Start":"04:25.670 ","End":"04:28.940","Text":"Now, the top of accounts that are created in"},{"Start":"04:28.940 ","End":"04:32.660","Text":"adjusting either the income or the expenses for"},{"Start":"04:32.660 ","End":"04:40.445","Text":"the period will be a liability account or an asset account in relation to income items,"},{"Start":"04:40.445 ","End":"04:47.765","Text":"and also an asset account or liability account in relation to the expense items."},{"Start":"04:47.765 ","End":"04:51.020","Text":"We\u0027ll discuss each of these 4 types of"},{"Start":"04:51.020 ","End":"04:55.290","Text":"balance sheet accounts in the examples that follow."}],"ID":28540},{"Watched":false,"Name":"Income adjustments Recover Part 1","Duration":"14m 37s","ChapterTopicVideoID":26490,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.415","Text":"My name is Dave Calleds,"},{"Start":"00:02.415 ","End":"00:03.660","Text":"and in this video,"},{"Start":"00:03.660 ","End":"00:07.320","Text":"we will focus on the recognition of income in"},{"Start":"00:07.320 ","End":"00:11.250","Text":"a period different than when the cash is received."},{"Start":"00:11.250 ","End":"00:14.370","Text":"You know from the accrual basis of accounting,"},{"Start":"00:14.370 ","End":"00:21.915","Text":"that income is recognized in the income statement when it is earned by the entity."},{"Start":"00:21.915 ","End":"00:24.960","Text":"Earning means the entity has performed it\u0027s"},{"Start":"00:24.960 ","End":"00:29.160","Text":"obligations under the contract with the customer."},{"Start":"00:29.160 ","End":"00:32.850","Text":"In other words, the entity, for example,"},{"Start":"00:32.850 ","End":"00:38.315","Text":"may have transferred ownership rights of assets to a customer,"},{"Start":"00:38.315 ","End":"00:40.850","Text":"inventory sold to a customer."},{"Start":"00:40.850 ","End":"00:45.215","Text":"As mentioned in previous video presentations,"},{"Start":"00:45.215 ","End":"00:49.010","Text":"the recognition of income as earned is often referred"},{"Start":"00:49.010 ","End":"00:54.110","Text":"to as a measure of accomplishment during the period."},{"Start":"00:54.110 ","End":"00:58.119","Text":"As we have discussed in previous presentations as well,"},{"Start":"00:58.119 ","End":"01:00.695","Text":"the cash flow, however,"},{"Start":"01:00.695 ","End":"01:05.925","Text":"may be received at different times before the income is recognized,"},{"Start":"01:05.925 ","End":"01:11.255","Text":"at the same time the income is recognized or after the income is recognized."},{"Start":"01:11.255 ","End":"01:13.490","Text":"Again, just to emphasize,"},{"Start":"01:13.490 ","End":"01:17.870","Text":"if the cash is received the same time as the income is recognized,"},{"Start":"01:17.870 ","End":"01:20.945","Text":"there are no adjustments required."},{"Start":"01:20.945 ","End":"01:28.685","Text":"We will now discuss the 2 income scenarios broadly before looking at detailed examples."},{"Start":"01:28.685 ","End":"01:31.650","Text":"With the income scenarios, as you all know,"},{"Start":"01:31.650 ","End":"01:37.440","Text":"where cash could be received before the income is recognized as earned,"},{"Start":"01:37.440 ","End":"01:42.740","Text":"or cash could be received after the income is recognized as earned."},{"Start":"01:42.740 ","End":"01:48.980","Text":"In principle, if the cash is received before the income is recognized as earned,"},{"Start":"01:48.980 ","End":"01:54.410","Text":"the entity creates a liability referred to"},{"Start":"01:54.410 ","End":"02:00.050","Text":"as unearned income or often referred to as deferred income."},{"Start":"02:00.050 ","End":"02:05.240","Text":"What is happening over here is that when the entity receives cash,"},{"Start":"02:05.240 ","End":"02:10.070","Text":"there will be a debit going to cash or bank and"},{"Start":"02:10.070 ","End":"02:15.784","Text":"the credit goes to the unearned income account,"},{"Start":"02:15.784 ","End":"02:18.275","Text":"which is a liability."},{"Start":"02:18.275 ","End":"02:22.010","Text":"Then at the end of the year or into the period,"},{"Start":"02:22.010 ","End":"02:28.850","Text":"the entity has to establish how much income is actually earned during the period."},{"Start":"02:28.850 ","End":"02:35.720","Text":"The mount of income earned is then recognized via a journal entry where we will then"},{"Start":"02:35.720 ","End":"02:44.240","Text":"debit the unearned income liability and remedy to debit that liability is to reduce it."},{"Start":"02:44.240 ","End":"02:49.820","Text":"The credit accounts, the credit will go to an income account."},{"Start":"02:49.820 ","End":"02:57.320","Text":"Looking broadly at the scenario where cash is received after the income is recognized."},{"Start":"02:57.320 ","End":"03:01.384","Text":"In that scenario, an asset is created."},{"Start":"03:01.384 ","End":"03:04.690","Text":"That asset will be some receivable."},{"Start":"03:04.690 ","End":"03:09.590","Text":"This is created when the income is recognized"},{"Start":"03:09.590 ","End":"03:14.795","Text":"as earned because remember here the cash will be received afterwards."},{"Start":"03:14.795 ","End":"03:18.335","Text":"When the income is recognized as being earned,"},{"Start":"03:18.335 ","End":"03:23.690","Text":"the entity will debit a receivable account,"},{"Start":"03:23.690 ","End":"03:25.565","Text":"which is an asset,"},{"Start":"03:25.565 ","End":"03:32.515","Text":"and it will credit the relevant income account to recognize the income as being earned."},{"Start":"03:32.515 ","End":"03:36.334","Text":"Remember the cash has not yet been received."},{"Start":"03:36.334 ","End":"03:41.225","Text":"In a subsequent year or period the cash will then be received."},{"Start":"03:41.225 ","End":"03:42.860","Text":"At that point in time,"},{"Start":"03:42.860 ","End":"03:47.330","Text":"the entity will debit cash to record the increase in the cash."},{"Start":"03:47.330 ","End":"03:54.980","Text":"It will credit that particular receivable account and eliminate the asset."},{"Start":"03:54.980 ","End":"03:59.630","Text":"This first example focuses on unearned income."},{"Start":"03:59.630 ","End":"04:05.655","Text":"In this example, we have a company entity B owns several properties."},{"Start":"04:05.655 ","End":"04:10.550","Text":"It signs a rental agreement with a tenant who\u0027s entity A,"},{"Start":"04:10.550 ","End":"04:15.910","Text":"and the agreement is signed on 1 November of the 20X1 year."},{"Start":"04:15.910 ","End":"04:23.015","Text":"The contract requires A to pay rent for 3 months in advance."},{"Start":"04:23.015 ","End":"04:26.540","Text":"Note that the payment or receipt of cash in"},{"Start":"04:26.540 ","End":"04:31.760","Text":"advance means the cash flow\u0027s taking place ahead of the,"},{"Start":"04:31.760 ","End":"04:34.840","Text":"in this case, the income being earned."},{"Start":"04:34.840 ","End":"04:40.150","Text":"The amount of the monthly rent is CU 1,000."},{"Start":"04:40.150 ","End":"04:42.795","Text":"You will see the contract starts,"},{"Start":"04:42.795 ","End":"04:49.540","Text":"A enters the property on 1 November of the 20X1 year."},{"Start":"04:49.540 ","End":"04:52.070","Text":"It has been using it since then."},{"Start":"04:52.070 ","End":"04:54.680","Text":"Importantly, in this example,"},{"Start":"04:54.680 ","End":"04:58.460","Text":"B\u0027s financial year end is 31 December."},{"Start":"04:58.460 ","End":"05:03.125","Text":"The required now is to record the entry in B\u0027s records,"},{"Start":"05:03.125 ","End":"05:05.660","Text":"we\u0027re looking at B\u0027s records all the way through here,"},{"Start":"05:05.660 ","End":"05:12.745","Text":"reporting entity to reflect the cash received on 1 November \u0027X2."},{"Start":"05:12.745 ","End":"05:20.660","Text":"Then the entries to recognize the rental income at 31 December 20X1,"},{"Start":"05:20.660 ","End":"05:23.680","Text":"the end of the financial year."},{"Start":"05:23.680 ","End":"05:31.350","Text":"Again, the recognition of the income at 31 January of 20X2."},{"Start":"05:31.350 ","End":"05:38.450","Text":"Part 1 of the required is to look at the accounting entry on 1 November of the \u0027X1 year,"},{"Start":"05:38.450 ","End":"05:42.235","Text":"when the cash is received from the tenant."},{"Start":"05:42.235 ","End":"05:45.454","Text":"When the cash of 3,000 is received,"},{"Start":"05:45.454 ","End":"05:53.105","Text":"entity B will debit cash or bank as an asset to increase it,"},{"Start":"05:53.105 ","End":"05:55.445","Text":"remember, assets increase with debits."},{"Start":"05:55.445 ","End":"06:03.470","Text":"The amount we record as 3,000 and because the income has not yet been earned because"},{"Start":"06:03.470 ","End":"06:07.250","Text":"the cash is received on the first November in relation"},{"Start":"06:07.250 ","End":"06:12.010","Text":"to the property which will be occupied for the next 3 months,"},{"Start":"06:12.010 ","End":"06:17.150","Text":"entity B needs to record an unreliability,"},{"Start":"06:17.150 ","End":"06:23.930","Text":"which we call an unearned rental income account"},{"Start":"06:23.930 ","End":"06:29.270","Text":"as a liability with 3,000 currency units."},{"Start":"06:29.270 ","End":"06:31.404","Text":"As a liability,"},{"Start":"06:31.404 ","End":"06:38.030","Text":"remember or appreciate that this unearned rental income represents the obligation of"},{"Start":"06:38.030 ","End":"06:46.460","Text":"entity B to provide the space of those property to the tenant for the next 3 months."},{"Start":"06:46.460 ","End":"06:55.325","Text":"With income to the end of the financial year of entity B on December 31 of the 20X1 year."},{"Start":"06:55.325 ","End":"06:58.070","Text":"At 31 December 20X1,"},{"Start":"06:58.070 ","End":"07:05.855","Text":"2 months have now gone past and the tenant has occupied the property for these 2 months."},{"Start":"07:05.855 ","End":"07:09.130","Text":"Therefore, entity B can recognize income."},{"Start":"07:09.130 ","End":"07:11.090","Text":"What now needs to happen,"},{"Start":"07:11.090 ","End":"07:14.300","Text":"is that the liability needs to be reduced."},{"Start":"07:14.300 ","End":"07:15.950","Text":"To reduce the ability,"},{"Start":"07:15.950 ","End":"07:17.120","Text":"which has a credit balance,"},{"Start":"07:17.120 ","End":"07:18.725","Text":"we need to debit it."},{"Start":"07:18.725 ","End":"07:24.749","Text":"We debit the unearned rental income accounts,"},{"Start":"07:24.749 ","End":"07:32.210","Text":"the liability account with the income earned for the 2 months of November and December,"},{"Start":"07:32.210 ","End":"07:34.475","Text":"in other words, 2,000."},{"Start":"07:34.475 ","End":"07:43.175","Text":"We now can credit rental income as an income account for 2,000."},{"Start":"07:43.175 ","End":"07:47.405","Text":"Now you will recall from previous video presentations,"},{"Start":"07:47.405 ","End":"07:54.455","Text":"income can come about through add and increase in assets or a decrease in liabilities."},{"Start":"07:54.455 ","End":"08:00.875","Text":"Here you are seeing income coming about through a decrease in a liability."},{"Start":"08:00.875 ","End":"08:03.155","Text":"While talking about that."},{"Start":"08:03.155 ","End":"08:07.925","Text":"Going back to transaction that we recorded on the first November,"},{"Start":"08:07.925 ","End":"08:12.320","Text":"although cash or this case cash or bank increased,"},{"Start":"08:12.320 ","End":"08:15.875","Text":"that did not give rise to the recognition of income."},{"Start":"08:15.875 ","End":"08:17.750","Text":"We recognize a liability,"},{"Start":"08:17.750 ","End":"08:20.750","Text":"remember, on the 1st of November."},{"Start":"08:20.750 ","End":"08:23.645","Text":"To be sure that you understand this,"},{"Start":"08:23.645 ","End":"08:30.754","Text":"income comes about through either an increase in assets or a decrease in liabilities."},{"Start":"08:30.754 ","End":"08:39.635","Text":"But all increases in assets don\u0027t necessarily result in the recognition of income."},{"Start":"08:39.635 ","End":"08:44.510","Text":"A month later,1 month into the new financial year."},{"Start":"08:44.510 ","End":"08:48.215","Text":"This time we are all on 31 January of 20X2."},{"Start":"08:48.215 ","End":"08:52.235","Text":"A further month has gone past and entity B"},{"Start":"08:52.235 ","End":"08:56.390","Text":"can now recognize a further 1000 of rental income."},{"Start":"08:56.390 ","End":"08:58.700","Text":"Again as before,"},{"Start":"08:58.700 ","End":"09:04.400","Text":"the journal entry is to debit the unearned rental income account,"},{"Start":"09:04.400 ","End":"09:07.415","Text":"debit the liability to reduce it."},{"Start":"09:07.415 ","End":"09:09.635","Text":"This case by 1000,"},{"Start":"09:09.635 ","End":"09:12.485","Text":"because it is for 1 month of rent."},{"Start":"09:12.485 ","End":"09:16.385","Text":"The credit again goes to the income account,"},{"Start":"09:16.385 ","End":"09:24.860","Text":"rental income to recognize the income earned in that 1 period."},{"Start":"09:24.860 ","End":"09:33.990","Text":"Let us now take a look at the transactions in this example on a transactions worksheet."},{"Start":"09:34.150 ","End":"09:38.210","Text":"You see at the top the accounting equation of"},{"Start":"09:38.210 ","End":"09:43.895","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"09:43.895 ","End":"09:50.915","Text":"The first transaction, you will recall took place on 1 November of the X1 year,"},{"Start":"09:50.915 ","End":"09:56.645","Text":"where the entity received rent of 3000 in advance."},{"Start":"09:56.645 ","End":"10:02.045","Text":"This was recorded with an increase in the asset bank and"},{"Start":"10:02.045 ","End":"10:07.625","Text":"a corresponding increase in the liability account, unearned income."},{"Start":"10:07.625 ","End":"10:13.340","Text":"Remember the increase to bank was recorded as a debit and the increase to"},{"Start":"10:13.340 ","End":"10:19.325","Text":"the unearned income as a liability was recorded as a credit."},{"Start":"10:19.325 ","End":"10:24.605","Text":"Then at 31 December of the 20X1 year,"},{"Start":"10:24.605 ","End":"10:27.635","Text":"the end of the entity\u0027s financial year,"},{"Start":"10:27.635 ","End":"10:32.570","Text":"the entity recorded an adjustment to recognize the income"},{"Start":"10:32.570 ","End":"10:39.260","Text":"earned for the 2 months from 1 November up until 31 December."},{"Start":"10:39.260 ","End":"10:45.410","Text":"That resulted in a decrease in the liability and earned"},{"Start":"10:45.410 ","End":"10:52.820","Text":"income and an increase in the rent income account."},{"Start":"10:52.820 ","End":"10:57.425","Text":"The decrease in the unearned income, you will remember,"},{"Start":"10:57.425 ","End":"10:59.840","Text":"was recorded with a debit to"},{"Start":"10:59.840 ","End":"11:04.205","Text":"the unearned income account to reduce that liability account."},{"Start":"11:04.205 ","End":"11:11.765","Text":"The increase in the rent income account was recorded as a credit."},{"Start":"11:11.765 ","End":"11:16.550","Text":"At the end of the year, the amount of income recognized from"},{"Start":"11:16.550 ","End":"11:22.310","Text":"the strong section alone is transferred from the income statement accounts,"},{"Start":"11:22.310 ","End":"11:28.385","Text":"the income accounts to the equity account retained profit account."},{"Start":"11:28.385 ","End":"11:33.620","Text":"Here you see the transfer which is in fact recorded with"},{"Start":"11:33.620 ","End":"11:40.895","Text":"a decrease to the income account and an increase to the retained profit account."},{"Start":"11:40.895 ","End":"11:43.160","Text":"In terms of debits and credits,"},{"Start":"11:43.160 ","End":"11:48.275","Text":"it would be recorded as a debit to the income account,"},{"Start":"11:48.275 ","End":"11:55.895","Text":"the rent income, and a credit to the retained profits account."},{"Start":"11:55.895 ","End":"11:58.655","Text":"Note that at the end of the period,"},{"Start":"11:58.655 ","End":"12:06.485","Text":"the balance in the unearned income liability account is shown at 1000."},{"Start":"12:06.485 ","End":"12:10.160","Text":"That balance is clearly a liability."},{"Start":"12:10.160 ","End":"12:17.120","Text":"It represents the obligation of the entity to provide the effectively,"},{"Start":"12:17.120 ","End":"12:21.905","Text":"in this case, the rental space to the tenant for 1 further month."},{"Start":"12:21.905 ","End":"12:26.375","Text":"In other words, for January of 20X2 year."},{"Start":"12:26.375 ","End":"12:32.900","Text":"Looking now at the transactions worksheet for the January 20X2 month,"},{"Start":"12:32.900 ","End":"12:36.110","Text":"again, just recording the accounting equation."},{"Start":"12:36.110 ","End":"12:40.710","Text":"Assets equals liabilities plus equity."},{"Start":"12:40.710 ","End":"12:46.460","Text":"The opening balance on 1 January of 20X2,"},{"Start":"12:46.460 ","End":"12:49.400","Text":"you will remember from the previous slide,"},{"Start":"12:49.400 ","End":"12:55.790","Text":"shows the unearned income with a 1000 balance representing,"},{"Start":"12:55.790 ","End":"12:57.800","Text":"as I mentioned on the previous slide,"},{"Start":"12:57.800 ","End":"13:00.920","Text":"the obligation of the entity to provide"},{"Start":"13:00.920 ","End":"13:04.760","Text":"rental space to the tenant for the month of January."},{"Start":"13:04.760 ","End":"13:06.800","Text":"When we get to the end of the month,"},{"Start":"13:06.800 ","End":"13:15.605","Text":"31 January of the 20th X2 year entity now recognizes the remaining 1000 as income."},{"Start":"13:15.605 ","End":"13:18.095","Text":"As on the previous slide,"},{"Start":"13:18.095 ","End":"13:22.745","Text":"the liability accounts, the unearned income account is decreased."},{"Start":"13:22.745 ","End":"13:25.175","Text":"The income statement account,"},{"Start":"13:25.175 ","End":"13:31.220","Text":"the rent income, is increased by 1000."},{"Start":"13:31.220 ","End":"13:37.820","Text":"As before, remember the decrease in under an income account was recorded as"},{"Start":"13:37.820 ","End":"13:45.800","Text":"a debit and the increase in the rent income account is recorded as a credit."},{"Start":"13:45.800 ","End":"13:49.595","Text":"Also, as in the previous slide,"},{"Start":"13:49.595 ","End":"13:53.390","Text":"the end of your retention of profit and loss."},{"Start":"13:53.390 ","End":"13:56.405","Text":"Again, assuming this is the only transaction,"},{"Start":"13:56.405 ","End":"14:00.830","Text":"transfers the 1000 earned"},{"Start":"14:00.830 ","End":"14:07.235","Text":"from the income statement account into the retained profit account."},{"Start":"14:07.235 ","End":"14:11.540","Text":"Note that the closing balance at the end of January in"},{"Start":"14:11.540 ","End":"14:16.460","Text":"the unearned income account is now zero because"},{"Start":"14:16.460 ","End":"14:19.895","Text":"the entity has performed it\u0027s obligation to provide"},{"Start":"14:19.895 ","End":"14:26.630","Text":"the rental space to the tenant for the 3 months from 1 November until the end of January."},{"Start":"14:26.630 ","End":"14:28.100","Text":"This is, of course,"},{"Start":"14:28.100 ","End":"14:35.610","Text":"assuming there\u0027s been no further receipt of cash for further advanced rental receipts."}],"ID":28541},{"Watched":false,"Name":"Income adjustments Recover Part 2","Duration":"12m 16s","ChapterTopicVideoID":26491,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.170 ","End":"00:06.869","Text":"We now turn our attention to an example looking at income receivable."},{"Start":"00:06.869 ","End":"00:12.210","Text":"In this example, the entity C is a law firm."},{"Start":"00:12.210 ","End":"00:15.765","Text":"It signs an agreement with entity A."},{"Start":"00:15.765 ","End":"00:17.640","Text":"The date here is important,"},{"Start":"00:17.640 ","End":"00:23.810","Text":"on 1 November of the 20X1 year to provide legal services."},{"Start":"00:23.810 ","End":"00:28.475","Text":"You will see the monthly fee is CU 1,000."},{"Start":"00:28.475 ","End":"00:34.575","Text":"The contract here requires that A pays every 3 months in arrears."},{"Start":"00:34.575 ","End":"00:40.370","Text":"Now note the referenced in arrears means"},{"Start":"00:40.370 ","End":"00:46.895","Text":"that the amount will be received by entities C at the end of the 3 month period."},{"Start":"00:46.895 ","End":"00:53.360","Text":"Just to recap and to make sure that you understand if cash is received in advance,"},{"Start":"00:53.360 ","End":"00:55.955","Text":"as in the previous example,"},{"Start":"00:55.955 ","End":"01:00.365","Text":"that means the cash is received at the beginning of the period."},{"Start":"01:00.365 ","End":"01:02.430","Text":"The period could be 1 month, 2 months,"},{"Start":"01:02.430 ","End":"01:07.100","Text":"or 3 months whereas if cash is received in arrears,"},{"Start":"01:07.100 ","End":"01:13.385","Text":"that means the cash is received at the end of the relevant period."},{"Start":"01:13.385 ","End":"01:15.050","Text":"In this case over here,"},{"Start":"01:15.050 ","End":"01:23.330","Text":"the required is to record in the accounting records of entity C the recognition of"},{"Start":"01:23.330 ","End":"01:25.716","Text":"the legal fee income at end of"},{"Start":"01:25.716 ","End":"01:32.820","Text":"December of 20X1 and then also in entity C\u0027s accounting records."},{"Start":"01:32.820 ","End":"01:38.810","Text":"The entry relation to the receipt of the cash and the recognition of"},{"Start":"01:38.810 ","End":"01:46.970","Text":"the legal fee income at the end of January of the 20X2 year."},{"Start":"01:46.970 ","End":"01:49.550","Text":"Note importantly here in the solution,"},{"Start":"01:49.550 ","End":"01:52.850","Text":"we are recording the receivable at the end of"},{"Start":"01:52.850 ","End":"01:57.365","Text":"the financial year 31 December of the 20X1 year,"},{"Start":"01:57.365 ","End":"02:03.410","Text":"and that there was no accounting entry recorded on 1 November when the contract was"},{"Start":"02:03.410 ","End":"02:11.540","Text":"signed because there was no economic transaction that had occurred on the 1 November."},{"Start":"02:11.540 ","End":"02:18.500","Text":"Here we are recording the income before the cash is received."},{"Start":"02:18.500 ","End":"02:21.630","Text":"Therefore, at 31 December of 20X1 year,"},{"Start":"02:21.760 ","End":"02:25.920","Text":"the entity have to recognize a receivable and"},{"Start":"02:25.920 ","End":"02:29.615","Text":"recognizes a fees or fee receivable account,"},{"Start":"02:29.615 ","End":"02:35.370","Text":"which is an asset account because the fees are owed to us to"},{"Start":"02:35.370 ","End":"02:39.315","Text":"the reporting entity and the fees are owed"},{"Start":"02:39.315 ","End":"02:44.015","Text":"for 2 months being the month of November and December and therefore,"},{"Start":"02:44.015 ","End":"02:46.910","Text":"it is an amount of 2,000,"},{"Start":"02:46.910 ","End":"02:54.447","Text":"and the credit here will go to increase the legal fees income accounts,"},{"Start":"02:54.447 ","End":"02:58.910","Text":"the income earned for the period of 2,000."},{"Start":"02:58.910 ","End":"03:01.415","Text":"Again, as we did before,"},{"Start":"03:01.415 ","End":"03:04.220","Text":"remind yourself of the definition of income."},{"Start":"03:04.220 ","End":"03:09.575","Text":"Income comes about through an increase in assets or a decrease liabilities."},{"Start":"03:09.575 ","End":"03:15.845","Text":"Here, income is being recognized with an increase in a fee receivable asset."},{"Start":"03:15.845 ","End":"03:18.170","Text":"As you should already be aware,"},{"Start":"03:18.170 ","End":"03:22.820","Text":"the asset that is increased does not have to be a cash asset."},{"Start":"03:22.820 ","End":"03:24.845","Text":"Any asset being increased,"},{"Start":"03:24.845 ","End":"03:28.295","Text":"which will typically be cash or a receivable,"},{"Start":"03:28.295 ","End":"03:33.665","Text":"can relate to and will result in the recognition of income."},{"Start":"03:33.665 ","End":"03:38.690","Text":"We now come to 31 January of the 20X2 year."},{"Start":"03:38.690 ","End":"03:42.330","Text":"Recall that the contract was signed on"},{"Start":"03:42.940 ","End":"03:46.610","Text":"1 November of the 20X1 year and that the fees will be received in"},{"Start":"03:46.610 ","End":"03:50.195","Text":"arrear after the 3 month period."},{"Start":"03:50.195 ","End":"03:59.370","Text":"In other words, the fees are being received on the 31 of January of the 20X2 year."},{"Start":"03:59.370 ","End":"04:03.275","Text":"What happens now when this cash is received?"},{"Start":"04:03.275 ","End":"04:09.380","Text":"The entity will debit bank as an asset and the amount being received,"},{"Start":"04:09.380 ","End":"04:12.605","Text":"remember, are the fees for all 3 months,"},{"Start":"04:12.605 ","End":"04:15.589","Text":"in other words, 3,000 is being received."},{"Start":"04:15.589 ","End":"04:19.325","Text":"But now you will recall that at the end of December,"},{"Start":"04:19.325 ","End":"04:22.670","Text":"we created a fee receivable asset for"},{"Start":"04:22.670 ","End":"04:28.129","Text":"2,000 representing the amount owing to us than December,"},{"Start":"04:28.129 ","End":"04:33.905","Text":"that now clearly has been received or is being received on 31 January."},{"Start":"04:33.905 ","End":"04:38.142","Text":"Therefore, we need to eliminate that fee receivable account,"},{"Start":"04:38.142 ","End":"04:44.085","Text":"it\u0027s an asset with a debit balance and therefore to eliminate it,"},{"Start":"04:44.085 ","End":"04:47.865","Text":"we need to post a credit to the account."},{"Start":"04:47.865 ","End":"04:50.100","Text":"The fees receivable asset,"},{"Start":"04:50.100 ","End":"04:52.545","Text":"let\u0027s take a credit of 2,000,"},{"Start":"04:52.545 ","End":"04:57.650","Text":"which cancels that account and we can now also at the same time"},{"Start":"04:57.650 ","End":"05:03.640","Text":"recognize the legal fee income for the month of January,"},{"Start":"05:03.640 ","End":"05:07.720","Text":"in this case the mount is 1,000."},{"Start":"05:07.720 ","End":"05:13.150","Text":"Remember in terms of recording journal entries,"},{"Start":"05:13.490 ","End":"05:19.440","Text":"my debit of 3,000 does equal the total credits of,"},{"Start":"05:19.440 ","End":"05:23.280","Text":"in this case, 2,000 plus 1,000."},{"Start":"05:23.280 ","End":"05:26.785","Text":"Looking now at the transactions worksheet,"},{"Start":"05:26.785 ","End":"05:29.859","Text":"and as always entering the accounting equation,"},{"Start":"05:29.859 ","End":"05:34.160","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"05:34.160 ","End":"05:37.970","Text":"You will remember that the entity in"},{"Start":"05:37.970 ","End":"05:45.095","Text":"this example is going to receive the cash for these legal services in a arrear,"},{"Start":"05:45.095 ","End":"05:48.125","Text":"in other words, at the end of the 3 month period which is"},{"Start":"05:48.125 ","End":"05:51.715","Text":"only in January of the 20X2 year."},{"Start":"05:51.715 ","End":"05:57.220","Text":"Therefore, when we get to the end of the X1 year,"},{"Start":"05:57.320 ","End":"06:02.330","Text":"31 December 20X1, the entity needs to recognize an asset."},{"Start":"06:02.330 ","End":"06:04.460","Text":"Fee is receivable."},{"Start":"06:04.460 ","End":"06:07.205","Text":"You will recall from the journal entries,"},{"Start":"06:07.205 ","End":"06:10.820","Text":"this was recorded by an increase in"},{"Start":"06:10.820 ","End":"06:13.670","Text":"the assets fee receivable and"},{"Start":"06:13.670 ","End":"06:18.560","Text":"a corresponding increase in the income account, fees income."},{"Start":"06:18.560 ","End":"06:20.990","Text":"The journal entry you will remember,"},{"Start":"06:20.990 ","End":"06:25.220","Text":"was a debit to increase the asset fee receivable"},{"Start":"06:25.220 ","End":"06:30.560","Text":"and a credit to increase the income account fees income."},{"Start":"06:30.560 ","End":"06:33.230","Text":"As in the previous examples,"},{"Start":"06:33.230 ","End":"06:39.365","Text":"there is now a transfer to retained profit at the end of the period."},{"Start":"06:39.365 ","End":"06:43.295","Text":"Assuming that this is the only income the entity has earned,"},{"Start":"06:43.295 ","End":"06:49.190","Text":"there is an amount of 2,000 transferred from the fee income account,"},{"Start":"06:49.190 ","End":"06:55.100","Text":"which will therefore take a debit and a increase in the retained profit account,"},{"Start":"06:55.100 ","End":"06:57.425","Text":"which will therefore take a credit."},{"Start":"06:57.425 ","End":"07:00.180","Text":"Note that at end of the December 20X1 year,"},{"Start":"07:01.450 ","End":"07:06.095","Text":"the balance in the fee receivable account is 2,000,"},{"Start":"07:06.095 ","End":"07:09.065","Text":"representing an asset, in other words,"},{"Start":"07:09.065 ","End":"07:15.980","Text":"the right to receive 2,000 from the client for legal services provided."},{"Start":"07:15.980 ","End":"07:21.410","Text":"We now move into the worksheet for the 20X2 year and as always,"},{"Start":"07:21.410 ","End":"07:23.435","Text":"let\u0027s put in the equation,"},{"Start":"07:23.435 ","End":"07:28.420","Text":"assets=liabilities plus owner\u0027s equity."},{"Start":"07:28.420 ","End":"07:32.300","Text":"The balance at the beginning of the X2 year,"},{"Start":"07:32.300 ","End":"07:37.820","Text":"the opening balance in that fee receivable account is the 2,000 we saw,"},{"Start":"07:37.820 ","End":"07:42.455","Text":"which was the closing balance at 31 December of 20X1."},{"Start":"07:42.455 ","End":"07:45.420","Text":"We now come to the end of January of 20X2."},{"Start":"07:47.000 ","End":"07:50.770","Text":"You will recall from the transactions on this date,"},{"Start":"07:50.770 ","End":"07:55.090","Text":"the entity receives 3,000 representing"},{"Start":"07:55.090 ","End":"08:02.575","Text":"the arrear payment for legal services provided over the 2 months in the previous year,"},{"Start":"08:02.575 ","End":"08:06.790","Text":"November, December, and the current 1 month in January."},{"Start":"08:06.790 ","End":"08:13.920","Text":"This was recorded, you will remember by an increase in the asset bank,"},{"Start":"08:13.920 ","End":"08:21.240","Text":"a corresponding decrease in the assets fee receivable,"},{"Start":"08:21.240 ","End":"08:28.495","Text":"and a increase in the income account legal fees earned."},{"Start":"08:28.495 ","End":"08:31.037","Text":"In terms of debits and credits,"},{"Start":"08:31.037 ","End":"08:36.410","Text":"this was a debit to the bank account of 3,000,"},{"Start":"08:36.410 ","End":"08:41.480","Text":"a credit to reduce the fee receivable because the amount is now being received,"},{"Start":"08:41.480 ","End":"08:44.825","Text":"it is no longer an asset of 2,000,"},{"Start":"08:44.825 ","End":"08:50.740","Text":"and a credit to record the legal fee income earned for the period."},{"Start":"08:50.740 ","End":"08:53.040","Text":"Note the end of January, 20X2,"},{"Start":"08:53.840 ","End":"09:00.710","Text":"the balance in the fee receivable account is now 0 assuming again that there"},{"Start":"09:00.710 ","End":"09:07.355","Text":"has been no further contract signed in respect of legal services."},{"Start":"09:07.355 ","End":"09:11.830","Text":"This final slide compares the income earned and"},{"Start":"09:11.830 ","End":"09:16.165","Text":"the cash received in each of these previous 2 examples."},{"Start":"09:16.165 ","End":"09:21.444","Text":"You recall the first example related to unearned income,"},{"Start":"09:21.444 ","End":"09:27.430","Text":"example where the rent was received in cash in advance."},{"Start":"09:27.430 ","End":"09:30.130","Text":"Remember here in this first example,"},{"Start":"09:30.130 ","End":"09:33.780","Text":"the cash was received in advance,"},{"Start":"09:33.780 ","End":"09:36.940","Text":"whereas in the second example,"},{"Start":"09:36.940 ","End":"09:40.195","Text":"relating to the income receivable,"},{"Start":"09:40.195 ","End":"09:43.420","Text":"the cash was received in arrear."},{"Start":"09:43.420 ","End":"09:47.635","Text":"Now, just remember the time period in both examples."},{"Start":"09:47.635 ","End":"09:50.405","Text":"The period we were looking at related"},{"Start":"09:50.405 ","End":"10:00.165","Text":"to 1 November of the X1 year up until 31 January of X2."},{"Start":"10:00.165 ","End":"10:03.630","Text":"This was the same for both examples;"},{"Start":"10:04.180 ","End":"10:10.190","Text":"1 November of the X1 year up to 31 January of the X2 year."},{"Start":"10:10.190 ","End":"10:12.170","Text":"Looking firstly then at"},{"Start":"10:12.170 ","End":"10:17.630","Text":"the unearned income example relating to the rent received in advance,"},{"Start":"10:17.630 ","End":"10:24.745","Text":"the cash that was received in the 20X1 year amounted to 3,000."},{"Start":"10:24.745 ","End":"10:28.865","Text":"That was the cash received in advance on 1 November."},{"Start":"10:28.865 ","End":"10:36.410","Text":"Therefore, the total cash received in relation to this contract amounted to 3,000."},{"Start":"10:36.410 ","End":"10:39.260","Text":"But now how was it recognized as income?"},{"Start":"10:39.260 ","End":"10:43.640","Text":"It was recognized as income in a 20X1 year at"},{"Start":"10:43.640 ","End":"10:49.010","Text":"the amount of 2,000 being the income earned for November and December,"},{"Start":"10:49.010 ","End":"10:53.070","Text":"and recognized at the amount of 1,000 in"},{"Start":"10:53.070 ","End":"10:58.640","Text":"the 20X2 year being the income earned in January of 20X2."},{"Start":"10:58.640 ","End":"11:04.790","Text":"Therefore, the amount of income recognized over the periods, in this case,"},{"Start":"11:04.790 ","End":"11:09.740","Text":"the 2 months in the X1 year and the 1 month in"},{"Start":"11:09.740 ","End":"11:15.184","Text":"the X2 year clearly totals the same 3,000 as the cash received."},{"Start":"11:15.184 ","End":"11:18.395","Text":"Looking then at the income receivable example,"},{"Start":"11:18.395 ","End":"11:21.145","Text":"the cash here was received in arrear."},{"Start":"11:21.145 ","End":"11:25.130","Text":"The cash was received only in the 20X2 year."},{"Start":"11:25.130 ","End":"11:30.715","Text":"You\u0027ll recall it was received at the end of January of 20X2."},{"Start":"11:30.715 ","End":"11:34.400","Text":"But in order to comply with the accrual basis of accounting,"},{"Start":"11:34.400 ","End":"11:38.510","Text":"we recognize income of 2,000 in"},{"Start":"11:38.510 ","End":"11:44.910","Text":"20X1 year being the income recognized as earned for November and December"},{"Start":"11:44.910 ","End":"11:50.030","Text":"and we recognized the further"},{"Start":"11:50.030 ","End":"11:56.715","Text":"1,000 as income in the 20X1 year at the end of January,"},{"Start":"11:56.715 ","End":"12:03.169","Text":"giving us a total of 3,000 recognized as income over the periods."},{"Start":"12:03.169 ","End":"12:06.245","Text":"In other words, the periods from the 2 months in"},{"Start":"12:06.245 ","End":"12:10.265","Text":"the 20X1 year and the 1 month in the 20X2 year."},{"Start":"12:10.265 ","End":"12:15.240","Text":"This equals the same total as the cash received."}],"ID":28542},{"Watched":false,"Name":"Expense adjustments Recover Part 1","Duration":"11m 57s","ChapterTopicVideoID":26492,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.580","Text":"My name is Dave Kolit."},{"Start":"00:02.580 ","End":"00:06.270","Text":"In this video, we will focus on the recognition of"},{"Start":"00:06.270 ","End":"00:11.910","Text":"expenses in the period different than when the cash is paid out."},{"Start":"00:11.910 ","End":"00:16.290","Text":"Recall from your knowledge of the accrual basis of accounting,"},{"Start":"00:16.290 ","End":"00:19.170","Text":"that expenses are recognized in"},{"Start":"00:19.170 ","End":"00:24.690","Text":"the income statement when the entity consumes some economic resources."},{"Start":"00:24.690 ","End":"00:29.850","Text":"In other words, you will remember expenses are recognized in"},{"Start":"00:29.850 ","End":"00:37.895","Text":"the period when incurred"},{"Start":"00:37.895 ","End":"00:43.225","Text":"as a measure of sacrifice during that period."},{"Start":"00:43.225 ","End":"00:47.445","Text":"Now, as you will also remember, the cash however,"},{"Start":"00:47.445 ","End":"00:51.500","Text":"could be paid out before the expense is incurred,"},{"Start":"00:51.500 ","End":"00:55.460","Text":"at the same time that the expense is incurred,"},{"Start":"00:55.460 ","End":"00:59.675","Text":"or in fact after the expense is incurred."},{"Start":"00:59.675 ","End":"01:04.040","Text":"In a similar concept as to the income adjustments,"},{"Start":"01:04.040 ","End":"01:09.620","Text":"remember that if the cash is paid out at the same time the expense is incurred,"},{"Start":"01:09.620 ","End":"01:12.655","Text":"there will be no adjustments required."},{"Start":"01:12.655 ","End":"01:16.040","Text":"This is clearly because the cash payment and"},{"Start":"01:16.040 ","End":"01:20.075","Text":"the expense will be recognized in the same period."},{"Start":"01:20.075 ","End":"01:23.525","Text":"Looking at the broad principles, remember,"},{"Start":"01:23.525 ","End":"01:28.400","Text":"cash could be paid before the expense is recognized,"},{"Start":"01:28.400 ","End":"01:33.620","Text":"or the cash could be paid after the expense is recognized."},{"Start":"01:33.620 ","End":"01:37.460","Text":"If the cash is paid before the expense is recognized,"},{"Start":"01:37.460 ","End":"01:44.585","Text":"an asset is created which we refer to as a prepaid expense."},{"Start":"01:44.585 ","End":"01:49.460","Text":"If the cash is paid after the expense is recognized,"},{"Start":"01:49.460 ","End":"01:56.275","Text":"a liability will be created which is referred to as an accrued expense."},{"Start":"01:56.275 ","End":"02:03.125","Text":"Let us look at the broad accounting principles relating to each of these 2 scenarios."},{"Start":"02:03.125 ","End":"02:07.115","Text":"Upon payment of cash for a future expense,"},{"Start":"02:07.115 ","End":"02:12.875","Text":"an asset is created which is referred to as the prepaid expense,"},{"Start":"02:12.875 ","End":"02:19.790","Text":"and the credit will go to the cash or bank account to reflect the payment of the cash."},{"Start":"02:19.790 ","End":"02:23.120","Text":"At the end of that period or year,"},{"Start":"02:23.120 ","End":"02:28.970","Text":"the amount of the expense belonging to that period is now recognized,"},{"Start":"02:28.970 ","End":"02:34.370","Text":"and that will require a journal entry to debit the relevant expense,"},{"Start":"02:34.370 ","End":"02:40.770","Text":"and to credit the asset that prepaid expense in order to reduce it."},{"Start":"02:40.770 ","End":"02:43.045","Text":"Looking at the second scenario,"},{"Start":"02:43.045 ","End":"02:46.465","Text":"cash is paid after the expense is recognized."},{"Start":"02:46.465 ","End":"02:50.160","Text":"When we come to the end of the period and we need to"},{"Start":"02:50.160 ","End":"02:53.880","Text":"recognize an expense but the cash has not yet been paid,"},{"Start":"02:53.880 ","End":"02:57.445","Text":"we will again debit the relevant expense,"},{"Start":"02:57.445 ","End":"03:03.475","Text":"and this time we credit a liability account which is that accrued expense."},{"Start":"03:03.475 ","End":"03:08.260","Text":"The subsequent are following year when the cash is actually paid,"},{"Start":"03:08.260 ","End":"03:12.100","Text":"then the debit goes to the liability account to reduce it,"},{"Start":"03:12.100 ","End":"03:18.055","Text":"and the credit goes to the bank account to reflect the cash being paid."},{"Start":"03:18.055 ","End":"03:23.580","Text":"We will now look at a couple of examples to illustrate these principles."},{"Start":"03:23.580 ","End":"03:25.595","Text":"In this first example,"},{"Start":"03:25.595 ","End":"03:28.145","Text":"focusing on prepayments,"},{"Start":"03:28.145 ","End":"03:37.450","Text":"Entity A here, signs a rental agreement for a shop on 1 November of 20X1 year."},{"Start":"03:37.450 ","End":"03:44.800","Text":"This contract requires A to pay rent in advance for 3 months."},{"Start":"03:44.800 ","End":"03:51.905","Text":"The monthly rent is an amount of CU1,000."},{"Start":"03:51.905 ","End":"04:02.165","Text":"Therefore, A is paying CU3,000 rent in advance on the 1st of November."},{"Start":"04:02.165 ","End":"04:07.660","Text":"Note that A\u0027s financial year-end is 31 December."},{"Start":"04:07.660 ","End":"04:12.560","Text":"We require to record in A\u0027s accounting records"},{"Start":"04:12.560 ","End":"04:18.545","Text":"the payments that A is making on 1 November the 20X1 year."},{"Start":"04:18.545 ","End":"04:25.940","Text":"The recognition of the rent expense at the end of the financial year 31 December 20X1,"},{"Start":"04:25.940 ","End":"04:34.145","Text":"and the recognition of the rent expense at the end of January of the 20X2 year."},{"Start":"04:34.145 ","End":"04:40.725","Text":"When the entity pays the CU3,000 on the 1st November,"},{"Start":"04:40.725 ","End":"04:46.040","Text":"as we have just seen we need to create an asset which is"},{"Start":"04:46.040 ","End":"04:52.015","Text":"called this prepaid rent account as an asset."},{"Start":"04:52.015 ","End":"04:56.835","Text":"The asset is created in the amount of 3,000,"},{"Start":"04:56.835 ","End":"05:02.510","Text":"and the credit side of the entry is a payment out of cash or out of the bank account,"},{"Start":"05:02.510 ","End":"05:08.255","Text":"so the bank account is credited or reduced by 3,000."},{"Start":"05:08.255 ","End":"05:13.970","Text":"Now remember, this prepaid rent as an asset represents the rights"},{"Start":"05:13.970 ","End":"05:20.540","Text":"that the entity has to occupy the property for the following 3 months."},{"Start":"05:20.540 ","End":"05:25.460","Text":"When we come to 31 December of the 20X1 year,"},{"Start":"05:25.460 ","End":"05:27.780","Text":"the end of the entities financial year,"},{"Start":"05:27.780 ","End":"05:33.215","Text":"the entity now needs to record an expense relating to the usage,"},{"Start":"05:33.215 ","End":"05:38.855","Text":"or consumption, effectively of that rent for the 2-month period."},{"Start":"05:38.855 ","End":"05:43.800","Text":"It therefore debits a rent expense account."},{"Start":"05:43.800 ","End":"05:50.105","Text":"Remember expenses increase with debits because expenses decrease equity,"},{"Start":"05:50.105 ","End":"05:52.770","Text":"and equity is a credit type account."},{"Start":"05:52.770 ","End":"05:55.880","Text":"Therefore for rent expense is increased with"},{"Start":"05:55.880 ","End":"05:59.960","Text":"a debit of 2,000 for the 2 months of November and December,"},{"Start":"05:59.960 ","End":"06:08.075","Text":"and the asset that we created initially that prepaid rent as the asset account,"},{"Start":"06:08.075 ","End":"06:11.930","Text":"that is then reduced by 2,000."},{"Start":"06:11.930 ","End":"06:15.800","Text":"Again, think back to the definition of an expense."},{"Start":"06:15.800 ","End":"06:20.000","Text":"Expenses come about through either a decrease in assets,"},{"Start":"06:20.000 ","End":"06:22.310","Text":"or an increase in liabilities."},{"Start":"06:22.310 ","End":"06:29.180","Text":"Here the expense is coming about through a decrease in the asset prepaid rent."},{"Start":"06:29.180 ","End":"06:35.525","Text":"We now move on to the accounting entry at 31 January of the 20X2 year."},{"Start":"06:35.525 ","End":"06:38.540","Text":"Therefore, a further month has gone past,"},{"Start":"06:38.540 ","End":"06:44.285","Text":"and therefore a further month\u0027s worth of rent expense needs to be recorded."},{"Start":"06:44.285 ","End":"06:49.220","Text":"Therefore, the entity again debits the rent expense account,"},{"Start":"06:49.220 ","End":"06:52.190","Text":"this time for 1,000 to represent"},{"Start":"06:52.190 ","End":"06:57.244","Text":"the rent expense incurred for the month of January, and again,"},{"Start":"06:57.244 ","End":"07:06.170","Text":"credits the prepaid rent the asset account to reduce it by 1,000."},{"Start":"07:06.170 ","End":"07:09.650","Text":"Let us now look at the transactions worksheet."},{"Start":"07:09.650 ","End":"07:12.605","Text":"As always, think about the accounting equation,"},{"Start":"07:12.605 ","End":"07:17.650","Text":"asset is equal to liabilities plus owner\u0027s equity."},{"Start":"07:17.650 ","End":"07:23.885","Text":"In this example, you will remember on 1 of November of the 20X1 year,"},{"Start":"07:23.885 ","End":"07:27.995","Text":"the entity paid 3,000 rent in advance."},{"Start":"07:27.995 ","End":"07:30.860","Text":"In other words, it paid rent for the period from"},{"Start":"07:30.860 ","End":"07:35.570","Text":"1 November all the way through to 31 January of the following year."},{"Start":"07:35.570 ","End":"07:37.640","Text":"When this rent was paid,"},{"Start":"07:37.640 ","End":"07:40.020","Text":"when the cash was paid out,"},{"Start":"07:42.310 ","End":"07:48.995","Text":"the entity recorded an increase in the asset prepaid rent,"},{"Start":"07:48.995 ","End":"07:55.190","Text":"and clearly a decrease in the asset bank to record the cash being paid out."},{"Start":"07:55.190 ","End":"08:01.220","Text":"The increase in the asset prepaid rent was recorded as a debit to increase the asset,"},{"Start":"08:01.220 ","End":"08:07.010","Text":"and the decrease in the asset bank was recorded as a credit."},{"Start":"08:07.010 ","End":"08:11.000","Text":"Then when we move to the end of the financial year,"},{"Start":"08:11.000 ","End":"08:14.720","Text":"in this case 31 of December 20X1 year,"},{"Start":"08:14.720 ","End":"08:18.295","Text":"the entity had to record an adjusting entry."},{"Start":"08:18.295 ","End":"08:22.880","Text":"An adjusting entry to record the amount of the rent expense used"},{"Start":"08:22.880 ","End":"08:28.295","Text":"for the 2 months from 1 November up until 31 December."},{"Start":"08:28.295 ","End":"08:36.180","Text":"This required a debit or an increase in the rent expense."},{"Start":"08:36.190 ","End":"08:43.175","Text":"But now remember, an increase in an expense in fact decreases equity."},{"Start":"08:43.175 ","End":"08:47.600","Text":"Equity is decreasing, although remember the expense is increasing."},{"Start":"08:47.600 ","End":"08:50.960","Text":"At the same time a decrease in"},{"Start":"08:50.960 ","End":"08:57.160","Text":"the asset prepaid rent by 2,000 representing the rent for the 2 month period."},{"Start":"08:57.160 ","End":"08:58.955","Text":"This you will recall,"},{"Start":"08:58.955 ","End":"09:05.045","Text":"was recorded with a debit to the rent expense account to increase the expense,"},{"Start":"09:05.045 ","End":"09:10.650","Text":"and a credit to the prepaid rent, the asset account."},{"Start":"09:11.900 ","End":"09:14.595","Text":"At the end of December,"},{"Start":"09:14.595 ","End":"09:16.700","Text":"again assuming that this is"},{"Start":"09:16.700 ","End":"09:21.125","Text":"the only transaction that has been entered into by the entity."},{"Start":"09:21.125 ","End":"09:25.525","Text":"There is the end of your retention of profit, in this case,"},{"Start":"09:25.525 ","End":"09:34.085","Text":"a transfer of the expense from the expense account to the retained profit account."},{"Start":"09:34.085 ","End":"09:38.045","Text":"The expense account is therefore decreased,"},{"Start":"09:38.045 ","End":"09:45.885","Text":"and the retained profit account at the end of the period."},{"Start":"09:45.885 ","End":"09:50.705","Text":"Again, assuming that this is the only transaction entered into by the entity."},{"Start":"09:50.705 ","End":"09:53.035","Text":"There is a transfer of,"},{"Start":"09:53.035 ","End":"09:59.450","Text":"in this case the expense from the rent expense account to the retained profit account."},{"Start":"09:59.450 ","End":"10:03.395","Text":"This will require a credit to the rent expense account,"},{"Start":"10:03.395 ","End":"10:08.360","Text":"and a debit to the retained profit account to decrease it."},{"Start":"10:08.360 ","End":"10:12.080","Text":"Note that the balance in the asset account,"},{"Start":"10:12.080 ","End":"10:13.515","Text":"the prepaid rent,"},{"Start":"10:13.515 ","End":"10:17.390","Text":"is 1,000 at the end of December representing"},{"Start":"10:17.390 ","End":"10:23.195","Text":"an asset being the right of the entity to occupy the property for the following 1 month,"},{"Start":"10:23.195 ","End":"10:25.870","Text":"in other words for the month of January."},{"Start":"10:25.870 ","End":"10:30.764","Text":"Looking now, at the transactions worksheet for that month of January."},{"Start":"10:30.764 ","End":"10:34.370","Text":"Again, just reminding ourselves of the accounting equation;"},{"Start":"10:34.370 ","End":"10:38.840","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"10:38.840 ","End":"10:41.270","Text":"The opening balance at the beginning of"},{"Start":"10:41.270 ","End":"10:45.785","Text":"January which must be the same as the closing balance at the end of December,"},{"Start":"10:45.785 ","End":"10:51.445","Text":"shows the prepaid rent in an amount of 1,000."},{"Start":"10:51.445 ","End":"10:54.335","Text":"When the entity gets to the end of January,"},{"Start":"10:54.335 ","End":"10:57.545","Text":"in order words 31 January 20X2 year,"},{"Start":"10:57.545 ","End":"11:02.630","Text":"the entity now recognizes the last of the 3 month\u0027s expenses."},{"Start":"11:02.630 ","End":"11:07.340","Text":"In other words, the last 1,000 of the 3,000 prepaid."},{"Start":"11:07.340 ","End":"11:13.070","Text":"To do this as the same for the end of the \u0027X2 year,"},{"Start":"11:13.070 ","End":"11:17.120","Text":"it decreases the asset rent prepaid,"},{"Start":"11:17.120 ","End":"11:20.764","Text":"and at the same time decreases equity."},{"Start":"11:20.764 ","End":"11:24.030","Text":"But again, I emphasize the decrease in equity is coming about"},{"Start":"11:24.030 ","End":"11:32.260","Text":"because of the increase in the expense rent expense."},{"Start":"11:32.260 ","End":"11:37.985","Text":"Thus, the recording of it was shown as a debit to increase the rent expense,"},{"Start":"11:37.985 ","End":"11:44.810","Text":"and a credit to decrease the rent prepaid asset account."},{"Start":"11:44.810 ","End":"11:47.465","Text":"Note now at the end of January,"},{"Start":"11:47.465 ","End":"11:51.695","Text":"and assuming no further payments being made in respect to rent,"},{"Start":"11:51.695 ","End":"11:57.240","Text":"that the balance in the rent prepaid account is in fact 0."}],"ID":28543},{"Watched":false,"Name":"Expense adjustments Recover Part 2","Duration":"10m 26s","ChapterTopicVideoID":26488,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.560 ","End":"00:06.060","Text":"The second example focuses on accrued expenses."},{"Start":"00:06.060 ","End":"00:08.325","Text":"Here entity A,"},{"Start":"00:08.325 ","End":"00:13.640","Text":"you\u0027re told outsources its legal affairs to local law firm,"},{"Start":"00:13.640 ","End":"00:19.875","Text":"and this contract starts on the 1st of November of 20X1 year."},{"Start":"00:19.875 ","End":"00:26.820","Text":"Note that the agreement specifies a monthly fee of 1,000 currency units."},{"Start":"00:26.820 ","End":"00:30.515","Text":"But entity A whose records we are looking at,"},{"Start":"00:30.515 ","End":"00:36.050","Text":"pays law firm in arrears every 3 months."},{"Start":"00:36.050 ","End":"00:38.225","Text":"Now again, we looked at this before."},{"Start":"00:38.225 ","End":"00:41.450","Text":"Payments and areas means that payment will take place at"},{"Start":"00:41.450 ","End":"00:45.890","Text":"the end of the relevant period. What is required?"},{"Start":"00:45.890 ","End":"00:51.260","Text":"To record the entries in A\u0027s accounting records to reflect"},{"Start":"00:51.260 ","End":"00:58.410","Text":"the recognition of the legal expense at the end of 31 December 20X1,"},{"Start":"00:58.410 ","End":"01:03.965","Text":"and again, to recognize the legal expense at the end of the first month of January,"},{"Start":"01:03.965 ","End":"01:08.080","Text":"that is 31 January of 20X2 year."},{"Start":"01:08.080 ","End":"01:14.150","Text":"The first part of the solution requires us to record the journal entry,"},{"Start":"01:14.150 ","End":"01:22.070","Text":"to recognize the expense for the period from November to December of 20X1."},{"Start":"01:22.070 ","End":"01:25.910","Text":"Remember there is no previous payments because the cash payment here"},{"Start":"01:25.910 ","End":"01:29.855","Text":"will be paid only in January of the following year."},{"Start":"01:29.855 ","End":"01:34.100","Text":"Remember here, the entity has had the benefit of"},{"Start":"01:34.100 ","End":"01:38.645","Text":"legal services for 2 months of November and December."},{"Start":"01:38.645 ","End":"01:46.720","Text":"We therefore need to record a legal fees expense for the 2 months."},{"Start":"01:46.720 ","End":"01:50.475","Text":"In other words, 1,000 per month, 2,000."},{"Start":"01:50.475 ","End":"01:52.880","Text":"The amount has not been paid."},{"Start":"01:52.880 ","End":"01:55.880","Text":"It will only be paid in the following period,"},{"Start":"01:55.880 ","End":"01:57.560","Text":"at the end of January."},{"Start":"01:57.560 ","End":"01:59.810","Text":"Therefore, we credit and"},{"Start":"01:59.810 ","End":"02:08.345","Text":"accrued legal expenses accounts as a liability for 2,000."},{"Start":"02:08.345 ","End":"02:11.645","Text":"Now again, think back to definition of an expense."},{"Start":"02:11.645 ","End":"02:18.265","Text":"Expenses come about through decreases in assets or increases in liabilities."},{"Start":"02:18.265 ","End":"02:22.670","Text":"Here the legal fees expense is being recognized through"},{"Start":"02:22.670 ","End":"02:28.280","Text":"an increase in the liability accrued legal expenses."},{"Start":"02:28.280 ","End":"02:33.515","Text":"We now come to the entry on 31 January 20X2,"},{"Start":"02:33.515 ","End":"02:38.165","Text":"where the entity pays the 3,000 currency units"},{"Start":"02:38.165 ","End":"02:44.105","Text":"relating to the legal expenses for the previous 3 months,"},{"Start":"02:44.105 ","End":"02:47.675","Text":"for November, December, and January."},{"Start":"02:47.675 ","End":"02:51.770","Text":"Now, you have seen that when journal entries are set out,"},{"Start":"02:51.770 ","End":"02:55.040","Text":"the debit side of the entry is always set"},{"Start":"02:55.040 ","End":"02:59.165","Text":"out ahead of or above the credit side of the entry."},{"Start":"02:59.165 ","End":"03:01.835","Text":"But as I\u0027ve also mentioned before,"},{"Start":"03:01.835 ","End":"03:05.540","Text":"it may often be easier in certain situations to"},{"Start":"03:05.540 ","End":"03:10.300","Text":"actually think of the credit side first if that is easier for you."},{"Start":"03:10.300 ","End":"03:16.220","Text":"In this case, because there is a payment of cash out of the bank account,"},{"Start":"03:16.220 ","End":"03:18.740","Text":"it may be easier to appreciate or to"},{"Start":"03:18.740 ","End":"03:23.555","Text":"understand that the bank account must be credited to reduce it."},{"Start":"03:23.555 ","End":"03:30.190","Text":"Because bank is an asset and to reduce it requires a credit entry."},{"Start":"03:30.190 ","End":"03:33.525","Text":"I can credit bank with 3,000."},{"Start":"03:33.525 ","End":"03:36.660","Text":"Then what will the 2 debits relate to?"},{"Start":"03:36.660 ","End":"03:39.815","Text":"The 3,000 that is being paid now,"},{"Start":"03:39.815 ","End":"03:47.929","Text":"relates to the legal expenses for the previous 2 months of November and December,"},{"Start":"03:47.929 ","End":"03:50.795","Text":"and also for the current month of January."},{"Start":"03:50.795 ","End":"03:53.180","Text":"Therefore, I need to eliminate"},{"Start":"03:53.180 ","End":"03:58.280","Text":"the accrued expense which was created at the end of December."},{"Start":"03:58.280 ","End":"04:01.220","Text":"That is a liability, and therefore,"},{"Start":"04:01.220 ","End":"04:05.060","Text":"we debit the accrued expense account to reduce"},{"Start":"04:05.060 ","End":"04:11.165","Text":"it by the 2,000 that was initially recorded at the end of December,"},{"Start":"04:11.165 ","End":"04:15.380","Text":"and clearly now the extra 1,000 that makes"},{"Start":"04:15.380 ","End":"04:22.090","Text":"this journal entry balance must go to the legal expense for the current period."},{"Start":"04:22.090 ","End":"04:27.475","Text":"Therefore, the legal expense account is increased with a debit."},{"Start":"04:27.475 ","End":"04:29.740","Text":"The full journal entry therefore,"},{"Start":"04:29.740 ","End":"04:35.485","Text":"reads a debit to the accrued legal expenses,"},{"Start":"04:35.485 ","End":"04:39.325","Text":"a debit to the legal expenses for the current period,"},{"Start":"04:39.325 ","End":"04:44.485","Text":"and a credit to record the payment out of the bank account."},{"Start":"04:44.485 ","End":"04:48.390","Text":"Looking now at the transaction worksheet, and, as always,"},{"Start":"04:48.390 ","End":"04:52.765","Text":"just entering the symbols for the accounting equation worksheet,"},{"Start":"04:52.765 ","End":"04:56.361","Text":"assets equals liabilities plus equity,"},{"Start":"04:56.361 ","End":"04:59.215","Text":"you will recall in this example,"},{"Start":"04:59.215 ","End":"05:05.140","Text":"that the cash is being paid in arrear for the legal expenses, in other words,"},{"Start":"05:05.140 ","End":"05:09.190","Text":"the cash is going to be paid here at the end of the 3 month period,"},{"Start":"05:09.190 ","End":"05:13.035","Text":"in the words, the end of January of the 20X1 year."},{"Start":"05:13.035 ","End":"05:17.960","Text":"Therefore, when the entity gets to the end of December of 20X1,"},{"Start":"05:17.960 ","End":"05:20.990","Text":"there\u0027s clearly been no cash payment."},{"Start":"05:20.990 ","End":"05:27.665","Text":"We\u0027ll see that there has been 0 cash paid out in the year ending December of 20X1."},{"Start":"05:27.665 ","End":"05:30.175","Text":"But at December 20X1,"},{"Start":"05:30.175 ","End":"05:35.000","Text":"the entity needs to record a liability representing its obligation to"},{"Start":"05:35.000 ","End":"05:40.265","Text":"pay for the legal expenses that have been used thus far."},{"Start":"05:40.265 ","End":"05:46.265","Text":"In other words, the liability has to be recorded in an amount of 2,000."},{"Start":"05:46.265 ","End":"05:51.110","Text":"Therefore, the entity increases a liability"},{"Start":"05:51.110 ","End":"05:56.810","Text":"accrued expenses by 2,000 and the entity, again,"},{"Start":"05:56.810 ","End":"05:59.000","Text":"will increase the legal expenses,"},{"Start":"05:59.000 ","End":"06:04.010","Text":"which decreases equity that you recall was recorded with"},{"Start":"06:04.010 ","End":"06:09.440","Text":"the journal entry of a debit to a legal fee, expense accounts,"},{"Start":"06:09.440 ","End":"06:14.735","Text":"and a corresponding credit to the liability accrued expenses."},{"Start":"06:14.735 ","End":"06:18.890","Text":"In terms of the end of year retention of profit and loss, again,"},{"Start":"06:18.890 ","End":"06:21.290","Text":"assuming this is the only transaction,"},{"Start":"06:21.290 ","End":"06:26.435","Text":"the entity needs to transfer the expense to retain profit."},{"Start":"06:26.435 ","End":"06:30.080","Text":"This is done with a credit to the expense account,"},{"Start":"06:30.080 ","End":"06:35.140","Text":"legal fee expense, and a debit to the retained profit account."},{"Start":"06:35.140 ","End":"06:38.080","Text":"Note the balance in the liability,"},{"Start":"06:38.080 ","End":"06:40.230","Text":"the accrued little expenses,"},{"Start":"06:40.230 ","End":"06:46.415","Text":"shows a 2,000 liability at the end of December of 20X1,"},{"Start":"06:46.415 ","End":"06:51.100","Text":"representing the obligations of the entity to pay these"},{"Start":"06:51.100 ","End":"06:55.745","Text":"2,000 of legal expenses relating to the 2 months,"},{"Start":"06:55.745 ","End":"06:58.165","Text":"being November and December."},{"Start":"06:58.165 ","End":"07:03.275","Text":"We now come to the transaction worksheet for the 20X2 year,"},{"Start":"07:03.275 ","End":"07:08.005","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"07:08.005 ","End":"07:12.250","Text":"The opening balance in the liability accounts of"},{"Start":"07:12.250 ","End":"07:18.620","Text":"accrued expenses is the same 2,000 that was the closing balance at the end of December."},{"Start":"07:18.620 ","End":"07:22.260","Text":"Now, the 31 December of the 20X2 year,"},{"Start":"07:22.260 ","End":"07:29.670","Text":"the entity pays the 3,000 cash in arrear relation to the previous 3 months,"},{"Start":"07:29.670 ","End":"07:31.305","Text":"and at the same time,"},{"Start":"07:31.305 ","End":"07:38.210","Text":"has to extinguish the liability and recognize the expense for the month of January."},{"Start":"07:38.210 ","End":"07:45.395","Text":"This is done by recording a decrease in the asset bank bond amounts of 3,000,"},{"Start":"07:45.395 ","End":"07:47.525","Text":"a decrease, as well,"},{"Start":"07:47.525 ","End":"07:52.610","Text":"in the liability because the liability is being extinguished,"},{"Start":"07:52.610 ","End":"07:54.470","Text":"and a decrease in equity,"},{"Start":"07:54.470 ","End":"08:02.240","Text":"increase in expense, but decrease in equity representing the expense for the period."},{"Start":"08:02.240 ","End":"08:04.350","Text":"In terms of debits and credits,"},{"Start":"08:04.350 ","End":"08:09.320","Text":"this was recorded as a debit to the expense account,"},{"Start":"08:09.320 ","End":"08:12.585","Text":"legal fees expense to increase it,"},{"Start":"08:12.585 ","End":"08:18.005","Text":"a debit to the liability accrued expenses to decrease it,"},{"Start":"08:18.005 ","End":"08:23.420","Text":"and a credit to the asset bank to decrease it as well."},{"Start":"08:23.420 ","End":"08:27.200","Text":"The 1,000 at the end of the period is transferred to"},{"Start":"08:27.200 ","End":"08:31.280","Text":"retained profits with a credit to the legal fee expenses,"},{"Start":"08:31.280 ","End":"08:35.345","Text":"and a debit to the retained profit account."},{"Start":"08:35.345 ","End":"08:42.410","Text":"This last slide summarizes the effect of the entries of the previous examples."},{"Start":"08:42.410 ","End":"08:46.985","Text":"In example 3.1, we had the prepayment,"},{"Start":"08:46.985 ","End":"08:49.220","Text":"and in example 3.2,"},{"Start":"08:49.220 ","End":"08:52.415","Text":"we had the accrued expenses."},{"Start":"08:52.415 ","End":"08:56.270","Text":"If you think back or look back to the previous examples,"},{"Start":"08:56.270 ","End":"08:59.975","Text":"in example 3.1, with the prepayment,"},{"Start":"08:59.975 ","End":"09:05.030","Text":"there was an expense of 2,000 recognized in"},{"Start":"09:05.030 ","End":"09:11.520","Text":"the 20X1 year and an expense of 1,000 recognized in the 20X2 year."},{"Start":"09:11.520 ","End":"09:17.945","Text":"Therefore, total expenses of 3,000 relating to this transaction overall,"},{"Start":"09:17.945 ","End":"09:20.645","Text":"because this involved a prepayment,"},{"Start":"09:20.645 ","End":"09:24.725","Text":"the full 3,000 was paid in the first year,"},{"Start":"09:24.725 ","End":"09:27.200","Text":"nothing was paid in the second year,"},{"Start":"09:27.200 ","End":"09:34.985","Text":"but clearly the total cash paid relating to the transaction is the same 3,000."},{"Start":"09:34.985 ","End":"09:41.345","Text":"A similar scenario comes about in example 3.2 for the accrued expenses."},{"Start":"09:41.345 ","End":"09:46.330","Text":"The entity recognized a 2,000 expense in"},{"Start":"09:46.330 ","End":"09:52.190","Text":"the X1 year and recognize a 1,000 expense in the X2 year."},{"Start":"09:52.190 ","End":"09:59.450","Text":"In other words, a total expenses of 3,000 recognized for this transaction."},{"Start":"09:59.450 ","End":"10:03.470","Text":"In relation to the cash paid,"},{"Start":"10:03.470 ","End":"10:08.640","Text":"there was no cash paid in the 20X1 year,"},{"Start":"10:08.640 ","End":"10:14.405","Text":"but there was 3,000 cash paid in the 20X2 year, giving you, again,"},{"Start":"10:14.405 ","End":"10:18.980","Text":"a total cash payment of 3,000 which equals the amount of"},{"Start":"10:18.980 ","End":"10:24.990","Text":"the expenses for both periods together."}],"ID":28544},{"Watched":false,"Name":"Exercise 1 - Introduction","Duration":"5m 26s","ChapterTopicVideoID":26346,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.970","Text":"Hello, and welcome to"},{"Start":"00:02.970 ","End":"00:07.984","Text":"another presentation in this series entitled end of year adjustments,"},{"Start":"00:07.984 ","End":"00:09.540","Text":"brought to you by Proprep."},{"Start":"00:09.540 ","End":"00:11.850","Text":"My name is Cathy Savis."},{"Start":"00:11.850 ","End":"00:16.680","Text":"Today we\u0027re going to do the exercise WMB."},{"Start":"00:16.680 ","End":"00:21.015","Text":"Now, let\u0027s read through the initial information."},{"Start":"00:21.015 ","End":"00:29.790","Text":"WMB is a small local car dealership representing a large car manufacturer."},{"Start":"00:29.790 ","End":"00:33.285","Text":"It has 2 owners and several employees."},{"Start":"00:33.285 ","End":"00:36.390","Text":"Its business model involves taking orders from"},{"Start":"00:36.390 ","End":"00:40.030","Text":"customers and placing them with the manufacturer."},{"Start":"00:40.030 ","End":"00:41.990","Text":"The customer has to place"},{"Start":"00:41.990 ","End":"00:46.850","Text":"a 10 percent deposit based on the selling price of the car on order."},{"Start":"00:46.850 ","End":"00:49.844","Text":"It also has a small stock of cars,"},{"Start":"00:49.844 ","End":"00:54.200","Text":"used and new, which are available for immediate delivery."},{"Start":"00:54.200 ","End":"01:01.015","Text":"Delivery of the new cars takes place 3 months after an order is placed."},{"Start":"01:01.015 ","End":"01:05.765","Text":"WMB has a December 31 financial year end,"},{"Start":"01:05.765 ","End":"01:08.600","Text":"and its trial balance on 31st December,"},{"Start":"01:08.600 ","End":"01:10.895","Text":"X1 is given below."},{"Start":"01:10.895 ","End":"01:14.015","Text":"All figures are in currency units."},{"Start":"01:14.015 ","End":"01:16.235","Text":"Here is the trial balance."},{"Start":"01:16.235 ","End":"01:20.495","Text":"We have property, plant and equipment, or PP\u0026E."},{"Start":"01:20.495 ","End":"01:22.355","Text":"We have inventory."},{"Start":"01:22.355 ","End":"01:26.945","Text":"Notice the date of the inventory is the 30th of November, X1."},{"Start":"01:26.945 ","End":"01:29.180","Text":"This trial balance,"},{"Start":"01:29.180 ","End":"01:30.838","Text":"we were told,"},{"Start":"01:30.838 ","End":"01:35.015","Text":"was dated the 31st of December, X1."},{"Start":"01:35.015 ","End":"01:37.940","Text":"This inventory balance is outdated."},{"Start":"01:37.940 ","End":"01:40.235","Text":"Just bear that in mind for the moment."},{"Start":"01:40.235 ","End":"01:43.547","Text":"Then we have accounts receivable, bank,"},{"Start":"01:43.547 ","End":"01:46.550","Text":"accounts payable, which is a liability."},{"Start":"01:46.550 ","End":"01:48.875","Text":"The rest were all assets."},{"Start":"01:48.875 ","End":"01:52.565","Text":"Cost of sales, this is an expense."},{"Start":"01:52.565 ","End":"01:54.980","Text":"Sales, it\u0027s income."},{"Start":"01:54.980 ","End":"02:03.380","Text":"Notice here that we have an expense which is on the debit side,"},{"Start":"02:03.380 ","End":"02:07.710","Text":"and sales, which is income,"},{"Start":"02:09.070 ","End":"02:11.930","Text":"which is on the credit side."},{"Start":"02:11.930 ","End":"02:14.540","Text":"Salaries, wages, and bonuses,"},{"Start":"02:14.540 ","End":"02:16.790","Text":"and other expense that\u0027s on the debit side,"},{"Start":"02:16.790 ","End":"02:19.430","Text":"admin expenses on the debit side."},{"Start":"02:19.430 ","End":"02:23.515","Text":"Share capital and retained earnings."},{"Start":"02:23.515 ","End":"02:26.915","Text":"These are both equity, so you see them on the credit side."},{"Start":"02:26.915 ","End":"02:30.940","Text":"Notice that retained earnings has a date of 31st December,"},{"Start":"02:30.940 ","End":"02:35.925","Text":"X0 and the trial balance is 31st of December, X1."},{"Start":"02:35.925 ","End":"02:40.670","Text":"This means that the retained earnings balance is"},{"Start":"02:40.670 ","End":"02:45.995","Text":"outdated and will need to be updated in the final trial balance."},{"Start":"02:45.995 ","End":"02:51.140","Text":"Now, we\u0027re also told that the sales value of the orders by customers"},{"Start":"02:51.140 ","End":"02:56.090","Text":"for new cars placed in the last 3 months of the year end at 31st of December,"},{"Start":"02:56.090 ","End":"03:01.445","Text":"20X1, which are then going to be delivered in 20X2."},{"Start":"03:01.445 ","End":"03:06.140","Text":"Remember the cars get delivered 3 months later,"},{"Start":"03:06.140 ","End":"03:08.900","Text":"roughly or as follows."},{"Start":"03:08.900 ","End":"03:11.165","Text":"These are all in currency units."},{"Start":"03:11.165 ","End":"03:18.505","Text":"In October, there were 520,00 currency units of sales,"},{"Start":"03:18.505 ","End":"03:24.635","Text":"which were going to be delivered 3 months later."},{"Start":"03:24.635 ","End":"03:28.010","Text":"That would be in January, roughly."},{"Start":"03:28.010 ","End":"03:31.520","Text":"November the sales were 350,000 in orders,"},{"Start":"03:31.520 ","End":"03:36.595","Text":"but those sales are going to be delivered in February."},{"Start":"03:36.595 ","End":"03:41.240","Text":"Then in December, we have orders of 330,000,"},{"Start":"03:41.240 ","End":"03:44.630","Text":"and those sales are going to be delivered in March."},{"Start":"03:44.630 ","End":"03:53.030","Text":"Now, you cannot record the income from these sales until the transaction is"},{"Start":"03:53.030 ","End":"04:02.140","Text":"complete and delivery has occurred because then the company has completed its obligation."},{"Start":"04:02.140 ","End":"04:05.830","Text":"Just bear in mind that we do have these orders,"},{"Start":"04:05.830 ","End":"04:07.315","Text":"they have been placed,"},{"Start":"04:07.315 ","End":"04:13.790","Text":"but the actual sale is only going to be affected in the following year."},{"Start":"04:13.790 ","End":"04:18.455","Text":"These are orders as at 31st of December X1,"},{"Start":"04:18.455 ","End":"04:23.499","Text":"but the sales cannot be recorded until January,"},{"Start":"04:23.499 ","End":"04:27.185","Text":"February, and March of 20X2."},{"Start":"04:27.185 ","End":"04:30.695","Text":"Then we\u0027re provided with additional information."},{"Start":"04:30.695 ","End":"04:36.085","Text":"We\u0027ll go through all of this additional information 1 by 1 in a moment."},{"Start":"04:36.085 ","End":"04:37.890","Text":"We have 1, 2, 3,"},{"Start":"04:37.890 ","End":"04:40.075","Text":"4, 5 pieces of information."},{"Start":"04:40.075 ","End":"04:42.249","Text":"Then we\u0027re given the required."},{"Start":"04:42.249 ","End":"04:45.475","Text":"The required asks us to, a,"},{"Start":"04:45.475 ","End":"04:48.680","Text":"record the journal entries required for preparing"},{"Start":"04:48.680 ","End":"04:52.720","Text":"the final trial balance at 31st December, 20X1,"},{"Start":"04:52.720 ","End":"05:01.210","Text":"and b, we are required to prepare the adjusted trial balance at 31st December, 20X1."},{"Start":"05:01.210 ","End":"05:03.620","Text":"Remember you\u0027ve been given a trial balance,"},{"Start":"05:03.620 ","End":"05:06.320","Text":"but as I pointed out to you, as you went through it,"},{"Start":"05:06.320 ","End":"05:08.825","Text":"there were a number of items that you could see"},{"Start":"05:08.825 ","End":"05:12.580","Text":"were out-of-date and would need to be adjusted."},{"Start":"05:12.580 ","End":"05:16.130","Text":"Then c, we are required to prepare"},{"Start":"05:16.130 ","End":"05:20.795","Text":"the income statement for the year ended 31st December, 20X1."},{"Start":"05:20.795 ","End":"05:26.790","Text":"Then finally, prepare the balance sheet at 31st December, 20X1."}],"ID":28545},{"Watched":false,"Name":"Exercise 1 - Part 1","Duration":"6m 25s","ChapterTopicVideoID":26347,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.020 ","End":"00:02.670","Text":"Let us now get started."},{"Start":"00:02.670 ","End":"00:05.415","Text":"Part a require the journal entries."},{"Start":"00:05.415 ","End":"00:08.055","Text":"Let us have a look at the additional information."},{"Start":"00:08.055 ","End":"00:11.010","Text":"Part 1 of the additional information told us that"},{"Start":"00:11.010 ","End":"00:15.060","Text":"sales personnel get paid a bonus of 2 percent of the value of"},{"Start":"00:15.060 ","End":"00:18.420","Text":"each order placed and they are paid 3 months in"},{"Start":"00:18.420 ","End":"00:23.565","Text":"arrears and this often happens roughly at the same time the car is delivered."},{"Start":"00:23.565 ","End":"00:25.830","Text":"The car gets delivered, if you recall,"},{"Start":"00:25.830 ","End":"00:28.050","Text":"roughly 3 months later."},{"Start":"00:28.050 ","End":"00:31.670","Text":"The trial balance does not reflect the bonuses for any"},{"Start":"00:31.670 ","End":"00:35.425","Text":"of the orders placed in the last quarter of 20X1."},{"Start":"00:35.425 ","End":"00:39.860","Text":"Now I want to just read this first part again because it\u0027s really important."},{"Start":"00:39.860 ","End":"00:48.035","Text":"Sales personnel get paid a bonus of 2 percent of the value of each order placed."},{"Start":"00:48.035 ","End":"00:55.285","Text":"It does not say that the sales personnel get paid a bonus of 2 percent of the sales."},{"Start":"00:55.285 ","End":"00:59.390","Text":"What we know here is that the sale cannot"},{"Start":"00:59.390 ","End":"01:03.110","Text":"get recorded yet and the reason for that is that"},{"Start":"01:03.110 ","End":"01:06.800","Text":"the company\u0027s obligation to deliver the vehicle to"},{"Start":"01:06.800 ","End":"01:11.180","Text":"the customer who placed the order has not been completed."},{"Start":"01:11.180 ","End":"01:13.250","Text":"Until the obligation is complete,"},{"Start":"01:13.250 ","End":"01:15.470","Text":"the company cannot record the sale."},{"Start":"01:15.470 ","End":"01:19.880","Text":"However, legally, it appears that the sales personnel are"},{"Start":"01:19.880 ","End":"01:24.920","Text":"owed their bonus of 2 percent of the value of each order placed."},{"Start":"01:24.920 ","End":"01:31.130","Text":"Even though the sale has not occurred and even if the company never delivers the vehicle,"},{"Start":"01:31.130 ","End":"01:35.530","Text":"that sales personnel is owed their bonus."},{"Start":"01:35.530 ","End":"01:40.460","Text":"It does not necessarily mean they are going to be paid their bonus yet,"},{"Start":"01:40.460 ","End":"01:42.785","Text":"but they are legally owed."},{"Start":"01:42.785 ","End":"01:45.380","Text":"They\u0027ve earned their bonus."},{"Start":"01:45.380 ","End":"01:49.010","Text":"At the 31st of December, X1,"},{"Start":"01:49.010 ","End":"01:53.480","Text":"it tells us that the trial balance has not yet included the bonuses for any of"},{"Start":"01:53.480 ","End":"01:58.249","Text":"the orders placed from the last quarter of 20X1 and that\u0027s clearly a problem."},{"Start":"01:58.249 ","End":"02:01.550","Text":"Because we do have an expense and this is 1 of"},{"Start":"02:01.550 ","End":"02:06.650","Text":"those situations where we have a transaction which has led to an expense"},{"Start":"02:06.650 ","End":"02:10.925","Text":"that has been incurred but the cash aspect of that transaction"},{"Start":"02:10.925 ","End":"02:15.845","Text":"is going to happen later or if you like, in arrears."},{"Start":"02:15.845 ","End":"02:19.175","Text":"Now, this was given to us earlier in the question."},{"Start":"02:19.175 ","End":"02:23.000","Text":"We were told that the sales value of orders by customers for"},{"Start":"02:23.000 ","End":"02:26.780","Text":"new cars placed on the last 3 months of the year in the 31st,"},{"Start":"02:26.780 ","End":"02:31.575","Text":"December, 20X1, which will be delivered in 20X2,"},{"Start":"02:31.575 ","End":"02:34.565","Text":"are as follows, all in currency units."},{"Start":"02:34.565 ","End":"02:42.700","Text":"In October, there were orders placed to the value of 520,000 currency units."},{"Start":"02:42.700 ","End":"02:45.620","Text":"That\u0027s the sales value but recall,"},{"Start":"02:45.620 ","End":"02:49.160","Text":"I said we can\u0027t record the sale yet,"},{"Start":"02:49.160 ","End":"02:54.035","Text":"but this is the value of the sale that has effectively been ordered."},{"Start":"02:54.035 ","End":"02:59.615","Text":"The delivery of the vehicle is going to occur in terms of the October orders."},{"Start":"02:59.615 ","End":"03:05.370","Text":"It will occur in January and that\u0027s when we will record those sales."},{"Start":"03:05.370 ","End":"03:09.070","Text":"Then the November orders of 350,000,"},{"Start":"03:09.070 ","End":"03:11.495","Text":"those will be delivered in February,"},{"Start":"03:11.495 ","End":"03:17.600","Text":"roughly and the December orders will be delivered in March, roughly."},{"Start":"03:17.600 ","End":"03:20.120","Text":"Now when the vehicles are delivered,"},{"Start":"03:20.120 ","End":"03:22.819","Text":"that\u0027s when we will record those sales."},{"Start":"03:22.819 ","End":"03:26.600","Text":"However, the bonuses are a different story."},{"Start":"03:26.600 ","End":"03:33.025","Text":"The bonus is due on the October orders 2 percent of"},{"Start":"03:33.025 ","End":"03:43.744","Text":"520,000 comes to 10,400 currency units and that is due in October."},{"Start":"03:43.744 ","End":"03:45.575","Text":"Not payable in October,"},{"Start":"03:45.575 ","End":"03:49.850","Text":"but our personnel have earned their 10,400."},{"Start":"03:49.850 ","End":"03:54.880","Text":"That is an expense for us in October, 20X1."},{"Start":"03:54.880 ","End":"03:58.590","Text":"Now the November orders of 350,000,"},{"Start":"03:58.590 ","End":"04:03.615","Text":"2 percent of that is a bonus of"},{"Start":"04:03.615 ","End":"04:10.180","Text":"7,000 and that 7,000 is an expense in November of 20X1."},{"Start":"04:10.910 ","End":"04:14.105","Text":"Then the December orders,"},{"Start":"04:14.105 ","End":"04:20.574","Text":"2 percent of those comes to 6,600 in terms of bonuses,"},{"Start":"04:20.574 ","End":"04:23.175","Text":"and that must be recorded in December."},{"Start":"04:23.175 ","End":"04:29.770","Text":"In total, we have 24,000 in bonuses that are"},{"Start":"04:29.770 ","End":"04:37.795","Text":"due in the year ended 31st, December, 20X1."},{"Start":"04:37.795 ","End":"04:43.450","Text":"Now we know that we have a journal that we need to process."},{"Start":"04:43.450 ","End":"04:46.195","Text":"We\u0027re going to need to record the fact that we have"},{"Start":"04:46.195 ","End":"04:49.810","Text":"an expense and that\u0027s going to go into our salaries,"},{"Start":"04:49.810 ","End":"04:53.410","Text":"wages, and bonuses expense account."},{"Start":"04:53.410 ","End":"04:57.535","Text":"Then we\u0027re going to have to record the fact that we have not yet paid it."},{"Start":"04:57.535 ","End":"04:59.530","Text":"That means we have to record"},{"Start":"04:59.530 ","End":"05:05.299","Text":"a liability and this is going to go into our bonus payable account."},{"Start":"05:05.299 ","End":"05:07.595","Text":"The narration simply reads,"},{"Start":"05:07.595 ","End":"05:12.650","Text":"recognizing the bonus payable to sales representatives or something similar;"},{"Start":"05:12.650 ","End":"05:17.120","Text":"anything that describes this particular transaction accurately."},{"Start":"05:17.120 ","End":"05:20.675","Text":"We then put in how we actually calculate it."},{"Start":"05:20.675 ","End":"05:24.520","Text":"It\u0027s 2 percent of the fourth quarter\u0027s orders."},{"Start":"05:24.520 ","End":"05:28.850","Text":"In other words, the last 3 months of 20X1."},{"Start":"05:29.410 ","End":"05:35.900","Text":"That\u0027s the same thing as saying 2 percent of the total of those orders,"},{"Start":"05:35.900 ","End":"05:43.550","Text":"which came to 1.2 million currency units and as we worked out on the previous slide,"},{"Start":"05:43.550 ","End":"05:46.685","Text":"that came to 24,000 currency units."},{"Start":"05:46.685 ","End":"05:51.115","Text":"We have an expense of 24,000 and we have a liability of 24,000."},{"Start":"05:51.115 ","End":"05:52.694","Text":"This is because,"},{"Start":"05:52.694 ","End":"05:55.850","Text":"once again, the transaction had actually occurred."},{"Start":"05:55.850 ","End":"06:00.440","Text":"In other words, our sales personnel had done their job that secured"},{"Start":"06:00.440 ","End":"06:05.210","Text":"the orders in the 20X1 financial year and therefore,"},{"Start":"06:05.210 ","End":"06:10.820","Text":"we owe them their bonus in the 20X1 financial year but the cash aspect of"},{"Start":"06:10.820 ","End":"06:17.375","Text":"this transaction had been delayed and thus we had a liability to record."},{"Start":"06:17.375 ","End":"06:25.770","Text":"In other words, the cash was being transferred in arrears so we have a liability."}],"ID":28546},{"Watched":false,"Name":"Exercise 1 - Part 2","Duration":"4m 56s","ChapterTopicVideoID":26348,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.200 ","End":"00:05.610","Text":"Now let\u0027s look at transaction number 2 in the additional information."},{"Start":"00:05.610 ","End":"00:10.590","Text":"The 10 percent deposit received from order-placing customers in"},{"Start":"00:10.590 ","End":"00:16.080","Text":"the last quarter of 20X1 has been recognized as part of sales."},{"Start":"00:16.080 ","End":"00:18.720","Text":"That is a deposit that was received,"},{"Start":"00:18.720 ","End":"00:21.405","Text":"this is the cash aspect of the transaction,"},{"Start":"00:21.405 ","End":"00:23.820","Text":"has been recorded as part of sales."},{"Start":"00:23.820 ","End":"00:26.150","Text":"You have to ask yourself,"},{"Start":"00:26.150 ","End":"00:29.899","Text":"has the sale transaction been earned?"},{"Start":"00:29.899 ","End":"00:31.520","Text":"Should it be recorded?"},{"Start":"00:31.520 ","End":"00:33.785","Text":"The answer is no."},{"Start":"00:33.785 ","End":"00:35.525","Text":"Now, why do I say that?"},{"Start":"00:35.525 ","End":"00:38.300","Text":"If we go back to the original question,"},{"Start":"00:38.300 ","End":"00:43.020","Text":"we\u0027re told the customer has to place"},{"Start":"00:43.020 ","End":"00:48.775","Text":"a 10 percent deposit based on the selling price of the car on order."},{"Start":"00:48.775 ","End":"00:53.720","Text":"The customer pays a 10 percent deposit when they order the car,"},{"Start":"00:53.720 ","End":"00:55.685","Text":"not when they receive the car."},{"Start":"00:55.685 ","End":"01:00.625","Text":"The deposit does not mean that a sale transaction has occurred."},{"Start":"01:00.625 ","End":"01:04.865","Text":"Then it goes on to say, the delivery of the new cars"},{"Start":"01:04.865 ","End":"01:10.010","Text":"takes place 3 months after an order is placed."},{"Start":"01:10.010 ","End":"01:14.490","Text":"Very clearly, we have a situation where deposits are received,"},{"Start":"01:14.490 ","End":"01:19.190","Text":"in other words, cash is received before the sale transaction occurs."},{"Start":"01:19.190 ","End":"01:23.255","Text":"Now if you have a look at this information that was given to us in the question,"},{"Start":"01:23.255 ","End":"01:26.270","Text":"we were told that the sales value of the orders by"},{"Start":"01:26.270 ","End":"01:30.710","Text":"customers for new cars placed in the last 3 months of the year ended 31st,"},{"Start":"01:30.710 ","End":"01:33.545","Text":"December, 20X1 were as follows."},{"Start":"01:33.545 ","End":"01:38.140","Text":"The October orders are going to lead to sales."},{"Start":"01:38.140 ","End":"01:43.040","Text":"Bear in mind, these are the orders with a sales value given."},{"Start":"01:43.040 ","End":"01:47.945","Text":"The sale will be recorded in the month of January,"},{"Start":"01:47.945 ","End":"01:49.755","Text":"that\u0027s 3 months later,"},{"Start":"01:49.755 ","End":"01:54.185","Text":"the November orders are going to lead to sales being recorded in February,"},{"Start":"01:54.185 ","End":"01:58.729","Text":"the December orders will lead to sales being recorded in March."},{"Start":"01:58.729 ","End":"02:04.995","Text":"The deposits that we receive in October would have been 52,000,"},{"Start":"02:04.995 ","End":"02:08.370","Text":"being 10 percent of the order."},{"Start":"02:08.370 ","End":"02:16.020","Text":"In November, 10 percent of those orders are 350,000 currency units comes to 35,000,"},{"Start":"02:16.020 ","End":"02:18.645","Text":"so we would\u0027ve received 35,000 in cash."},{"Start":"02:18.645 ","End":"02:22.635","Text":"In December, 10 percent of the orders of"},{"Start":"02:22.635 ","End":"02:29.690","Text":"330,000 gives us deposits that we would have received totaling 33,000."},{"Start":"02:29.690 ","End":"02:33.965","Text":"The total of that comes to 120,000,"},{"Start":"02:33.965 ","End":"02:37.310","Text":"or in other words, 10 percent of the total."},{"Start":"02:37.310 ","End":"02:39.260","Text":"Now that 120,000,"},{"Start":"02:39.260 ","End":"02:41.015","Text":"what has the company done?"},{"Start":"02:41.015 ","End":"02:46.460","Text":"The company has recognized this in cash or bank,"},{"Start":"02:46.460 ","End":"02:49.235","Text":"whatever the account name is, I can\u0027t recall."},{"Start":"02:49.235 ","End":"02:54.290","Text":"They\u0027ve debited that to record the fact that the cash account,"},{"Start":"02:54.290 ","End":"02:57.305","Text":"which is an asset or bank account, an asset,"},{"Start":"02:57.305 ","End":"03:01.720","Text":"has gone up, so they have debited the cash account."},{"Start":"03:01.720 ","End":"03:04.495","Text":"That\u0027s correct, however,"},{"Start":"03:04.495 ","End":"03:09.290","Text":"we are told that they have recognized this in sales,"},{"Start":"03:09.290 ","End":"03:14.585","Text":"which is an income, and income gets increased on the credit side."},{"Start":"03:14.585 ","End":"03:19.340","Text":"We know that these deposits are part of the sales,"},{"Start":"03:19.340 ","End":"03:24.680","Text":"which are only going to be recognizable as sales in January,"},{"Start":"03:24.680 ","End":"03:29.130","Text":"February, and March of 20X2."},{"Start":"03:29.420 ","End":"03:34.200","Text":"This part, debiting the cash and bank, is correct."},{"Start":"03:34.200 ","End":"03:38.825","Text":"This part, crediting sales, is not correct."},{"Start":"03:38.825 ","End":"03:41.270","Text":"What do we need to do?"},{"Start":"03:41.270 ","End":"03:46.495","Text":"We need to process a journal entry and we need to correct the sales."},{"Start":"03:46.495 ","End":"03:48.495","Text":"How do we correct that?"},{"Start":"03:48.495 ","End":"03:50.780","Text":"Well, we have recognized sales that we should not"},{"Start":"03:50.780 ","End":"03:53.150","Text":"have done and that was to credit sales."},{"Start":"03:53.150 ","End":"03:55.310","Text":"How do we undo that?"},{"Start":"03:55.310 ","End":"03:58.050","Text":"We\u0027re now going to have to debit the sales."},{"Start":"03:58.050 ","End":"04:01.190","Text":"We\u0027re going to put an amount in the debit column for sales."},{"Start":"04:01.190 ","End":"04:03.875","Text":"Instead of recognizing it as sales,"},{"Start":"04:03.875 ","End":"04:05.765","Text":"what do you recognize it as?"},{"Start":"04:05.765 ","End":"04:08.240","Text":"Well, we have received 120,000,"},{"Start":"04:08.240 ","End":"04:11.740","Text":"so we did need to debit our assets, the cash."},{"Start":"04:11.740 ","End":"04:17.090","Text":"We do need to credit something and we\u0027re going to credit a liability."},{"Start":"04:17.090 ","End":"04:18.830","Text":"Why is it a liability?"},{"Start":"04:18.830 ","End":"04:21.530","Text":"Well, we have an obligation to deliver"},{"Start":"04:21.530 ","End":"04:24.755","Text":"the vehicle and that\u0027s why we record it as a liability."},{"Start":"04:24.755 ","End":"04:28.145","Text":"If we do not deliver the vehicle,"},{"Start":"04:28.145 ","End":"04:31.250","Text":"we will be obliged to return the cash."},{"Start":"04:31.250 ","End":"04:34.690","Text":"We have received 10 percent of 1.2"},{"Start":"04:34.690 ","End":"04:39.064","Text":"million currency units and we had recorded it in sales,"},{"Start":"04:39.064 ","End":"04:43.330","Text":"and we should have recorded it in unearned income."},{"Start":"04:43.330 ","End":"04:46.005","Text":"10 percent of the 1.2 million is"},{"Start":"04:46.005 ","End":"04:50.570","Text":"120,000 and you saw us calculate that on the previous page."},{"Start":"04:50.570 ","End":"04:56.430","Text":"We are reducing the sales and we are recognizing a liability."}],"ID":28547},{"Watched":false,"Name":"Exercise 1 - Part 3","Duration":"3m 29s","ChapterTopicVideoID":26349,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.430","Text":"Transaction number 3."},{"Start":"00:02.430 ","End":"00:07.395","Text":"A physical count of inventory was conducted on 31 December, 20X1."},{"Start":"00:07.395 ","End":"00:11.205","Text":"It revealed that the cost of physical inventory on hand"},{"Start":"00:11.205 ","End":"00:15.330","Text":"was only 1.26 million currency units."},{"Start":"00:15.330 ","End":"00:19.670","Text":"Upon further investigation, it was found that the difference between"},{"Start":"00:19.670 ","End":"00:23.930","Text":"this physical stock count and the amount shown in the trial balance,"},{"Start":"00:23.930 ","End":"00:25.565","Text":"which we\u0027ll look at just now,"},{"Start":"00:25.565 ","End":"00:29.450","Text":"represents sales of cars from stock for"},{"Start":"00:29.450 ","End":"00:33.475","Text":"which the accountant had not recorded the cost of the sale."},{"Start":"00:33.475 ","End":"00:36.750","Text":"They had not recorded the cost of the sale."},{"Start":"00:36.750 ","End":"00:39.560","Text":"The cash received from the sale had,"},{"Start":"00:39.560 ","End":"00:42.800","Text":"however, been properly credited to sales."},{"Start":"00:42.800 ","End":"00:45.634","Text":"We have sales which are correct,"},{"Start":"00:45.634 ","End":"00:50.735","Text":"but the cost of the sale has just not been recorded at all."},{"Start":"00:50.735 ","End":"00:54.080","Text":"Now, let\u0027s have a look at that trial balance,"},{"Start":"00:54.080 ","End":"00:56.120","Text":"which we were given in the question,"},{"Start":"00:56.120 ","End":"01:00.540","Text":"to see what the inventory is currently shown at."},{"Start":"01:01.850 ","End":"01:04.930","Text":"This is the trial balance we were given,"},{"Start":"01:04.930 ","End":"01:07.345","Text":"and I\u0027ve highlighted it in red."},{"Start":"01:07.345 ","End":"01:13.245","Text":"Notice the inventory was given at 30th of November,"},{"Start":"01:13.245 ","End":"01:17.100","Text":"X1, and it showed an amount of 1.3 million."},{"Start":"01:17.100 ","End":"01:20.650","Text":"We\u0027ve just counted the stock and discovered that"},{"Start":"01:20.650 ","End":"01:25.375","Text":"the stock that we actually have on hand is 1,260."},{"Start":"01:25.375 ","End":"01:30.760","Text":"So this inventory of 1.3 is too much."},{"Start":"01:30.760 ","End":"01:34.225","Text":"It needs to be reduced by an amount of"},{"Start":"01:34.225 ","End":"01:41.060","Text":"40,000 so that it shows the reality that we have of 1,260."},{"Start":"01:42.280 ","End":"01:45.650","Text":"How do we do this?"},{"Start":"01:45.650 ","End":"01:50.653","Text":"All I\u0027ve done here is I\u0027ve highlighted the physical stock count, is 1,260;"},{"Start":"01:50.653 ","End":"01:52.355","Text":"physical stock count,"},{"Start":"01:52.355 ","End":"01:57.970","Text":"and then the amount shown in the trial balance for inventory is the 1.3."},{"Start":"01:57.970 ","End":"02:00.980","Text":"Now, this is a journal that we\u0027re going to process."},{"Start":"02:00.980 ","End":"02:05.780","Text":"We\u0027re going to adjust the inventory to reflect the physical stock on hand."},{"Start":"02:05.780 ","End":"02:09.695","Text":"We\u0027re going to adjust inventory to reflect reality."},{"Start":"02:09.695 ","End":"02:14.720","Text":"The difference between what we are currently showing as inventory and what we need to"},{"Start":"02:14.720 ","End":"02:20.390","Text":"show as inventory is the cost of the cars sold from inventory."},{"Start":"02:20.390 ","End":"02:25.860","Text":"That is currently 1.3 million,"},{"Start":"02:25.860 ","End":"02:27.825","Text":"that\u0027s shown in the trial balance,"},{"Start":"02:27.825 ","End":"02:33.140","Text":"and the 1,260 is the reality, if you like."},{"Start":"02:33.140 ","End":"02:35.165","Text":"That\u0027s our stock count."},{"Start":"02:35.165 ","End":"02:39.285","Text":"The amount of the adjustment is 40,000."},{"Start":"02:39.285 ","End":"02:42.975","Text":"Now, we know we need to reduce our inventory."},{"Start":"02:42.975 ","End":"02:45.770","Text":"Ask yourself, what is inventory?"},{"Start":"02:45.770 ","End":"02:48.350","Text":"What element does inventory represent?"},{"Start":"02:48.350 ","End":"02:50.030","Text":"Well, inventory is an asset."},{"Start":"02:50.030 ","End":"02:53.600","Text":"Assets get bigger on the debit side,"},{"Start":"02:53.600 ","End":"02:55.520","Text":"so we need to decrease it."},{"Start":"02:55.520 ","End":"02:58.945","Text":"We\u0027re going to credit the inventory."},{"Start":"02:58.945 ","End":"03:06.900","Text":"We know this 40,000 in the credit column is going to be the adjustment to inventory."},{"Start":"03:07.580 ","End":"03:10.260","Text":"That\u0027s our inventory asset."},{"Start":"03:10.260 ","End":"03:14.150","Text":"Then the debit side represents the cost"},{"Start":"03:14.150 ","End":"03:18.160","Text":"of the sale that the accountant had not yet recorded,"},{"Start":"03:18.160 ","End":"03:19.770","Text":"and that is an expense."},{"Start":"03:19.770 ","End":"03:21.515","Text":"So we\u0027re debiting the expense."},{"Start":"03:21.515 ","End":"03:23.165","Text":"Why would we be doing that?"},{"Start":"03:23.165 ","End":"03:25.745","Text":"Because we\u0027re increasing our expenses,"},{"Start":"03:25.745 ","End":"03:29.940","Text":"and expenses get bigger on the debit side."}],"ID":28548},{"Watched":false,"Name":"Exercise 1 - Part 4","Duration":"5m 34s","ChapterTopicVideoID":26350,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.200 ","End":"00:03.345","Text":"Now transaction number 4,"},{"Start":"00:03.345 ","End":"00:07.020","Text":"on 31 October, X1,"},{"Start":"00:07.020 ","End":"00:14.130","Text":"WNB purchased an annual insurance policy to cover its property, plant, and equipment."},{"Start":"00:14.130 ","End":"00:16.830","Text":"It\u0027s an annual insurance policy."},{"Start":"00:16.830 ","End":"00:18.405","Text":"The date is important."},{"Start":"00:18.405 ","End":"00:22.710","Text":"We purchased it on the 31st of October, X1."},{"Start":"00:22.710 ","End":"00:27.420","Text":"At that time, it paid 9,000 currency units and it"},{"Start":"00:27.420 ","End":"00:32.770","Text":"recorded the full amount in administrative expenses."},{"Start":"00:33.230 ","End":"00:37.020","Text":"Now, what is interesting about this is that it\u0027s annual."},{"Start":"00:37.020 ","End":"00:39.825","Text":"If you look at a timeline,"},{"Start":"00:39.825 ","End":"00:42.254","Text":"what have we actually purchased."},{"Start":"00:42.254 ","End":"00:46.475","Text":"This is the 31st of October,"},{"Start":"00:46.475 ","End":"00:49.685","Text":"X1 and our year end,"},{"Start":"00:49.685 ","End":"00:51.125","Text":"this is not to scale,"},{"Start":"00:51.125 ","End":"00:56.545","Text":"is 31st of December and we\u0027ve purchased"},{"Start":"00:56.545 ","End":"01:03.035","Text":"an insurance policy which will continue to the 31st of October,"},{"Start":"01:03.035 ","End":"01:06.980","Text":"X2, an entire 12 months."},{"Start":"01:06.980 ","End":"01:13.220","Text":"We have got 2 months here, November and December,"},{"Start":"01:13.220 ","End":"01:18.490","Text":"and then we have 10 months here,"},{"Start":"01:18.490 ","End":"01:23.715","Text":"January through to October."},{"Start":"01:23.715 ","End":"01:29.068","Text":"We are doing the trial balance so for the 31st of December, X1,"},{"Start":"01:29.068 ","End":"01:37.235","Text":"what has happened is the entire 9,000 has been recorded as an expense."},{"Start":"01:37.235 ","End":"01:46.280","Text":"What the accountant has done is to debit the admin expense with 9,000,"},{"Start":"01:46.280 ","End":"01:51.110","Text":"and he has credited the cash or the bank account,"},{"Start":"01:51.110 ","End":"01:55.175","Text":"which is an asset, with 9,000."},{"Start":"01:55.175 ","End":"01:58.430","Text":"But that is for a full 12 months."},{"Start":"01:58.430 ","End":"02:04.940","Text":"If you take 9,000 and you divide that by 12,"},{"Start":"02:04.940 ","End":"02:10.520","Text":"you get to 750 currency units per month."},{"Start":"02:10.520 ","End":"02:13.430","Text":"That is the expense per month."},{"Start":"02:13.430 ","End":"02:16.820","Text":"What we should have put in to the expense account for"},{"Start":"02:16.820 ","End":"02:19.940","Text":"these 2 months to the 31st of December,"},{"Start":"02:19.940 ","End":"02:28.330","Text":"X1 is 750 times 2 which is equal to only 1,500."},{"Start":"02:28.730 ","End":"02:33.935","Text":"The remaining 750 times 10,"},{"Start":"02:33.935 ","End":"02:36.420","Text":"which is 7,500,"},{"Start":"02:36.420 ","End":"02:38.650","Text":"making it the 9,"},{"Start":"02:38.650 ","End":"02:46.475","Text":"that 7,500 does not belong as an expense in the trial balance for December 31,"},{"Start":"02:46.475 ","End":"02:49.790","Text":"X1, that is an expense prepaid."},{"Start":"02:49.790 ","End":"02:51.785","Text":"This is an instance where"},{"Start":"02:51.785 ","End":"03:01.595","Text":"the cash has been paid before the expense has been incurred."},{"Start":"03:01.595 ","End":"03:04.385","Text":"On the 31 October,"},{"Start":"03:04.385 ","End":"03:09.065","Text":"X1 transaction date, 9,000 was paid,"},{"Start":"03:09.065 ","End":"03:11.810","Text":"but nothing yet had been incurred."},{"Start":"03:11.810 ","End":"03:14.300","Text":"Then by the end of November,"},{"Start":"03:14.300 ","End":"03:17.690","Text":"1 months of insurance had been incurred,"},{"Start":"03:17.690 ","End":"03:20.570","Text":"by the end of December, another month,"},{"Start":"03:20.570 ","End":"03:24.635","Text":"therefore, 2 months insurance expense had been incurred."},{"Start":"03:24.635 ","End":"03:28.290","Text":"But 10 months, at 31 December, X1,"},{"Start":"03:28.290 ","End":"03:34.465","Text":"10 months of the insurance expense had not yet been incurred."},{"Start":"03:34.465 ","End":"03:36.755","Text":"This admin expense here,"},{"Start":"03:36.755 ","End":"03:39.485","Text":"debit admin expense 9,000,"},{"Start":"03:39.485 ","End":"03:44.345","Text":"which is what we are told the accountant has done, is incorrect."},{"Start":"03:44.345 ","End":"03:49.145","Text":"That expense is too great so we need to take some of that out,"},{"Start":"03:49.145 ","End":"03:57.505","Text":"we need to take 7,500 out and we need to put that into an expense prepaid account."},{"Start":"03:57.505 ","End":"03:59.010","Text":"That\u0027s an asset account."},{"Start":"03:59.010 ","End":"04:01.565","Text":"It is an asset because it is a resource,"},{"Start":"04:01.565 ","End":"04:05.030","Text":"we are going to get the benefit of not having to pay"},{"Start":"04:05.030 ","End":"04:08.990","Text":"that insurance in the next 10 months."},{"Start":"04:08.990 ","End":"04:11.150","Text":"How do we deal with this?"},{"Start":"04:11.150 ","End":"04:16.325","Text":"This is the journal that we\u0027re going to process to correct this."},{"Start":"04:16.325 ","End":"04:23.370","Text":"We need to record a prepayment for the annual insurance policy."},{"Start":"04:23.510 ","End":"04:29.175","Text":"That would be the 9,000 insurance times 10/12,"},{"Start":"04:29.175 ","End":"04:30.770","Text":"9,000 divided by 12,"},{"Start":"04:30.770 ","End":"04:36.880","Text":"giving you the insurance per month times the 10 months that have not yet gone by."},{"Start":"04:36.880 ","End":"04:42.185","Text":"That is an amount of 7,500 that needs to be taken out of the account."},{"Start":"04:42.185 ","End":"04:43.940","Text":"Which account was that?"},{"Start":"04:43.940 ","End":"04:48.740","Text":"Well, he\u0027s put it into the admin expense, so therefore,"},{"Start":"04:48.740 ","End":"04:51.305","Text":"we need to credit"},{"Start":"04:51.305 ","End":"04:56.489","Text":"the administrative expenses because expenses get bigger on the debit side."},{"Start":"04:56.489 ","End":"04:59.120","Text":"We are reducing our expense in this case,"},{"Start":"04:59.120 ","End":"05:01.460","Text":"so we have to credit it."},{"Start":"05:01.460 ","End":"05:03.320","Text":"Now what do we debit?"},{"Start":"05:03.320 ","End":"05:06.529","Text":"We need to debit the prepaid insurance,"},{"Start":"05:06.529 ","End":"05:07.785","Text":"which is an asset."},{"Start":"05:07.785 ","End":"05:14.625","Text":"This is 10 months of insurance that we have already paid."},{"Start":"05:14.625 ","End":"05:16.320","Text":"That is a resource."},{"Start":"05:16.320 ","End":"05:22.340","Text":"This is 10 months of insurance that we have prepaid,"},{"Start":"05:22.340 ","End":"05:28.235","Text":"and that is obviously a great resource because now we don\u0027t have to pay it next year."},{"Start":"05:28.235 ","End":"05:31.115","Text":"That\u0027s what makes it an asset."},{"Start":"05:31.115 ","End":"05:35.130","Text":"Now moving on to transaction 5."}],"ID":28549},{"Watched":false,"Name":"Exercise 1 - Part 5","Duration":"4m 17s","ChapterTopicVideoID":26340,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.240","Text":"Now let\u0027s look at transaction number 5."},{"Start":"00:03.240 ","End":"00:07.935","Text":"The tax on profits is 20 percent of the pre-tax profit."},{"Start":"00:07.935 ","End":"00:09.930","Text":"This tax is due for payment in"},{"Start":"00:09.930 ","End":"00:16.335","Text":"20X2 and no journal entries have been processed in this regard."},{"Start":"00:16.335 ","End":"00:18.615","Text":"Now we have to ask ourselves,"},{"Start":"00:18.615 ","End":"00:23.340","Text":"is it correct that no tax is being processed simply because it"},{"Start":"00:23.340 ","End":"00:28.170","Text":"hasn\u0027t been paid in 20X1 and it\u0027s only due for payment in 20X2?"},{"Start":"00:28.170 ","End":"00:30.210","Text":"Well, the answer is, no,"},{"Start":"00:30.210 ","End":"00:36.495","Text":"it wouldn\u0027t be correct because we\u0027ve made profit and tax is calculated on net profit."},{"Start":"00:36.495 ","End":"00:38.850","Text":"It means that in the year you make the profit,"},{"Start":"00:38.850 ","End":"00:41.100","Text":"you have to record the tax."},{"Start":"00:41.100 ","End":"00:46.535","Text":"That tax has been incurred even though it will be payable in the future."},{"Start":"00:46.535 ","End":"00:50.825","Text":"This is an example of where we have a transaction that is incurred,"},{"Start":"00:50.825 ","End":"00:54.170","Text":"transaction that basically has to be recognized,"},{"Start":"00:54.170 ","End":"01:01.095","Text":"but the cash aspect of that transaction is only going to occur some stage in the future."},{"Start":"01:01.095 ","End":"01:03.265","Text":"Because we\u0027re dealing with an expense,"},{"Start":"01:03.265 ","End":"01:07.925","Text":"when the cash aspect of that expense happens in the future,"},{"Start":"01:07.925 ","End":"01:09.845","Text":"it leads to a payable,"},{"Start":"01:09.845 ","End":"01:11.825","Text":"in other words a liability."},{"Start":"01:11.825 ","End":"01:18.590","Text":"Now the other aspect of this is the tax and profits is 20 percent of the pre-tax profit."},{"Start":"01:18.590 ","End":"01:22.670","Text":"Now, profit is income less expenses."},{"Start":"01:22.670 ","End":"01:26.240","Text":"You can work this out using the trial balance that you were given in"},{"Start":"01:26.240 ","End":"01:31.670","Text":"the question and adjust it for the journal entries that you have processed so far."},{"Start":"01:31.670 ","End":"01:34.400","Text":"Looking at those journals that we\u0027ve processed so far,"},{"Start":"01:34.400 ","End":"01:40.070","Text":"some of them have affected the income accounts and some have affected expense accounts."},{"Start":"01:40.070 ","End":"01:42.920","Text":"You simply make an adjustment for those journals."},{"Start":"01:42.920 ","End":"01:47.795","Text":"The other way of calculating this pre-tax profit is from the income statement."},{"Start":"01:47.795 ","End":"01:49.070","Text":"In our income statement,"},{"Start":"01:49.070 ","End":"01:52.635","Text":"we\u0027re going to take our income and we\u0027re going to subtract our expenses."},{"Start":"01:52.635 ","End":"01:56.195","Text":"The income statement is a requirement of this question."},{"Start":"01:56.195 ","End":"02:02.075","Text":"It is part C. What I\u0027m going to do is I\u0027m going to show you the journal entry."},{"Start":"02:02.075 ","End":"02:06.585","Text":"I\u0027m going to ask you to trust me on the amount of the pre-tax profits,"},{"Start":"02:06.585 ","End":"02:08.170","Text":"and when we get to part C,"},{"Start":"02:08.170 ","End":"02:12.080","Text":"you will see how I calculated that pre-tax profit."},{"Start":"02:12.080 ","End":"02:13.910","Text":"In an exam situation,"},{"Start":"02:13.910 ","End":"02:16.130","Text":"what you would want to do is,"},{"Start":"02:16.130 ","End":"02:19.325","Text":"process the journal that you see here,"},{"Start":"02:19.325 ","End":"02:24.935","Text":"or populate as far as possible and after having done part C,"},{"Start":"02:24.935 ","End":"02:29.240","Text":"you would come back and put the amounts into your journal entry."},{"Start":"02:29.240 ","End":"02:30.935","Text":"In other words, to begin with,"},{"Start":"02:30.935 ","End":"02:35.870","Text":"you would leave the debit amount and the credit amount blank,"},{"Start":"02:35.870 ","End":"02:37.610","Text":"and everything else you would fill in."},{"Start":"02:37.610 ","End":"02:40.025","Text":"You would fill in the account that you\u0027re going to debit"},{"Start":"02:40.025 ","End":"02:43.160","Text":"and you\u0027d fill in the account that you\u0027re going to credit,"},{"Start":"02:43.160 ","End":"02:47.370","Text":"and you would put in as much of the calculation as possible,"},{"Start":"02:47.370 ","End":"02:50.470","Text":"borrowing, putting in the profit before tax,"},{"Start":"02:50.470 ","End":"02:52.330","Text":"which at this stage you don\u0027t know."},{"Start":"02:52.330 ","End":"02:55.660","Text":"Your pre-tax profit or profit before tax,"},{"Start":"02:55.660 ","End":"02:57.260","Text":"you wouldn\u0027t know that part."},{"Start":"02:57.260 ","End":"03:00.790","Text":"You would fill this journal in as far as possible and then come"},{"Start":"03:00.790 ","End":"03:05.390","Text":"back to it after having done part C which is your income statement."},{"Start":"03:06.200 ","End":"03:09.190","Text":"A narration would be something along the lines of"},{"Start":"03:09.190 ","End":"03:11.320","Text":"recording the tax expense for the year,"},{"Start":"03:11.320 ","End":"03:14.885","Text":"and we\u0027d show our marker if this was an exam."},{"Start":"03:14.885 ","End":"03:19.810","Text":"We\u0027re going to calculate it at 20 percent of the pre-tax profit."},{"Start":"03:19.810 ","End":"03:26.080","Text":"We would then show our marker that we know we\u0027re going to debit our tax expense."},{"Start":"03:26.080 ","End":"03:29.890","Text":"Expenses get bigger on the debit side."},{"Start":"03:29.890 ","End":"03:36.710","Text":"We would then show our marker that we know that we have to credit our tax"},{"Start":"03:36.710 ","End":"03:38.980","Text":"payable because we have"},{"Start":"03:38.980 ","End":"03:43.610","Text":"an expense that has to be recorded and the cash aspect of that has not happened."},{"Start":"03:43.610 ","End":"03:45.500","Text":"In other words, cash payment has not yet happened."},{"Start":"03:45.500 ","End":"03:49.205","Text":"Therefore, we have an obligation to make a payment in the future."},{"Start":"03:49.205 ","End":"03:51.860","Text":"Now, this is the part I\u0027m asking you to"},{"Start":"03:51.860 ","End":"03:54.725","Text":"trust me and I\u0027m going to cheat a little bit here."},{"Start":"03:54.725 ","End":"04:01.580","Text":"It\u0027s 20 percent of the pre-tax profit of 1.27 million."},{"Start":"04:01.580 ","End":"04:06.260","Text":"Right now, I know that it\u0027s 1.27 million because I\u0027ve done the income statement already,"},{"Start":"04:06.260 ","End":"04:08.660","Text":"but you\u0027d have to come back and fill this in."},{"Start":"04:08.660 ","End":"04:14.840","Text":"20 percent of 1,270 gives you 254,000."},{"Start":"04:14.840 ","End":"04:18.070","Text":"That is transaction number 5."}],"ID":28550},{"Watched":false,"Name":"Exercise 1 - Trial balance","Duration":"12m 28s","ChapterTopicVideoID":26341,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.610","Text":"Part B, the trial balance."},{"Start":"00:02.610 ","End":"00:05.610","Text":"In the question, we were given a trial balance."},{"Start":"00:05.610 ","End":"00:11.220","Text":"Now that trial balance is what I call a pre-adjustment trial balance."},{"Start":"00:11.220 ","End":"00:13.995","Text":"Now why do I call it a pre-adjustment trial balance?"},{"Start":"00:13.995 ","End":"00:16.560","Text":"Well, that\u0027s because it wasn\u0027t yet final."},{"Start":"00:16.560 ","End":"00:20.580","Text":"The reason I know is because we were given additional information."},{"Start":"00:20.580 ","End":"00:22.380","Text":"There were 5 pieces of information,"},{"Start":"00:22.380 ","End":"00:25.935","Text":"5 transactions that still needed to be journalized."},{"Start":"00:25.935 ","End":"00:28.695","Text":"What normally happens and what always happens"},{"Start":"00:28.695 ","End":"00:31.770","Text":"is that those journals that we processed or recorded,"},{"Start":"00:31.770 ","End":"00:35.385","Text":"they then need to be posted to the ledger."},{"Start":"00:35.385 ","End":"00:38.370","Text":"The normal way of extracting"},{"Start":"00:38.370 ","End":"00:44.240","Text":"a final trial balance for a year is then to go to that ledger,"},{"Start":"00:44.240 ","End":"00:49.039","Text":"after we\u0027ve posted those additional 5 journals and simply"},{"Start":"00:49.039 ","End":"00:55.340","Text":"extract the latest balances and populate the final trial balance with those balances."},{"Start":"00:55.340 ","End":"00:57.890","Text":"In this particular question, however,"},{"Start":"00:57.890 ","End":"01:02.180","Text":"we were not asked to produce the ledger."},{"Start":"01:02.180 ","End":"01:06.680","Text":"We were not asked to post the journal entries to the ledger accounts."},{"Start":"01:06.680 ","End":"01:14.660","Text":"How does one extract a trial balance if you haven\u0027t created a finalized ledger?"},{"Start":"01:14.660 ","End":"01:19.520","Text":"In other words, if you haven\u0027t posted those 5 journals that we recorded in Part A."},{"Start":"01:19.520 ","End":"01:21.725","Text":"Well, we could use this worksheet method."},{"Start":"01:21.725 ","End":"01:23.255","Text":"In this worksheet method,"},{"Start":"01:23.255 ","End":"01:28.610","Text":"what we do is we take the pre-adjustment trial balance and we add to"},{"Start":"01:28.610 ","End":"01:34.250","Text":"that another column for those general adjustments that still needed to be posted."},{"Start":"01:34.250 ","End":"01:37.100","Text":"Those 5 journals that we did in part a are simply"},{"Start":"01:37.100 ","End":"01:40.220","Text":"going to be included in this journal adjustment column."},{"Start":"01:40.220 ","End":"01:42.920","Text":"Going to the pre-adjustment trial balance,"},{"Start":"01:42.920 ","End":"01:44.560","Text":"just take a note here,"},{"Start":"01:44.560 ","End":"01:46.740","Text":"I\u0027ve left a few blanks."},{"Start":"01:46.740 ","End":"01:52.195","Text":"That is because I know that when we were doing those journal entries in Part A,"},{"Start":"01:52.195 ","End":"01:55.220","Text":"there was some accounts that we debited and credited that actually"},{"Start":"01:55.220 ","End":"01:58.430","Text":"did not exist in that pre-adjustment trial balance."},{"Start":"01:58.430 ","End":"02:03.110","Text":"I know that I\u0027m going to have to create new accounts in order to"},{"Start":"02:03.110 ","End":"02:09.120","Text":"accommodate those journal entries that we still needed to post to the ledger."},{"Start":"02:09.120 ","End":"02:13.985","Text":"These additional ledger accounts that were not in the pre-adjustment trial balance,"},{"Start":"02:13.985 ","End":"02:16.070","Text":"are these that I\u0027ve highlighted in red."},{"Start":"02:16.070 ","End":"02:19.085","Text":"For example, journal number 5,"},{"Start":"02:19.085 ","End":"02:23.660","Text":"we recorded the tax expense but we didn\u0027t have a tax expense account."},{"Start":"02:23.660 ","End":"02:26.870","Text":"These were the only expenses that we had in"},{"Start":"02:26.870 ","End":"02:30.080","Text":"the pre-adjustment trial balance that we were given in the question,"},{"Start":"02:30.080 ","End":"02:31.310","Text":"so we had to create"},{"Start":"02:31.310 ","End":"02:35.150","Text":"a tax expense account and then we credited to the tax payable account."},{"Start":"02:35.150 ","End":"02:39.110","Text":"But we only had one liability account in"},{"Start":"02:39.110 ","End":"02:44.760","Text":"the pre-adjustment trial balance so we had to still create the tax payable account."},{"Start":"02:45.400 ","End":"02:51.365","Text":"After processing or listing the journals in the journal adjustment column,"},{"Start":"02:51.365 ","End":"02:55.440","Text":"we will then have the post-adjustment trial balance."},{"Start":"02:55.440 ","End":"02:57.495","Text":"We take the pre-adjustment trial balance,"},{"Start":"02:57.495 ","End":"03:01.400","Text":"we adjust those balances by any general adjustment that affected them,"},{"Start":"03:01.400 ","End":"03:05.575","Text":"and we extract the post-adjustment trial balance."},{"Start":"03:05.575 ","End":"03:09.285","Text":"Let\u0027s get going. Let\u0027s look at journal number 1."},{"Start":"03:09.285 ","End":"03:12.840","Text":"Here we have journal number 1 from Part A."},{"Start":"03:12.840 ","End":"03:16.670","Text":"Remember a journal entry is just an instruction."},{"Start":"03:16.670 ","End":"03:21.235","Text":"What this journal entry is instructing us to do is to take"},{"Start":"03:21.235 ","End":"03:26.720","Text":"24,000 and put it on the debit side of the salaries, wages,"},{"Start":"03:26.720 ","End":"03:31.940","Text":"and bonuses expense account and then we must take an amount of 24,000 and"},{"Start":"03:31.940 ","End":"03:38.160","Text":"put it on the credit side of the bonus payable liability account."},{"Start":"03:38.210 ","End":"03:45.850","Text":"That\u0027s what we do. The journal told us to debit an amount of 24,000."},{"Start":"03:45.850 ","End":"03:51.589","Text":"So the journal told us to debit an amount of 24,000 to the salaries,"},{"Start":"03:51.589 ","End":"03:53.465","Text":"wages and bonuses account."},{"Start":"03:53.465 ","End":"03:55.190","Text":"Notice that these salaries, wages,"},{"Start":"03:55.190 ","End":"04:00.965","Text":"and bonuses account had an amount of 550,000 in their pre-adjustment trial balance,"},{"Start":"04:00.965 ","End":"04:05.875","Text":"so we take the 550,000 and we add to it, the 24,000."},{"Start":"04:05.875 ","End":"04:10.615","Text":"We\u0027re adding because the 550,000 was a debit balance."},{"Start":"04:10.615 ","End":"04:14.015","Text":"We\u0027re debiting it with a further 24,000."},{"Start":"04:14.015 ","End":"04:20.660","Text":"You simply add the two together and we get to the new debit balance of 574,000."},{"Start":"04:20.660 ","End":"04:27.290","Text":"Then the general entry told us to credit an amount of 24,000 to a bonus payable account."},{"Start":"04:27.290 ","End":"04:29.075","Text":"Now, the bonus payable account,"},{"Start":"04:29.075 ","End":"04:32.420","Text":"you can see did not exist in the pre-a trial balance."},{"Start":"04:32.420 ","End":"04:37.880","Text":"The balance that we show in the pre-adjustment trial balance is nil."},{"Start":"04:37.880 ","End":"04:41.165","Text":"We\u0027re going to credit it with 24,000."},{"Start":"04:41.165 ","End":"04:45.540","Text":"Our new balance is 24,000 for the bonus payable account."},{"Start":"04:45.540 ","End":"04:48.550","Text":"Now let\u0027s do journal 2."},{"Start":"04:48.550 ","End":"04:51.240","Text":"Here we have journal number 2."},{"Start":"04:51.240 ","End":"04:56.470","Text":"Journal number 2 tells us to debit 120,000 to sales,"},{"Start":"04:56.470 ","End":"04:57.880","Text":"which is an income account."},{"Start":"04:57.880 ","End":"05:00.500","Text":"So we were reducing the sales."},{"Start":"05:00.500 ","End":"05:06.430","Text":"It tells us to credit 120,000 to the unearned income account,"},{"Start":"05:06.430 ","End":"05:09.145","Text":"which is a liability account."},{"Start":"05:09.145 ","End":"05:14.590","Text":"Let\u0027s process that journal entry into our worksheet."},{"Start":"05:14.590 ","End":"05:22.035","Text":"We were told to debit an amount of 120,00 to the sales account."},{"Start":"05:22.035 ","End":"05:31.925","Text":"Now notice that the sales account had a balance of 3,650,000 to credit balance."},{"Start":"05:31.925 ","End":"05:36.195","Text":"Now we\u0027ve been told to debit it with 120,000."},{"Start":"05:36.195 ","End":"05:40.175","Text":"If the account has a credit balance and you\u0027re told to debit it,"},{"Start":"05:40.175 ","End":"05:43.820","Text":"they\u0027re going in opposite directions, so you subtract."},{"Start":"05:43.820 ","End":"05:54.475","Text":"Our new balance is a 3,650,000 less the 120,000 and that gives us 3,530,000."},{"Start":"05:54.475 ","End":"06:00.860","Text":"Then we were told to credit an amount of 120,000 to the unearned income account,"},{"Start":"06:00.860 ","End":"06:04.205","Text":"which did not exist in the pre-adjustment trial balance."},{"Start":"06:04.205 ","End":"06:07.730","Text":"So we show the balance and the pre-adjustment trial balance as nil."},{"Start":"06:07.730 ","End":"06:10.460","Text":"Final balance for the unearned income is"},{"Start":"06:10.460 ","End":"06:14.765","Text":"the nil opening balance plus 120,000 on the credit side."},{"Start":"06:14.765 ","End":"06:17.820","Text":"So we put it in a 120,000."},{"Start":"06:17.820 ","End":"06:19.575","Text":"Now let\u0027s do journal 3."},{"Start":"06:19.575 ","End":"06:25.265","Text":"General number 3 tells us to debit an amount of 40,000 to cost of sales,"},{"Start":"06:25.265 ","End":"06:26.622","Text":"which is an expense,"},{"Start":"06:26.622 ","End":"06:32.895","Text":"then it tells us to credit an amount of 40,000 to inventory being an asset."},{"Start":"06:32.895 ","End":"06:36.090","Text":"Let\u0027s record that in our worksheet."},{"Start":"06:36.090 ","End":"06:37.910","Text":"The journal entry, if you recall,"},{"Start":"06:37.910 ","End":"06:44.740","Text":"tells us to debit 40,000 to the cost of sales account."},{"Start":"06:44.740 ","End":"06:47.990","Text":"The cost of sales account had a balance of"},{"Start":"06:47.990 ","End":"06:51.950","Text":"1.55 million in the pre-adjustment trial balance."},{"Start":"06:51.950 ","End":"06:55.175","Text":"We\u0027re now debiting a further 40,000."},{"Start":"06:55.175 ","End":"06:57.449","Text":"Net opening balance was a debit balance,"},{"Start":"06:57.449 ","End":"07:00.620","Text":"so notice that we are therefore adding another debit,"},{"Start":"07:00.620 ","End":"07:04.400","Text":"so we\u0027re adding the 2 amounts together."},{"Start":"07:04.400 ","End":"07:07.520","Text":"That gives us 1.59 million."},{"Start":"07:07.520 ","End":"07:13.570","Text":"Then the other side of the entry was to credit 40,000 to inventory."},{"Start":"07:13.570 ","End":"07:15.560","Text":"In the pre-adjustment trial balance,"},{"Start":"07:15.560 ","End":"07:20.750","Text":"our inventory had a balance of 1.3 million and we\u0027re crediting it."},{"Start":"07:20.750 ","End":"07:23.305","Text":"Now remember, inventory is an asset,"},{"Start":"07:23.305 ","End":"07:25.325","Text":"so it has a debit balance,"},{"Start":"07:25.325 ","End":"07:27.650","Text":"1.3 million and we are crediting it,"},{"Start":"07:27.650 ","End":"07:29.900","Text":"so it\u0027s going in opposite directions."},{"Start":"07:29.900 ","End":"07:33.240","Text":"A debit, we are now crediting it, so you subtract."},{"Start":"07:33.240 ","End":"07:38.300","Text":"That gives us a new balance of 1.26 million."},{"Start":"07:38.300 ","End":"07:40.810","Text":"Let\u0027s move on to journal number 4."},{"Start":"07:40.810 ","End":"07:42.750","Text":"Journal number 4,"},{"Start":"07:42.750 ","End":"07:50.015","Text":"we\u0027re told to debit an amount of 7,500 to the pre-paid insurance asset account."},{"Start":"07:50.015 ","End":"07:57.515","Text":"Then we\u0027re told to credit an amount of 7,500 to the admin expenses account."},{"Start":"07:57.515 ","End":"08:00.280","Text":"Let\u0027s record that in our worksheet."},{"Start":"08:00.280 ","End":"08:06.645","Text":"Journal number 4 told us debit an amount of 7,500 to a prepayment account."},{"Start":"08:06.645 ","End":"08:11.150","Text":"We didn\u0027t have a prepayment account in the original pre-adjustment trial balance,"},{"Start":"08:11.150 ","End":"08:13.550","Text":"so we show the balance as nil."},{"Start":"08:13.550 ","End":"08:17.630","Text":"Notice that a prepayment balance is put in the debit column."},{"Start":"08:17.630 ","End":"08:20.270","Text":"That is because a prepayment is an asset."},{"Start":"08:20.270 ","End":"08:23.035","Text":"Assets have debit balances."},{"Start":"08:23.035 ","End":"08:25.280","Text":"We don\u0027t have an opening balance,"},{"Start":"08:25.280 ","End":"08:28.295","Text":"but we putting in a debit of 7,500,"},{"Start":"08:28.295 ","End":"08:31.670","Text":"so our new balance is 7,500."},{"Start":"08:31.670 ","End":"08:35.120","Text":"The other side of the entry told us to credit an amount of"},{"Start":"08:35.120 ","End":"08:39.035","Text":"7,500 to the administrative expense account."},{"Start":"08:39.035 ","End":"08:43.175","Text":"That account had a balance of 103,500."},{"Start":"08:43.175 ","End":"08:45.300","Text":"Now we are crediting this account."},{"Start":"08:45.300 ","End":"08:48.945","Text":"Notice administrative expenses, being an expense,"},{"Start":"08:48.945 ","End":"08:51.725","Text":"has a balance on the debit side,"},{"Start":"08:51.725 ","End":"08:55.450","Text":"it\u0027s a debit balance and we\u0027re being told to credit it,"},{"Start":"08:55.450 ","End":"08:57.710","Text":"so it\u0027s going in the opposite direction."},{"Start":"08:57.710 ","End":"08:59.870","Text":"We must subtract the 2 figures."},{"Start":"08:59.870 ","End":"09:03.365","Text":"103,500 less 7,500,"},{"Start":"09:03.365 ","End":"09:07.440","Text":"gives us our new debit balance of 96,000."},{"Start":"09:07.440 ","End":"09:09.150","Text":"Now let\u0027s do journal 5."},{"Start":"09:09.150 ","End":"09:13.235","Text":"Here\u0027s our journal number 5 in which we are told to debit"},{"Start":"09:13.235 ","End":"09:17.690","Text":"an amount of 254,000 to the tax expense account."},{"Start":"09:17.690 ","End":"09:24.740","Text":"Then we\u0027re told to credit an amount of 254,000 to the texts payable liability account."},{"Start":"09:24.740 ","End":"09:27.500","Text":"Let\u0027s record that in our worksheet."},{"Start":"09:27.500 ","End":"09:33.935","Text":"We were told to debit an amount of 254,000 to a tax expense account."},{"Start":"09:33.935 ","End":"09:38.220","Text":"Now that tax expense account did not exist in"},{"Start":"09:38.220 ","End":"09:43.445","Text":"the pre-adjustment trial balance so you see we put a 0 in the debit column."},{"Start":"09:43.445 ","End":"09:44.825","Text":"Why the debit column?"},{"Start":"09:44.825 ","End":"09:46.795","Text":"Because expenses are debits."},{"Start":"09:46.795 ","End":"09:49.005","Text":"We put it in the debit column, 0,"},{"Start":"09:49.005 ","End":"09:53.220","Text":"and we\u0027re now putting 254,000 on the debit side."},{"Start":"09:53.220 ","End":"09:58.735","Text":"Our new post-adjustment balance for tax expense is 254,000."},{"Start":"09:58.735 ","End":"10:05.925","Text":"Then the credit side of the journal entry was to credit 254,000 to a tax payable account."},{"Start":"10:05.925 ","End":"10:08.240","Text":"Just like tax expense, well,"},{"Start":"10:08.240 ","End":"10:12.680","Text":"the tax payable also did not exist in the pre-adjustment trial balance."},{"Start":"10:12.680 ","End":"10:17.600","Text":"We put in a 0 balance in the pre-adjustment trial balance,"},{"Start":"10:17.600 ","End":"10:22.415","Text":"and notice the tax payable balance is put under the credit column."},{"Start":"10:22.415 ","End":"10:28.070","Text":"Why is that? Because the tax payable is a liability and liabilities have credit balances."},{"Start":"10:28.070 ","End":"10:33.530","Text":"Now the journal adjustment is telling us to credit it with 254,000."},{"Start":"10:33.530 ","End":"10:38.435","Text":"We\u0027ve got no opening balance plus the 254,000 on the credit side,"},{"Start":"10:38.435 ","End":"10:44.470","Text":"so our closing balance is 254,000 and put in under the credit column."},{"Start":"10:44.470 ","End":"10:48.845","Text":"Now we have recorded all 5 of our journal entries in"},{"Start":"10:48.845 ","End":"10:53.180","Text":"our journal adjustment column of our worksheet."},{"Start":"10:53.180 ","End":"10:57.530","Text":"There are still some accounts here, for example, property,"},{"Start":"10:57.530 ","End":"11:01.980","Text":"plant and equipment and we\u0027ve made no change."},{"Start":"11:01.980 ","End":"11:06.350","Text":"I\u0027ve simply indicated this as no change,"},{"Start":"11:06.350 ","End":"11:07.925","Text":"N/C for no change."},{"Start":"11:07.925 ","End":"11:09.980","Text":"Property, plant and equipment, there was no change."},{"Start":"11:09.980 ","End":"11:13.460","Text":"In other words, none of the 5 journal entries that we"},{"Start":"11:13.460 ","End":"11:18.304","Text":"recorded effected these particular accounts."},{"Start":"11:18.304 ","End":"11:21.515","Text":"There was no journal entry that affects the property, plant, and equipment."},{"Start":"11:21.515 ","End":"11:28.415","Text":"The pre-adjustment balance of 220,000 equals the post adjustment balance of 220,000."},{"Start":"11:28.415 ","End":"11:34.445","Text":"Similarly, for example, there was no journal entry that affected accounts receivable."},{"Start":"11:34.445 ","End":"11:40.400","Text":"That balance was 98,500 in the pre-adjustment trial balance that had been given to us."},{"Start":"11:40.400 ","End":"11:42.020","Text":"There was no change to that balance."},{"Start":"11:42.020 ","End":"11:46.840","Text":"We simply show 98,500 in the post adjustment trial balance."},{"Start":"11:46.840 ","End":"11:51.154","Text":"The same thing happens to PPE, accounts receivable,"},{"Start":"11:51.154 ","End":"11:53.825","Text":"bank accounts payable,"},{"Start":"11:53.825 ","End":"11:58.200","Text":"share capital, and even the retained earnings."},{"Start":"11:58.200 ","End":"12:01.370","Text":"Everything is done other than the final step,"},{"Start":"12:01.370 ","End":"12:06.770","Text":"which is simply to add up all of our debits and then add up all of our credits"},{"Start":"12:06.770 ","End":"12:12.820","Text":"and make sure that the total of all our debits equals the total of all of our credits."},{"Start":"12:12.820 ","End":"12:14.360","Text":"If you add all of those up,"},{"Start":"12:14.360 ","End":"12:17.810","Text":"you should get to 4,173,000 on"},{"Start":"12:17.810 ","End":"12:23.080","Text":"both sides so that therefore suggest that we have not yet made a mistake."},{"Start":"12:23.080 ","End":"12:29.490","Text":"Now we are ready to extract our income statement, which is Part C."}],"ID":28551},{"Watched":false,"Name":"Exercise 1 - Income statement part A","Duration":"2m 5s","ChapterTopicVideoID":26342,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.445","Text":"Part C, the income statement."},{"Start":"00:02.445 ","End":"00:04.380","Text":"Now, when we do an income statement,"},{"Start":"00:04.380 ","End":"00:09.135","Text":"what we\u0027re working out is whether we\u0027ve made a profit or a loss."},{"Start":"00:09.135 ","End":"00:11.850","Text":"In order to work out whether we made a profit or loss,"},{"Start":"00:11.850 ","End":"00:16.677","Text":"we\u0027re looking to see whether our income exceeds our expenses,"},{"Start":"00:16.677 ","End":"00:18.345","Text":"in which case we\u0027ve made a profit,"},{"Start":"00:18.345 ","End":"00:20.340","Text":"or whether our expenses exceed our income,"},{"Start":"00:20.340 ","End":"00:22.470","Text":"in which case we\u0027ve made a loss."},{"Start":"00:22.470 ","End":"00:26.130","Text":"In order to prepare your income statement,"},{"Start":"00:26.130 ","End":"00:29.910","Text":"we normally go to our post adjustment trial balance and we simply"},{"Start":"00:29.910 ","End":"00:34.065","Text":"extract the balances that relates to the income statement."},{"Start":"00:34.065 ","End":"00:37.185","Text":"Let\u0027s go and have a look at that post adjustment trial balance again,"},{"Start":"00:37.185 ","End":"00:38.670","Text":"the one we did in part b."},{"Start":"00:38.670 ","End":"00:42.333","Text":"Here\u0027s our post adjustment trial balance,"},{"Start":"00:42.333 ","End":"00:44.855","Text":"and those are the columns we\u0027re going to be focusing on."},{"Start":"00:44.855 ","End":"00:46.760","Text":"Here are the accounts; property,"},{"Start":"00:46.760 ","End":"00:48.260","Text":"plant and equipment, inventory,"},{"Start":"00:48.260 ","End":"00:49.550","Text":"accounts receivable, bank,"},{"Start":"00:49.550 ","End":"00:52.520","Text":"and prepayments are all assets,"},{"Start":"00:52.520 ","End":"00:54.755","Text":"so they do not affect our income statement."},{"Start":"00:54.755 ","End":"00:56.360","Text":"Then we\u0027ve got accounts payable,"},{"Start":"00:56.360 ","End":"00:57.890","Text":"bonus payable, unearned income,"},{"Start":"00:57.890 ","End":"01:01.175","Text":"and tax payable and these are all liabilities."},{"Start":"01:01.175 ","End":"01:03.470","Text":"Then we have sales."},{"Start":"01:03.470 ","End":"01:05.615","Text":"Sales is an income."},{"Start":"01:05.615 ","End":"01:07.610","Text":"Then we have cost of sales, salaries,"},{"Start":"01:07.610 ","End":"01:11.310","Text":"and tax expense, and these are all expenses."},{"Start":"01:11.310 ","End":"01:16.310","Text":"The income list expenses are what we\u0027re going to be needing for our income statement."},{"Start":"01:16.310 ","End":"01:19.325","Text":"But for the purposes of completeness,"},{"Start":"01:19.325 ","End":"01:20.870","Text":"let\u0027s have a look at these 2."},{"Start":"01:20.870 ","End":"01:22.880","Text":"That\u0027s share capital retained earnings."},{"Start":"01:22.880 ","End":"01:25.165","Text":"This is equity."},{"Start":"01:25.165 ","End":"01:27.845","Text":"Equity does not affect the income statement."},{"Start":"01:27.845 ","End":"01:29.900","Text":"It\u0027s just the sales,"},{"Start":"01:29.900 ","End":"01:31.070","Text":"costs of sales salaries,"},{"Start":"01:31.070 ","End":"01:35.030","Text":"wages and bonuses, admin expense, and tax expense."},{"Start":"01:35.030 ","End":"01:40.880","Text":"Those are the accounts that we\u0027re going to have to include in our income statement,"},{"Start":"01:40.880 ","End":"01:50.910","Text":"the amounts that we\u0027re looking at include 3530 and the amounts of 1590,"},{"Start":"01:50.910 ","End":"01:54.220","Text":"574, 96, and 254."},{"Start":"01:54.220 ","End":"01:58.975","Text":"Those are the amounts that we\u0027re going to see in our income statement."},{"Start":"01:58.975 ","End":"02:05.760","Text":"Here, we have our income statement for the year ending 31st of December 20X1."}],"ID":28552},{"Watched":false,"Name":"Exercise 1 - Income statement part B","Duration":"3m 17s","ChapterTopicVideoID":26343,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.080 ","End":"00:02.745","Text":"Now we move onto cost of sales."},{"Start":"00:02.745 ","End":"00:06.795","Text":"Now cost of sales was affected by journal number 3."},{"Start":"00:06.795 ","End":"00:08.880","Text":"What we do is we start with"},{"Start":"00:08.880 ","End":"00:14.760","Text":"the balance forecast of sales in the trial balance that we were given in the question."},{"Start":"00:14.760 ","End":"00:16.530","Text":"The pre-adjustment trial balance,"},{"Start":"00:16.530 ","End":"00:19.095","Text":"which was 1.55 million on the debit side,"},{"Start":"00:19.095 ","End":"00:23.565","Text":"we then have to add a further 40,000 debit according to journal number 3,"},{"Start":"00:23.565 ","End":"00:28.155","Text":"and that then gives us our new balance of 1.59 million."},{"Start":"00:28.155 ","End":"00:30.720","Text":"That then gives us a gross profit,"},{"Start":"00:30.720 ","End":"00:33.860","Text":"so sales less cost of sales gives us the gross profit,"},{"Start":"00:33.860 ","End":"00:35.945","Text":"and that\u0027s 1.94 million."},{"Start":"00:35.945 ","End":"00:38.375","Text":"Then we have operating expenses."},{"Start":"00:38.375 ","End":"00:42.770","Text":"We have 2, so let\u0027s look at the administrative expenses."},{"Start":"00:43.060 ","End":"00:46.445","Text":"Those were affected by journal number 4."},{"Start":"00:46.445 ","End":"00:49.910","Text":"We start with the pre-adjustment trial balance given us in"},{"Start":"00:49.910 ","End":"00:54.250","Text":"the question of 103,500 on the debit side,"},{"Start":"00:54.250 ","End":"00:57.920","Text":"and then we look at journal number 4 and they told us to credit it."},{"Start":"00:57.920 ","End":"01:01.790","Text":"In other words, subtract 7,500 and that then"},{"Start":"01:01.790 ","End":"01:07.110","Text":"gives us our new administrative expense balance of 96,000."},{"Start":"01:07.510 ","End":"01:10.820","Text":"Then we look at salaries, wages, and bonus."},{"Start":"01:10.820 ","End":"01:13.175","Text":"They were affected by a journal number 1."},{"Start":"01:13.175 ","End":"01:16.540","Text":"We start with the balance and the pre-adjustment trial balance"},{"Start":"01:16.540 ","End":"01:20.065","Text":"given to us in the question of 550,000,"},{"Start":"01:20.065 ","End":"01:25.625","Text":"then we add to that a further 24,000 debit according to journal number 1."},{"Start":"01:25.625 ","End":"01:29.975","Text":"That then gives us a new balance of 574,000."},{"Start":"01:29.975 ","End":"01:36.390","Text":"That then gives us our profit before tax subtotal of 1.27 million."},{"Start":"01:36.390 ","End":"01:39.220","Text":"Then finally our tax expense,"},{"Start":"01:39.220 ","End":"01:42.970","Text":"which was affected by journal 5 and there was"},{"Start":"01:42.970 ","End":"01:48.010","Text":"no balance for tax expense in our pre-adjustment trial balance, don\u0027t forget."},{"Start":"01:48.010 ","End":"01:49.900","Text":"There was no balance or tax expense in"},{"Start":"01:49.900 ","End":"01:52.750","Text":"the pre-adjustment trial balance given to us in the question."},{"Start":"01:52.750 ","End":"01:56.870","Text":"We have to calculate the tax expense by simply taking the profit"},{"Start":"01:56.870 ","End":"02:00.965","Text":"before tax of 1.27 million and according to the question,"},{"Start":"02:00.965 ","End":"02:03.260","Text":"multiplying it by 20 percent."},{"Start":"02:03.260 ","End":"02:07.450","Text":"That thing gives us a tax expense of 254,000."},{"Start":"02:07.450 ","End":"02:12.450","Text":"Alternatively, we simply pick that up from journal number 5."},{"Start":"02:12.450 ","End":"02:16.365","Text":"In other words, per the original trial balance,"},{"Start":"02:16.365 ","End":"02:24.460","Text":"we have a balance of 0 plus the 254,000 from journal number 5."},{"Start":"02:24.460 ","End":"02:27.080","Text":"That gives you the 254,000."},{"Start":"02:27.080 ","End":"02:30.050","Text":"But do remember when we did part A,"},{"Start":"02:30.050 ","End":"02:31.940","Text":"and we were going through journal number 5,"},{"Start":"02:31.940 ","End":"02:36.680","Text":"I told you to trust me that the profit before tax was 1.27 million."},{"Start":"02:36.680 ","End":"02:39.920","Text":"You had to know either how to calculate the profit before"},{"Start":"02:39.920 ","End":"02:44.930","Text":"tax on a scrap piece of paper or you had to have done this income statement first."},{"Start":"02:44.930 ","End":"02:47.780","Text":"It\u0027s just simply your sales or in other words,"},{"Start":"02:47.780 ","End":"02:51.855","Text":"any of your income accounts list all of your expense accounts."},{"Start":"02:51.855 ","End":"02:54.470","Text":"That gives you a profit before tax multiplied by"},{"Start":"02:54.470 ","End":"02:58.060","Text":"20 percent and you\u0027ve got the amount for your journal number 5."},{"Start":"02:58.060 ","End":"03:01.790","Text":"Then profit for the year is your final balance in"},{"Start":"03:01.790 ","End":"03:06.275","Text":"your income statement and it\u0027s the 1.27 million profit before tax,"},{"Start":"03:06.275 ","End":"03:08.090","Text":"less the tax expense."},{"Start":"03:08.090 ","End":"03:11.310","Text":"You get 1,016,000."},{"Start":"03:12.170 ","End":"03:15.570","Text":"Now we\u0027re ready to do part D,"},{"Start":"03:15.570 ","End":"03:18.160","Text":"which is our balance sheet."}],"ID":28553},{"Watched":false,"Name":"Exercise 1 - Balance sheet part A","Duration":"11m 40s","ChapterTopicVideoID":26344,"CourseChapterTopicPlaylistID":254925,"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":"Now part d, the balance sheet."},{"Start":"00:02.700 ","End":"00:05.400","Text":"Now, the balance sheet unlike the income statement,"},{"Start":"00:05.400 ","End":"00:07.830","Text":"is prepared on a specific date."},{"Start":"00:07.830 ","End":"00:11.340","Text":"It simply shows the balances on a specific date."},{"Start":"00:11.340 ","End":"00:13.980","Text":"It\u0027s like a snapshot in time, a photograph,"},{"Start":"00:13.980 ","End":"00:17.415","Text":"if you like, of where the businesses is at,"},{"Start":"00:17.415 ","End":"00:22.650","Text":"whether it has more assets than liabilities and therefore it\u0027s positive equity,"},{"Start":"00:22.650 ","End":"00:25.830","Text":"or whether its liabilities exceed its assets,"},{"Start":"00:25.830 ","End":"00:30.900","Text":"in which case, it\u0027s in a bad situation and has negative equity."},{"Start":"00:30.900 ","End":"00:32.985","Text":"For our balance sheet,"},{"Start":"00:32.985 ","End":"00:36.300","Text":"what we need to do is to go back to our trial balance and look"},{"Start":"00:36.300 ","End":"00:39.690","Text":"at the post adjustment trial balance for the balances"},{"Start":"00:39.690 ","End":"00:47.135","Text":"relating to assets, liabilities, and equity."},{"Start":"00:47.135 ","End":"00:52.400","Text":"Those are the 3 elements that appear in our balance sheet. Let\u0027s do that now."},{"Start":"00:52.400 ","End":"00:55.610","Text":"As you can see in our trial balance,"},{"Start":"00:55.610 ","End":"00:57.920","Text":"we used our sales,"},{"Start":"00:57.920 ","End":"01:00.080","Text":"cost of sales, salaries,"},{"Start":"01:00.080 ","End":"01:03.605","Text":"wages and bonuses, admin expenses, and tax expense."},{"Start":"01:03.605 ","End":"01:06.920","Text":"All of those accounts were income and expense accounts,"},{"Start":"01:06.920 ","End":"01:09.470","Text":"so they appeared in our income statement."},{"Start":"01:09.470 ","End":"01:17.100","Text":"From the sales all the way down to the last of our of tax expense,"},{"Start":"01:17.100 ","End":"01:21.270","Text":"none of those affect our balance sheet."},{"Start":"01:21.270 ","End":"01:25.280","Text":"By contrast, our balance sheet has to show our assets,"},{"Start":"01:25.280 ","End":"01:28.400","Text":"our liabilities, and our equity."},{"Start":"01:28.400 ","End":"01:32.461","Text":"All of the remaining accounts that were not highlighted in yellow there,"},{"Start":"01:32.461 ","End":"01:34.100","Text":"were not used in our income statement,"},{"Start":"01:34.100 ","End":"01:36.620","Text":"are going to appear in our balance sheet."},{"Start":"01:36.620 ","End":"01:39.750","Text":"If you look at our assets,"},{"Start":"01:40.540 ","End":"01:43.459","Text":"we have property, plant, and equipment."},{"Start":"01:43.459 ","End":"01:46.970","Text":"That is actually what we call a non-current asset."},{"Start":"01:46.970 ","End":"01:48.620","Text":"We have inventory,"},{"Start":"01:48.620 ","End":"01:51.694","Text":"that is a current asset, accounts receivable,"},{"Start":"01:51.694 ","End":"01:53.820","Text":"current assets, bank,"},{"Start":"01:53.820 ","End":"01:56.524","Text":"a current asset, and prepayments,"},{"Start":"01:56.524 ","End":"01:58.685","Text":"these are current assets."},{"Start":"01:58.685 ","End":"02:01.115","Text":"Just as a rough rule of thumb,"},{"Start":"02:01.115 ","End":"02:06.425","Text":"a non-current asset is an asset that you\u0027re going to use for more than 1 period."},{"Start":"02:06.425 ","End":"02:10.925","Text":"Go back to the definition of non-current assets and current assets."},{"Start":"02:10.925 ","End":"02:12.860","Text":"Then if we look at our liabilities,"},{"Start":"02:12.860 ","End":"02:14.210","Text":"we\u0027ve got accounts payable,"},{"Start":"02:14.210 ","End":"02:18.365","Text":"bonus payable, unearned income, and tax payable."},{"Start":"02:18.365 ","End":"02:23.735","Text":"All of these liabilities are in fact what we call current liabilities."},{"Start":"02:23.735 ","End":"02:26.435","Text":"Non-current liability by contrast,"},{"Start":"02:26.435 ","End":"02:32.045","Text":"is a liability that is expected to still be in your balance sheet for years to come."},{"Start":"02:32.045 ","End":"02:35.625","Text":"Then we have our share capital and our retained earnings,"},{"Start":"02:35.625 ","End":"02:40.970","Text":"and that retained earnings balance is still showing the balance at the end of X0,"},{"Start":"02:40.970 ","End":"02:44.795","Text":"which is the end of our last financial year."},{"Start":"02:44.795 ","End":"02:48.770","Text":"That retained earnings balance will be increased"},{"Start":"02:48.770 ","End":"02:53.480","Text":"by the profit that we\u0027ve made in the current year."},{"Start":"02:53.480 ","End":"02:55.310","Text":"When the sales, costs of sales,"},{"Start":"02:55.310 ","End":"02:57.740","Text":"salaries, wages and bonuses, admin expense,"},{"Start":"02:57.740 ","End":"03:00.380","Text":"and tax expense accounts are closed off,"},{"Start":"03:00.380 ","End":"03:05.300","Text":"they\u0027ll be closed off and added to the retained earnings account."},{"Start":"03:05.300 ","End":"03:07.520","Text":"The retained earnings account that we show in"},{"Start":"03:07.520 ","End":"03:10.400","Text":"our balance sheet is going to include the income and"},{"Start":"03:10.400 ","End":"03:12.950","Text":"expenses because the profit that you"},{"Start":"03:12.950 ","End":"03:16.555","Text":"make is going to increase this equity account for the year."},{"Start":"03:16.555 ","End":"03:19.535","Text":"Now let\u0027s take the assets, liabilities,"},{"Start":"03:19.535 ","End":"03:24.395","Text":"and equity accounts and populate our balance sheet."},{"Start":"03:24.395 ","End":"03:28.700","Text":"I\u0027m going to start by first showing you the balance sheet in the vertical presentation."},{"Start":"03:28.700 ","End":"03:32.735","Text":"After that, I\u0027ll show you how to present it in a horizontal format."},{"Start":"03:32.735 ","End":"03:35.270","Text":"When you\u0027re using a vertical presentation,"},{"Start":"03:35.270 ","End":"03:36.800","Text":"you have 1 column."},{"Start":"03:36.800 ","End":"03:40.960","Text":"It\u0027s headed up CU, which stands for currency units."},{"Start":"03:40.960 ","End":"03:43.235","Text":"We start with showing our assets."},{"Start":"03:43.235 ","End":"03:46.902","Text":"Now we split our assets into 2 different categories;"},{"Start":"03:46.902 ","End":"03:48.470","Text":"1 is called a non-current assets,"},{"Start":"03:48.470 ","End":"03:50.554","Text":"the other is our current assets."},{"Start":"03:50.554 ","End":"03:52.400","Text":"If you recall from the trial balance,"},{"Start":"03:52.400 ","End":"03:54.410","Text":"we only had 1 non-current asset,"},{"Start":"03:54.410 ","End":"03:55.970","Text":"which was property, plant, and equipment,"},{"Start":"03:55.970 ","End":"03:58.430","Text":"and the amount was 220,000."},{"Start":"03:58.430 ","End":"04:00.350","Text":"Let\u0027s have a look at that trial balance to be"},{"Start":"04:00.350 ","End":"04:02.785","Text":"sure you know where I took that figure from."},{"Start":"04:02.785 ","End":"04:05.880","Text":"Here\u0027s the trial balance and here is the property,"},{"Start":"04:05.880 ","End":"04:08.600","Text":"plant, and equipment line item and the amount."},{"Start":"04:08.600 ","End":"04:12.515","Text":"Remember, we do not look at the pre-adjustment trial balance figures."},{"Start":"04:12.515 ","End":"04:15.830","Text":"Obviously we do not look at the journal adjustment column."},{"Start":"04:15.830 ","End":"04:18.275","Text":"We look only at the post-adjustment figures."},{"Start":"04:18.275 ","End":"04:23.815","Text":"The property, plant, and equipment final balance was 220,000."},{"Start":"04:23.815 ","End":"04:26.820","Text":"That\u0027s where we got the 220,000 from."},{"Start":"04:26.820 ","End":"04:29.385","Text":"As I said, that was our only non-current asset."},{"Start":"04:29.385 ","End":"04:31.073","Text":"The total of our property, plant,"},{"Start":"04:31.073 ","End":"04:34.185","Text":"and equipment is 220,000."},{"Start":"04:34.185 ","End":"04:36.345","Text":"Then we look at current assets."},{"Start":"04:36.345 ","End":"04:37.905","Text":"Looking at the trial balance,"},{"Start":"04:37.905 ","End":"04:40.940","Text":"we had 4 current assets: inventory,"},{"Start":"04:40.940 ","End":"04:43.070","Text":"accounts receivable, bank, and prepayments."},{"Start":"04:43.070 ","End":"04:49.640","Text":"We take those 4 accounts and their amounts and we put them in the balance sheet."},{"Start":"04:49.640 ","End":"04:52.970","Text":"They would go under the heading current assets."},{"Start":"04:52.970 ","End":"04:56.168","Text":"Here\u0027s our inventory, prepayments, accounts receivable,"},{"Start":"04:56.168 ","End":"04:59.705","Text":"and cash at bank in slightly different order."},{"Start":"04:59.705 ","End":"05:04.830","Text":"Cash is normally given last because it is the most liquid,"},{"Start":"05:04.830 ","End":"05:06.960","Text":"so we\u0027re showing it in order of liquidity."},{"Start":"05:06.960 ","End":"05:09.470","Text":"Property, plant, and equipment is the most liquid,"},{"Start":"05:09.470 ","End":"05:10.895","Text":"then we go to our current assets,"},{"Start":"05:10.895 ","End":"05:12.515","Text":"and within the current assets,"},{"Start":"05:12.515 ","End":"05:14.265","Text":"the most illiquid,"},{"Start":"05:14.265 ","End":"05:16.610","Text":"in other words, the most not liquid,"},{"Start":"05:16.610 ","End":"05:22.010","Text":"is inventory because it still has to be converted into an accounts receivables."},{"Start":"05:22.010 ","End":"05:23.660","Text":"In other words, it first has to be sold,"},{"Start":"05:23.660 ","End":"05:25.415","Text":"then somebody has to owe us some money,"},{"Start":"05:25.415 ","End":"05:27.200","Text":"and then eventually we receive the cash."},{"Start":"05:27.200 ","End":"05:29.735","Text":"The cash is the most liquid of our assets."},{"Start":"05:29.735 ","End":"05:34.585","Text":"The total of our current assets is 1,439,000."},{"Start":"05:34.585 ","End":"05:37.020","Text":"We have, in totaling,"},{"Start":"05:37.020 ","End":"05:43.890","Text":"our non-current assets of 220,000 and our current assets of 1.439 million."},{"Start":"05:43.890 ","End":"05:48.500","Text":"That gives us 1.659 million as our total assets."},{"Start":"05:48.500 ","End":"05:57.040","Text":"That\u0027s made up of the non-current assets of 220 and the current assets of 1.439 million."},{"Start":"05:57.040 ","End":"06:01.050","Text":"The vertical presentations is quite long so we move on to the next page."},{"Start":"06:01.050 ","End":"06:05.395","Text":"Here you see our total assets brought forward 1.65 million."},{"Start":"06:05.395 ","End":"06:09.980","Text":"Now we\u0027re going to populate our balance sheet with the liability figures."},{"Start":"06:09.980 ","End":"06:11.900","Text":"Just like with assets,"},{"Start":"06:11.900 ","End":"06:17.825","Text":"they\u0027re going to be separated into non-current liabilities and current liabilities."},{"Start":"06:17.825 ","End":"06:19.835","Text":"If you recall from the trial balance,"},{"Start":"06:19.835 ","End":"06:22.700","Text":"we had no non-current liabilities."},{"Start":"06:22.700 ","End":"06:25.955","Text":"Non-current liabilities actually add up to 0."},{"Start":"06:25.955 ","End":"06:27.820","Text":"Our current liabilities,"},{"Start":"06:27.820 ","End":"06:30.185","Text":"let\u0027s have a look at our trial balance."},{"Start":"06:30.185 ","End":"06:32.690","Text":"Now we\u0027re looking at our liabilities."},{"Start":"06:32.690 ","End":"06:35.900","Text":"We have 4 liabilities: accounts payable,"},{"Start":"06:35.900 ","End":"06:39.905","Text":"bonuses payable, unearned income, and tax payable."},{"Start":"06:39.905 ","End":"06:45.980","Text":"They\u0027re all current liabilities and here are the amounts: 125,000,"},{"Start":"06:45.980 ","End":"06:49.835","Text":"24,000, 120,000, and 254,000."},{"Start":"06:49.835 ","End":"06:52.435","Text":"We put those into our balance sheet."},{"Start":"06:52.435 ","End":"06:55.640","Text":"Putting these into our balance sheet here you see them: the accounts payable,"},{"Start":"06:55.640 ","End":"06:57.050","Text":"the bonus payable, unearned income,"},{"Start":"06:57.050 ","End":"07:00.020","Text":"and the tax payable and they are the same amounts."},{"Start":"07:00.020 ","End":"07:01.520","Text":"Now we need to add up all of"},{"Start":"07:01.520 ","End":"07:05.960","Text":"our current liabilities to show our total current liabilities."},{"Start":"07:05.960 ","End":"07:09.830","Text":"We then add our non-current liabilities and current liabilities together."},{"Start":"07:09.830 ","End":"07:13.159","Text":"Because we had no non-current liabilities,"},{"Start":"07:13.159 ","End":"07:16.570","Text":"our total liabilities are 523,000,"},{"Start":"07:16.570 ","End":"07:19.310","Text":"and that\u0027s simply made up of the total of"},{"Start":"07:19.310 ","End":"07:23.840","Text":"our non-current liabilities and the total of our current liabilities."},{"Start":"07:23.840 ","End":"07:28.655","Text":"Now, when doing the balance sheet using the vertical presentation,"},{"Start":"07:28.655 ","End":"07:31.730","Text":"we\u0027re using the accounting equation in the format of"},{"Start":"07:31.730 ","End":"07:36.745","Text":"assets minus liabilities equals equity."},{"Start":"07:36.745 ","End":"07:38.790","Text":"We have our assets,"},{"Start":"07:38.790 ","End":"07:40.920","Text":"and we have our liabilities."},{"Start":"07:40.920 ","End":"07:46.910","Text":"The next step is to simply subtract the 1 from the other to get our net assets."},{"Start":"07:46.910 ","End":"07:50.930","Text":"Net assets or net liabilities,"},{"Start":"07:50.930 ","End":"07:53.674","Text":"if our liabilities exceeded our assets,"},{"Start":"07:53.674 ","End":"07:55.190","Text":"giving us the equity."},{"Start":"07:55.190 ","End":"08:04.165","Text":"Net assets, assets minus liabilities gives us 1,136,000 and that\u0027s the total assets,"},{"Start":"08:04.165 ","End":"08:09.150","Text":"1,659,000 less the total liabilities of 523,000."},{"Start":"08:09.150 ","End":"08:11.390","Text":"As I said, the vertical presentation is quite long,"},{"Start":"08:11.390 ","End":"08:13.655","Text":"so we move on to yet another page."},{"Start":"08:13.655 ","End":"08:19.730","Text":"Here we have our net assets brought forward of 1,136,000."},{"Start":"08:19.730 ","End":"08:23.965","Text":"Now we check to see that it equals our equity."},{"Start":"08:23.965 ","End":"08:30.590","Text":"Shareholders equity, it\u0027s made up of share capital and retained earnings."},{"Start":"08:30.590 ","End":"08:33.695","Text":"Now let\u0027s have a look at that trial balance again."},{"Start":"08:33.695 ","End":"08:35.630","Text":"If we have a looked at our trial balance,"},{"Start":"08:35.630 ","End":"08:37.655","Text":"here are the 2 equity accounts."},{"Start":"08:37.655 ","End":"08:40.940","Text":"We\u0027ve got share capital and we\u0027ve got retained earnings."},{"Start":"08:40.940 ","End":"08:46.880","Text":"Those are the only 2 equity accounts and we saw them included in our balance sheet."},{"Start":"08:46.880 ","End":"08:49.595","Text":"However, in the balance sheet,"},{"Start":"08:49.595 ","End":"08:52.685","Text":"although we included share capital of 30,000,"},{"Start":"08:52.685 ","End":"08:56.785","Text":"our retained earnings was not shown at 90,000."},{"Start":"08:56.785 ","End":"09:01.760","Text":"The reason for this is that this retained earnings of 90,000 shown in"},{"Start":"09:01.760 ","End":"09:07.055","Text":"our post adjustment trial balance is still day to the 31st of December X0."},{"Start":"09:07.055 ","End":"09:12.260","Text":"The reason for that is because our sales and costs of sales salaries, admin,"},{"Start":"09:12.260 ","End":"09:13.520","Text":"and tax expense accounts or"},{"Start":"09:13.520 ","End":"09:18.305","Text":"income and expense accounts are still shown in our post-adjustment trial balance."},{"Start":"09:18.305 ","End":"09:20.540","Text":"They have not yet been closed off."},{"Start":"09:20.540 ","End":"09:23.600","Text":"What normally happens when we produce"},{"Start":"09:23.600 ","End":"09:27.230","Text":"our final balance sheet before we start the next year,"},{"Start":"09:27.230 ","End":"09:30.170","Text":"all of our income and expense accounts are going to be closed"},{"Start":"09:30.170 ","End":"09:33.905","Text":"off and ultimately transferred into our retained earnings account."},{"Start":"09:33.905 ","End":"09:38.000","Text":"That final balance on the retained earnings account at"},{"Start":"09:38.000 ","End":"09:42.670","Text":"31st December X1 needs to be included in our balance sheet."},{"Start":"09:42.670 ","End":"09:44.660","Text":"At this stage, we\u0027ve got"},{"Start":"09:44.660 ","End":"09:49.340","Text":"the income and expense accounts still being shown separately in the trial balance."},{"Start":"09:49.340 ","End":"09:57.440","Text":"These figures here, the 3,530 income and the expenses of the 159, 574,"},{"Start":"09:57.440 ","End":"09:59.180","Text":"the 96 and the 254,"},{"Start":"09:59.180 ","End":"10:04.445","Text":"they all ultimately needs to be added into that retained earnings account,"},{"Start":"10:04.445 ","End":"10:07.940","Text":"which currently has an opening balance of 90,000."},{"Start":"10:07.940 ","End":"10:10.759","Text":"If we have a look at our income statement,"},{"Start":"10:10.759 ","End":"10:15.755","Text":"we will see what the impact was of the income and the expenses."},{"Start":"10:15.755 ","End":"10:17.600","Text":"Going back to our income statement,"},{"Start":"10:17.600 ","End":"10:22.160","Text":"you can see our income and then all of the expenses being"},{"Start":"10:22.160 ","End":"10:27.445","Text":"subtracted gave us a profit for the year of 1,016,000."},{"Start":"10:27.445 ","End":"10:31.520","Text":"The impact in our trial balance of the income and"},{"Start":"10:31.520 ","End":"10:38.450","Text":"these expenses was a profit of 1,016,000."},{"Start":"10:39.260 ","End":"10:49.170","Text":"Our credits of 3,530 exceeded our debits by 1.16 million,"},{"Start":"10:49.170 ","End":"10:52.540","Text":"that then needs to be added to the 90,000."},{"Start":"10:52.540 ","End":"10:56.770","Text":"Going back to our balance sheet in our trial balance,"},{"Start":"10:56.770 ","End":"10:59.045","Text":"our post-adjustment trial balance,"},{"Start":"10:59.045 ","End":"11:02.224","Text":"we had the opening balance of retained earnings."},{"Start":"11:02.224 ","End":"11:07.850","Text":"This is at the 31st of December X0 and we have to add to it"},{"Start":"11:07.850 ","End":"11:14.210","Text":"the profit for our year ended 31st of December X1,"},{"Start":"11:14.210 ","End":"11:18.800","Text":"and that was 1,016,000 and that gives"},{"Start":"11:18.800 ","End":"11:24.350","Text":"us 1,106,000 as our closing retained earnings."},{"Start":"11:24.350 ","End":"11:31.165","Text":"The total of our shareholders equity then is 1,136,000."},{"Start":"11:31.165 ","End":"11:35.670","Text":"You can see our net assets equals our total equity."},{"Start":"11:35.670 ","End":"11:41.700","Text":"Now what if we had not been asked to do a post-adjustment trial balance?"}],"ID":28554},{"Watched":false,"Name":"Exercise 1 - Balance sheet part B","Duration":"7m 46s","ChapterTopicVideoID":26345,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.220","Text":"Now let\u0027s look at the balance sheet again."},{"Start":"00:02.220 ","End":"00:06.420","Text":"But here I am simply assuming that we had"},{"Start":"00:06.420 ","End":"00:11.774","Text":"not been asked to do the post adjustment trial balance."},{"Start":"00:11.774 ","End":"00:13.710","Text":"So that part B, in other words,"},{"Start":"00:13.710 ","End":"00:15.330","Text":"was not a requirement."},{"Start":"00:15.330 ","End":"00:21.030","Text":"How would 1 calculate the figures for the balance sheet?"},{"Start":"00:21.030 ","End":"00:23.130","Text":"Well, the first item we had was property, plant,"},{"Start":"00:23.130 ","End":"00:25.410","Text":"and equipment of 220,000,"},{"Start":"00:25.410 ","End":"00:28.350","Text":"but where do we get that 220,000 from?"},{"Start":"00:28.350 ","End":"00:34.725","Text":"Well, it was from the pre-adjustment trial balance of 220,000,"},{"Start":"00:34.725 ","End":"00:37.590","Text":"and there were no journals that affected it,"},{"Start":"00:37.590 ","End":"00:39.675","Text":"so there was no adjustment."},{"Start":"00:39.675 ","End":"00:41.270","Text":"May I say 1 is easy enough."},{"Start":"00:41.270 ","End":"00:43.145","Text":"Let\u0027s look at the current assets."},{"Start":"00:43.145 ","End":"00:48.650","Text":"Here, we have inventory of 1,260. How do we get that?"},{"Start":"00:48.650 ","End":"00:52.040","Text":"Well, we had a pre-adjustment trial balance,"},{"Start":"00:52.040 ","End":"00:56.155","Text":"which showed an amount of 1.3 million."},{"Start":"00:56.155 ","End":"01:00.265","Text":"That was a debit because it\u0027s an asset."},{"Start":"01:00.265 ","End":"01:08.155","Text":"Then we had to adjust it downwards by 40,000 because of a journal entry."},{"Start":"01:08.155 ","End":"01:11.295","Text":"That journal entry was journal number 3."},{"Start":"01:11.295 ","End":"01:13.990","Text":"Then we had prepayments of 7,500."},{"Start":"01:13.990 ","End":"01:15.980","Text":"How did we get to that figure?"},{"Start":"01:15.980 ","End":"01:18.650","Text":"Well, we had a pre-adjustment trial balance,"},{"Start":"01:18.650 ","End":"01:21.295","Text":"and it had a nil balance in it."},{"Start":"01:21.295 ","End":"01:29.660","Text":"Then we had to adjust it by debiting 7,500 to a prepayment account."},{"Start":"01:29.660 ","End":"01:31.960","Text":"That was in terms of journal number 4."},{"Start":"01:31.960 ","End":"01:35.995","Text":"Then we had accounts receivable of 98,500."},{"Start":"01:35.995 ","End":"01:42.950","Text":"Well, again, there was a pre-adjustment trial balance of 98,500, and in this case,"},{"Start":"01:42.950 ","End":"01:46.535","Text":"there were no journals that affected that balance,"},{"Start":"01:46.535 ","End":"01:51.380","Text":"simply remained at 98,500."},{"Start":"01:51.380 ","End":"01:55.120","Text":"Similarly, the cash at bank was 73,000."},{"Start":"01:55.120 ","End":"01:56.910","Text":"How did we get to that?"},{"Start":"01:56.910 ","End":"02:02.415","Text":"That\u0027s a pre-adjustment trial balance of 73,000 plus no journals."},{"Start":"02:02.415 ","End":"02:04.490","Text":"Then we would have to add up our current assets,"},{"Start":"02:04.490 ","End":"02:07.205","Text":"which we do 1,439,"},{"Start":"02:07.205 ","End":"02:14.300","Text":"and then we add our non-current assets to our current assets to get to our total assets."},{"Start":"02:14.300 ","End":"02:17.965","Text":"Then the vertical presentation continues on the next page."},{"Start":"02:17.965 ","End":"02:20.320","Text":"We start then, on current assets,"},{"Start":"02:20.320 ","End":"02:23.000","Text":"and then we populated with our liabilities."},{"Start":"02:23.000 ","End":"02:25.760","Text":"Our non-current liabilities, there weren\u0027t any,"},{"Start":"02:25.760 ","End":"02:29.945","Text":"and then we had our current liabilities. We had 4 of them."},{"Start":"02:29.945 ","End":"02:34.700","Text":"What we need to do is work out how do we get to these figures?"},{"Start":"02:34.700 ","End":"02:38.320","Text":"Well, in terms of the accounts payable of 125,000,"},{"Start":"02:38.320 ","End":"02:44.195","Text":"that was from our pre-adjustment trial balance of 125,000,"},{"Start":"02:44.195 ","End":"02:46.410","Text":"and there were no journals."},{"Start":"02:46.410 ","End":"02:49.425","Text":"Then we had a bonus payable of 24,000,"},{"Start":"02:49.425 ","End":"02:51.020","Text":"but how did we get to that?"},{"Start":"02:51.020 ","End":"02:54.290","Text":"Well, the pre adjustment trial balance had nothing for bonus payable,"},{"Start":"02:54.290 ","End":"02:58.595","Text":"and then we had to actually put through a 24,000 on credit,"},{"Start":"02:58.595 ","End":"03:01.100","Text":"creating a bonus payable account."},{"Start":"03:01.100 ","End":"03:04.430","Text":"That was in terms of journal number 1."},{"Start":"03:04.430 ","End":"03:07.940","Text":"Then we have unearned income of 120,000,"},{"Start":"03:07.940 ","End":"03:09.710","Text":"how did we get to that?"},{"Start":"03:09.710 ","End":"03:14.915","Text":"Once again, we had a pre-adjustment trial balance with no balance for unearned income,"},{"Start":"03:14.915 ","End":"03:22.015","Text":"and then we had to create an unearned income account by crediting it with 120,000,"},{"Start":"03:22.015 ","End":"03:25.375","Text":"and that was in terms of journal number 2."},{"Start":"03:25.375 ","End":"03:30.425","Text":"Then finally, we had tax payable of 254,000,"},{"Start":"03:30.425 ","End":"03:35.285","Text":"and that was a pre-adjustment opening balance of nil,"},{"Start":"03:35.285 ","End":"03:40.640","Text":"plus an amount that we had to credit to the tax payable account,"},{"Start":"03:40.640 ","End":"03:42.290","Text":"creating the tax payable account,"},{"Start":"03:42.290 ","End":"03:45.625","Text":"and that was in terms of journal number 5."},{"Start":"03:45.625 ","End":"03:49.280","Text":"So that\u0027s how we calculated those current liabilities,"},{"Start":"03:49.280 ","End":"03:51.145","Text":"so we add those altogether,"},{"Start":"03:51.145 ","End":"03:53.775","Text":"that comes to 523,000,"},{"Start":"03:53.775 ","End":"03:58.145","Text":"and then our total liabilities are 523,000,"},{"Start":"03:58.145 ","End":"04:04.645","Text":"made-up of our non-current liabilities of nil and the current liabilities of 523,000."},{"Start":"04:04.645 ","End":"04:08.025","Text":"Then we calculate our net assets."},{"Start":"04:08.025 ","End":"04:10.965","Text":"Our net assets are 1.136 million,"},{"Start":"04:10.965 ","End":"04:14.945","Text":"that\u0027s made up of our total assets of 1.659 million,"},{"Start":"04:14.945 ","End":"04:18.730","Text":"less our total liabilities of 523,000."},{"Start":"04:18.730 ","End":"04:22.130","Text":"The vertical presentation continues on the next page."},{"Start":"04:22.130 ","End":"04:26.375","Text":"Here, we have our net assets of 1.136 million,"},{"Start":"04:26.375 ","End":"04:29.450","Text":"and now we compare it to our equity."},{"Start":"04:29.450 ","End":"04:34.460","Text":"Because remember, we are presenting our vertical balance sheet,"},{"Start":"04:34.460 ","End":"04:36.965","Text":"so that\u0027s using the accounting equation,"},{"Start":"04:36.965 ","End":"04:38.945","Text":"a minus l,"},{"Start":"04:38.945 ","End":"04:43.310","Text":"assets minus liabilities equals equity."},{"Start":"04:43.310 ","End":"04:45.835","Text":"So now we have our shareholders equity."},{"Start":"04:45.835 ","End":"04:48.430","Text":"The share capital was 30,000,"},{"Start":"04:48.430 ","End":"04:50.215","Text":"how did we get to that?"},{"Start":"04:50.215 ","End":"04:55.070","Text":"That\u0027s our pre-adjustment trial balance of 30,000,"},{"Start":"04:55.070 ","End":"04:57.575","Text":"plus no journals affected this."},{"Start":"04:57.575 ","End":"05:00.110","Text":"Then we have our retained earnings of"},{"Start":"05:00.110 ","End":"05:05.270","Text":"pre-adjustment trial balance showed an amount of 90,000, and to that,"},{"Start":"05:05.270 ","End":"05:07.445","Text":"we add all of our income,"},{"Start":"05:07.445 ","End":"05:09.845","Text":"less our expenses,"},{"Start":"05:09.845 ","End":"05:14.545","Text":"or you could just do it quicker by saying add our profit for the year."},{"Start":"05:14.545 ","End":"05:17.640","Text":"The profit for the year, if you go back to part C,"},{"Start":"05:17.640 ","End":"05:23.445","Text":"shows that our profit is 1,016,000."},{"Start":"05:23.445 ","End":"05:26.580","Text":"If we add the 90,000 to the 1,016,"},{"Start":"05:26.580 ","End":"05:29.700","Text":"you get to the 1,106."},{"Start":"05:29.700 ","End":"05:35.805","Text":"Our total equity is then, 1,136."},{"Start":"05:35.805 ","End":"05:40.890","Text":"You\u0027ll notice that our net assets equal our total equity."},{"Start":"05:40.890 ","End":"05:44.740","Text":"Notice, again, that this is our accounting equation."},{"Start":"05:44.740 ","End":"05:50.665","Text":"Assets minus liabilities equals equity."},{"Start":"05:50.665 ","End":"05:56.170","Text":"Now in terms of the horizontal presentation, it\u0027s very simple."},{"Start":"05:56.170 ","End":"05:58.000","Text":"We just show the balance sheet using"},{"Start":"05:58.000 ","End":"06:01.525","Text":"a slightly different variation of the same accounting equation."},{"Start":"06:01.525 ","End":"06:06.970","Text":"Where we show, instead of assets minus liabilities equals equity,"},{"Start":"06:06.970 ","End":"06:11.080","Text":"we show assets equals equity,"},{"Start":"06:11.080 ","End":"06:14.230","Text":"and we take the liabilities across,"},{"Start":"06:14.230 ","End":"06:16.240","Text":"so that\u0027s the format we\u0027ll use."},{"Start":"06:16.240 ","End":"06:18.530","Text":"We\u0027ll put the assets on the left-hand side,"},{"Start":"06:18.530 ","End":"06:22.670","Text":"and we\u0027ll put the equity and the liabilities on the right-hand side."},{"Start":"06:22.670 ","End":"06:25.025","Text":"Here\u0027s the horizontal presentation."},{"Start":"06:25.025 ","End":"06:28.125","Text":"We\u0027re going to put our assets on the left-hand side,"},{"Start":"06:28.125 ","End":"06:33.755","Text":"and then we\u0027re going to put our liabilities and our equity on the right-hand side."},{"Start":"06:33.755 ","End":"06:37.070","Text":"There are non-current assets,"},{"Start":"06:37.070 ","End":"06:38.210","Text":"property, plant, and equipment,"},{"Start":"06:38.210 ","End":"06:43.775","Text":"current assets, all these figures are identical to how we use vertical presentation."},{"Start":"06:43.775 ","End":"06:48.410","Text":"That gives us our total assets of 1,659 million."},{"Start":"06:48.410 ","End":"06:50.300","Text":"Then on the right-hand side,"},{"Start":"06:50.300 ","End":"06:56.405","Text":"we put in our liabilities split between non-current liabilities and current liabilities,"},{"Start":"06:56.405 ","End":"06:59.240","Text":"giving us our total liabilities."},{"Start":"06:59.240 ","End":"07:01.460","Text":"It\u0027s our non-current liabilities and"},{"Start":"07:01.460 ","End":"07:04.735","Text":"current liabilities together giving us our total liabilities."},{"Start":"07:04.735 ","End":"07:08.105","Text":"Then we have our shareholder\u0027s equity, share capital,"},{"Start":"07:08.105 ","End":"07:14.255","Text":"these are retained profits at x1, 1.106."},{"Start":"07:14.255 ","End":"07:18.785","Text":"So our total equity is 1,136."},{"Start":"07:18.785 ","End":"07:21.545","Text":"Finally, on the right-hand side,"},{"Start":"07:21.545 ","End":"07:27.845","Text":"we have a total showing the total of the liabilities and the equity of 1,659."},{"Start":"07:27.845 ","End":"07:31.040","Text":"Then finally, on the right-hand side we have a"},{"Start":"07:31.040 ","End":"07:34.910","Text":"total showing the total liabilities and equity made up"},{"Start":"07:34.910 ","End":"07:42.235","Text":"of the total liabilities of 523,000 and the total equity of 1.136 million."},{"Start":"07:42.235 ","End":"07:44.150","Text":"I hope that helped."},{"Start":"07:44.150 ","End":"07:47.310","Text":"That\u0027s the end of this exercise."}],"ID":28555},{"Watched":false,"Name":"Exercise 2 - Introduction","Duration":"2m 28s","ChapterTopicVideoID":27430,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.645","Text":"Hello and welcome to another exercise in the series entitled,"},{"Start":"00:03.645 ","End":"00:04.995","Text":"end of year adjustments,"},{"Start":"00:04.995 ","End":"00:06.735","Text":"brought to you by Proprep."},{"Start":"00:06.735 ","End":"00:09.420","Text":"Today\u0027s exercise is Ama."},{"Start":"00:09.420 ","End":"00:13.935","Text":"Ama is a service company which started operations in July 20X0."},{"Start":"00:13.935 ","End":"00:17.010","Text":"Its financial year end is 31 December."},{"Start":"00:17.010 ","End":"00:19.470","Text":"Now this means that it\u0027s very first financial year"},{"Start":"00:19.470 ","End":"00:21.750","Text":"will only be a few months long because it"},{"Start":"00:21.750 ","End":"00:26.640","Text":"will start in July 20X0 and end at the end of December 20X0,"},{"Start":"00:26.640 ","End":"00:29.145","Text":"instead of being for a full 12 months."},{"Start":"00:29.145 ","End":"00:31.705","Text":"Ama receives cash from its customers,"},{"Start":"00:31.705 ","End":"00:34.580","Text":"which it immediately recognizes in revenue."},{"Start":"00:34.580 ","End":"00:37.700","Text":"However, some of this cash received from the customers"},{"Start":"00:37.700 ","End":"00:41.450","Text":"is paid in advance for services not yet provided."},{"Start":"00:41.450 ","End":"00:45.770","Text":"The table below summarizes the annual revenue that was initially"},{"Start":"00:45.770 ","End":"00:49.835","Text":"recorded in each of the years 20X0-20X3,"},{"Start":"00:49.835 ","End":"00:52.040","Text":"where this revenue was recorded before"},{"Start":"00:52.040 ","End":"00:55.895","Text":"any adjustment was made to account for the unearned revenue."},{"Start":"00:55.895 ","End":"01:00.244","Text":"If you have a look at the column revenue recorded,"},{"Start":"01:00.244 ","End":"01:04.625","Text":"each of these amounts is actually the cash that was received."},{"Start":"01:04.625 ","End":"01:08.755","Text":"The unearned revenue each year is calculated as an estimate,"},{"Start":"01:08.755 ","End":"01:10.610","Text":"where this estimate is calculated as"},{"Start":"01:10.610 ","End":"01:14.350","Text":"a percentage of the initially recorded revenue each year."},{"Start":"01:14.350 ","End":"01:18.280","Text":"For example, if we look at the column unearned revenue,"},{"Start":"01:18.280 ","End":"01:22.820","Text":"the very first row indicates 5 percent,"},{"Start":"01:22.820 ","End":"01:24.960","Text":"and that means in 20X0,"},{"Start":"01:24.960 ","End":"01:28.180","Text":"we believe an estimated 5 percent of the"},{"Start":"01:28.180 ","End":"01:32.485","Text":"800,000 was received in advance of us having earned it."},{"Start":"01:32.485 ","End":"01:34.760","Text":"In this business\u0027s situation,"},{"Start":"01:34.760 ","End":"01:38.140","Text":"all unearned revenue at the end of a financial year is in"},{"Start":"01:38.140 ","End":"01:42.335","Text":"subsequently earned and thus recognized as revenue in the following year."},{"Start":"01:42.335 ","End":"01:46.990","Text":"Required, determine the amount of revenue to be recognized in the income statement of"},{"Start":"01:46.990 ","End":"01:52.075","Text":"Ama for the years ending 31 December 20X0-20X3,"},{"Start":"01:52.075 ","End":"01:53.710","Text":"so that\u0027s 4 years,"},{"Start":"01:53.710 ","End":"01:55.720","Text":"X0, X1,"},{"Start":"01:55.720 ","End":"01:57.820","Text":"X2, and X3."},{"Start":"01:57.820 ","End":"02:02.660","Text":"Then b, determine the amount of the unearned revenue to be recognized in"},{"Start":"02:02.660 ","End":"02:08.135","Text":"the balance sheet of Ama at 31 December 20X0 through to 20X3."},{"Start":"02:08.135 ","End":"02:13.595","Text":"Remember that unearned revenue is actually an obligation, it\u0027s a liability."},{"Start":"02:13.595 ","End":"02:19.534","Text":"We\u0027re obliged if we never earn that revenue to refund that cash received."},{"Start":"02:19.534 ","End":"02:21.395","Text":"It\u0027s for that reason,"},{"Start":"02:21.395 ","End":"02:23.300","Text":"that it will appear in the balance sheet,"},{"Start":"02:23.300 ","End":"02:29.340","Text":"because the balance sheet shows liabilities together with assets and equity."}],"ID":28556},{"Watched":false,"Name":"Exercise 2 - Part 1","Duration":"5m 15s","ChapterTopicVideoID":27431,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.280","Text":"The solution to Ama."},{"Start":"00:02.280 ","End":"00:05.475","Text":"Now, we were required to calculate"},{"Start":"00:05.475 ","End":"00:10.095","Text":"the revenue to be recognized in the income statement as Part A,"},{"Start":"00:10.095 ","End":"00:13.470","Text":"and then part B, we were asked to calculate"},{"Start":"00:13.470 ","End":"00:18.614","Text":"the unearned revenue to be reflected in the balance sheet as the liability."},{"Start":"00:18.614 ","End":"00:20.820","Text":"This, is in fact, the answer."},{"Start":"00:20.820 ","End":"00:24.585","Text":"What we\u0027re going to do, is we\u0027ll work through each of the years 1-by-1."},{"Start":"00:24.585 ","End":"00:28.470","Text":"I\u0027ll show you the workings as to how to calculate each of those figures."},{"Start":"00:28.470 ","End":"00:30.735","Text":"Let\u0027s start with 20X0,"},{"Start":"00:30.735 ","End":"00:36.015","Text":"Working 1, where the unearned revenue for the year would be 40,000."},{"Start":"00:36.015 ","End":"00:38.985","Text":"Let\u0027s start with 20X0 Working 1."},{"Start":"00:38.985 ","End":"00:42.435","Text":"The answer that we\u0027re going to calculate is a,"},{"Start":"00:42.435 ","End":"00:46.430","Text":"760,000 will be the revenue recognized in the income statement,"},{"Start":"00:46.430 ","End":"00:49.070","Text":"and 40,000 is going to appear in our balance sheet"},{"Start":"00:49.070 ","End":"00:52.680","Text":"as our unearned revenue being a liability."},{"Start":"00:52.680 ","End":"00:55.930","Text":"Solution, Working 1."},{"Start":"00:55.930 ","End":"01:00.350","Text":"You\u0027ll notice here that I\u0027ve got a column for assets, column for liabilities."},{"Start":"01:00.350 ","End":"01:03.410","Text":"We\u0027ve actually got 2 columns here for equity."},{"Start":"01:03.410 ","End":"01:05.780","Text":"Initially the equity is revenue,"},{"Start":"01:05.780 ","End":"01:09.185","Text":"which appears in the income statement,"},{"Start":"01:09.185 ","End":"01:12.590","Text":"and that revenue will then get closed off to retained earnings"},{"Start":"01:12.590 ","End":"01:15.830","Text":"and retained earnings gets presented in the balance sheet."},{"Start":"01:15.830 ","End":"01:19.895","Text":"Now, you\u0027ll notice that the opening balances are all 0,"},{"Start":"01:19.895 ","End":"01:24.380","Text":"initially, and that is because the first year of operations was 20X0."},{"Start":"01:24.380 ","End":"01:28.794","Text":"There was no prior year balance to bring forward as our opening balances."},{"Start":"01:28.794 ","End":"01:31.670","Text":"Similarly, the very next line which we\u0027ll"},{"Start":"01:31.670 ","End":"01:34.445","Text":"use called unearned revenue from the last year,"},{"Start":"01:34.445 ","End":"01:36.993","Text":"recognize now in the current year,"},{"Start":"01:36.993 ","End":"01:41.450","Text":"that\u0027s recognized as revenue in the current year, will also be 0."},{"Start":"01:41.450 ","End":"01:45.275","Text":"That\u0027s because we didn\u0027t have a year prior to 20X0."},{"Start":"01:45.275 ","End":"01:48.320","Text":"The next line is the revenue recognized."},{"Start":"01:48.320 ","End":"01:49.970","Text":"Now if you go back to the question,"},{"Start":"01:49.970 ","End":"01:54.515","Text":"you\u0027ll see that the cash received in 20X0 is 800,000."},{"Start":"01:54.515 ","End":"01:59.825","Text":"We were told that the 800,000 cash was initially recognized as revenue."},{"Start":"01:59.825 ","End":"02:02.480","Text":"You can see us putting it into the cash column,"},{"Start":"02:02.480 ","End":"02:07.645","Text":"cash is an asset and we\u0027re putting it into the revenue column, which is equity."},{"Start":"02:07.645 ","End":"02:10.745","Text":"If you\u0027re interested at all in the debits and credits,"},{"Start":"02:10.745 ","End":"02:12.620","Text":"we would be increasing our cash,"},{"Start":"02:12.620 ","End":"02:14.690","Text":"and that requires a debit to the cash,"},{"Start":"02:14.690 ","End":"02:20.600","Text":"and our revenue would be increasing and revenue is income with credits balance."},{"Start":"02:20.600 ","End":"02:23.910","Text":"So therefore we would be crediting revenue is 800,"},{"Start":"02:23.910 ","End":"02:30.525","Text":"then we\u0027re told that we estimate that 5 percent of that 800,000 was actually not earned."},{"Start":"02:30.525 ","End":"02:31.850","Text":"If it\u0027s not earned,"},{"Start":"02:31.850 ","End":"02:34.175","Text":"it may not be recognized as revenue."},{"Start":"02:34.175 ","End":"02:37.100","Text":"Therefore, we need to take that 5 percent out of"},{"Start":"02:37.100 ","End":"02:41.615","Text":"the revenue and transfer it into the unearned revenue."},{"Start":"02:41.615 ","End":"02:44.840","Text":"Unearned revenue is a liability,"},{"Start":"02:44.840 ","End":"02:47.030","Text":"and a liability is an obligation."},{"Start":"02:47.030 ","End":"02:49.565","Text":"So what are we saying our obligation is here?"},{"Start":"02:49.565 ","End":"02:52.790","Text":"Our obligation is to refund the cash."},{"Start":"02:52.790 ","End":"02:56.870","Text":"If we don\u0027t do the work or our obligation is to do the work in"},{"Start":"02:56.870 ","End":"03:01.681","Text":"which case you would then be transferred back from liability into revenue,"},{"Start":"03:01.681 ","End":"03:03.510","Text":"but only once we\u0027ve done the work."},{"Start":"03:03.510 ","End":"03:07.490","Text":"At this stage, we haven\u0027t done the work and therefore we\u0027re taking it out of revenue"},{"Start":"03:07.490 ","End":"03:12.870","Text":"and pumping it into the unearned revenue liability account."},{"Start":"03:13.070 ","End":"03:16.855","Text":"At that point, we\u0027ve got cash of 800,000,"},{"Start":"03:16.855 ","End":"03:18.960","Text":"we\u0027ve got unearned revenue of 40,000,"},{"Start":"03:18.960 ","End":"03:21.630","Text":"and revenue of 760,000."},{"Start":"03:21.630 ","End":"03:26.170","Text":"So 760,000 will appear on our income statement,"},{"Start":"03:26.170 ","End":"03:29.765","Text":"and our unearned revenue being a liability appears in the balance sheet."},{"Start":"03:29.765 ","End":"03:32.555","Text":"That\u0027s the answer to Part A,"},{"Start":"03:32.555 ","End":"03:36.680","Text":"revenue and B, what is our unearned revenue."},{"Start":"03:36.680 ","End":"03:42.890","Text":"Just for interest, we would then close the revenue to our retained earnings."},{"Start":"03:42.890 ","End":"03:44.435","Text":"This is a closing entry;"},{"Start":"03:44.435 ","End":"03:47.540","Text":"taking the revenue and pumping it into"},{"Start":"03:47.540 ","End":"03:51.050","Text":"retained earnings so we\u0027re clearing out our revenue account."},{"Start":"03:51.050 ","End":"03:54.630","Text":"We do this for all income and expense accounts."},{"Start":"03:54.950 ","End":"03:57.200","Text":"As you can see the bottom,"},{"Start":"03:57.200 ","End":"03:59.600","Text":"the green assets of 800,000,"},{"Start":"03:59.600 ","End":"04:01.670","Text":"the liabilities, the yellow 40,000,"},{"Start":"04:01.670 ","End":"04:04.405","Text":"and the retained earnings of 760,000"},{"Start":"04:04.405 ","End":"04:08.120","Text":"are the 3 balances that would appear in our balance sheet on the assumption,"},{"Start":"04:08.120 ","End":"04:11.840","Text":"of course, that there are no other transactions."},{"Start":"04:11.840 ","End":"04:16.530","Text":"The end of the 20X0 balances of the 800,000, 40,000,"},{"Start":"04:16.530 ","End":"04:22.970","Text":"and 760,000 would then be carried forward and appear as opening balances in 20X1."},{"Start":"04:22.970 ","End":"04:26.420","Text":"The other thing we must note is that given in the question,"},{"Start":"04:26.420 ","End":"04:28.490","Text":"we were told that the unearned revenue at"},{"Start":"04:28.490 ","End":"04:33.440","Text":"the end of any 1 year is recognized as revenue in the next year."},{"Start":"04:33.440 ","End":"04:37.385","Text":"In other words, we do actually do work in the very next year."},{"Start":"04:37.385 ","End":"04:40.430","Text":"Therefore anything that was unearned"},{"Start":"04:40.430 ","End":"04:44.375","Text":"at the end of 1 year becomes earned in the next year."},{"Start":"04:44.375 ","End":"04:51.954","Text":"So the 40,000 unearned revenue at the end of 20X0 will then impact our revenue in 20X1,"},{"Start":"04:51.954 ","End":"04:55.850","Text":"because it\u0027s going to be transferred into a revenue account next year."},{"Start":"04:55.850 ","End":"04:59.030","Text":"This is how we present our solution,"},{"Start":"04:59.030 ","End":"05:01.160","Text":"this is 760,000 revenue."},{"Start":"05:01.160 ","End":"05:03.500","Text":"This going to be recognized in our income statement,"},{"Start":"05:03.500 ","End":"05:08.465","Text":"and the 40,000 unearned revenue being a liability that will appear in the balance sheet."},{"Start":"05:08.465 ","End":"05:10.310","Text":"That was Working 1."},{"Start":"05:10.310 ","End":"05:15.880","Text":"Now let\u0027s look at 20X1 and we\u0027ll do that in Working 2."}],"ID":28557},{"Watched":false,"Name":"Exercise 2 - Part 2","Duration":"4m 12s","ChapterTopicVideoID":27432,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.095","Text":"Now let\u0027s do the solution for Ama, but for 20X1."},{"Start":"00:04.095 ","End":"00:07.050","Text":"We\u0027ll do that in Working 2."},{"Start":"00:07.050 ","End":"00:12.525","Text":"Working 2 for 20X1 starts with your opening balances from the prior year."},{"Start":"00:12.525 ","End":"00:18.295","Text":"Go back to Working 1 to find the balances at the end of 20X0."},{"Start":"00:18.295 ","End":"00:21.215","Text":"Those were assets of 800,000,"},{"Start":"00:21.215 ","End":"00:23.570","Text":"liabilities of 40,000,"},{"Start":"00:23.570 ","End":"00:27.235","Text":"and the retained earnings with 760,000."},{"Start":"00:27.235 ","End":"00:30.930","Text":"Now we were told in the question that any unearned revenue at"},{"Start":"00:30.930 ","End":"00:33.360","Text":"the end of the prior year became revenue in"},{"Start":"00:33.360 ","End":"00:36.375","Text":"the next year because it was earned in the next year."},{"Start":"00:36.375 ","End":"00:44.615","Text":"Here we have unearned revenue from last year recognized as revenue in the current year."},{"Start":"00:44.615 ","End":"00:47.915","Text":"We taking out this balance of 40,000,"},{"Start":"00:47.915 ","End":"00:51.470","Text":"we removing it so that we\u0027re subtracting it and we\u0027re moving it into"},{"Start":"00:51.470 ","End":"00:56.275","Text":"the revenue column because we\u0027re now going to recognize it because we\u0027ve done the work."},{"Start":"00:56.275 ","End":"00:59.180","Text":"Then we were told in the question that the revenue"},{"Start":"00:59.180 ","End":"01:02.255","Text":"that was recognized in 20X1 was 1,000,000."},{"Start":"01:02.255 ","End":"01:06.065","Text":"Now that was the cash that was received in 20X1."},{"Start":"01:06.065 ","End":"01:08.890","Text":"We put 1,000,000 into the cash column,"},{"Start":"01:08.890 ","End":"01:12.215","Text":"and for those of you who are interested in the debits and credits,"},{"Start":"01:12.215 ","End":"01:15.275","Text":"we\u0027re increasing our cash and therefore we are debiting it."},{"Start":"01:15.275 ","End":"01:18.135","Text":"We put 1,000,000 into the revenue column and"},{"Start":"01:18.135 ","End":"01:20.810","Text":"that because it is income has a credit balance,"},{"Start":"01:20.810 ","End":"01:23.395","Text":"means we are crediting revenue."},{"Start":"01:23.395 ","End":"01:27.230","Text":"Just for interest, the previous entry, remember,"},{"Start":"01:27.230 ","End":"01:30.740","Text":"unearned revenue is a liability and liabilities have credit balances."},{"Start":"01:30.740 ","End":"01:34.685","Text":"That means the opening balance of 40,000 was credit and therefore,"},{"Start":"01:34.685 ","End":"01:35.960","Text":"when we want to reduce it,"},{"Start":"01:35.960 ","End":"01:37.955","Text":"we would be debiting it."},{"Start":"01:37.955 ","End":"01:41.090","Text":"That\u0027s half of the side of the entry and the other half of the side of"},{"Start":"01:41.090 ","End":"01:44.075","Text":"the entry would be to be crediting it to revenue."},{"Start":"01:44.075 ","End":"01:46.640","Text":"Remember, revenue is income,"},{"Start":"01:46.640 ","End":"01:50.130","Text":"and income has a credit balance."},{"Start":"01:52.100 ","End":"01:58.850","Text":"Here we have the 2 sides of the first entry: debit unearned revenue,"},{"Start":"01:58.850 ","End":"02:01.130","Text":"credit revenue, and then the revenue"},{"Start":"02:01.130 ","End":"02:05.890","Text":"recognized transaction is debit cash, credit revenue."},{"Start":"02:05.890 ","End":"02:10.220","Text":"Then we are told that we must estimate the unearned revenue."},{"Start":"02:10.220 ","End":"02:11.630","Text":"If you go back to the question,"},{"Start":"02:11.630 ","End":"02:15.020","Text":"it\u0027ll tell you that 12 percent of the cash"},{"Start":"02:15.020 ","End":"02:18.820","Text":"received in 20X1 was considered to be unearned."},{"Start":"02:18.820 ","End":"02:23.195","Text":"So 12 percent of the cash received of 1,000,000 is 120,000."},{"Start":"02:23.195 ","End":"02:27.365","Text":"That mustn\u0027t be recognized as revenue yet because we haven\u0027t done the work."},{"Start":"02:27.365 ","End":"02:36.070","Text":"We take the 120,000 out of the revenue column because it\u0027s 12 percent of that 1,000,000."},{"Start":"02:36.070 ","End":"02:43.115","Text":"Take it out of revenue and pop it into the unearned revenue liability account."},{"Start":"02:43.115 ","End":"02:47.220","Text":"Our balances now are at the moment,"},{"Start":"02:47.220 ","End":"02:50.630","Text":"1,800,000 for cash but here is the answer to our question."},{"Start":"02:50.630 ","End":"02:53.455","Text":"We were asked for the revenue,"},{"Start":"02:53.455 ","End":"02:55.360","Text":"which is for Part A,"},{"Start":"02:55.360 ","End":"02:58.910","Text":"what revenue will appear in our 20X1 income statement?"},{"Start":"02:58.910 ","End":"03:02.617","Text":"The answer is 920,000 and then B,"},{"Start":"03:02.617 ","End":"03:07.420","Text":"unearned revenue, what unearned revenue will appear in our 20X1 balance sheet?"},{"Start":"03:07.420 ","End":"03:09.760","Text":"The answer is 120,000."},{"Start":"03:09.760 ","End":"03:12.775","Text":"Then for those who are interested,"},{"Start":"03:12.775 ","End":"03:15.580","Text":"the closing entry, which is not part of the question,"},{"Start":"03:15.580 ","End":"03:16.840","Text":"we don\u0027t have to put this in,"},{"Start":"03:16.840 ","End":"03:20.950","Text":"but the closing entry would be to transfer the revenue out"},{"Start":"03:20.950 ","End":"03:25.825","Text":"of the revenue account and pop it into the retained earnings account."},{"Start":"03:25.825 ","End":"03:28.910","Text":"Remember, revenue has a credit balance."},{"Start":"03:28.910 ","End":"03:30.415","Text":"For those of you who are interested,"},{"Start":"03:30.415 ","End":"03:33.370","Text":"we would then be debiting the revenue to get rid of"},{"Start":"03:33.370 ","End":"03:36.595","Text":"it and crediting the retained earnings."},{"Start":"03:36.595 ","End":"03:43.975","Text":"Remember, retained earnings is equity and equity like income has a credit balance."},{"Start":"03:43.975 ","End":"03:45.610","Text":"All right, so you\u0027re just moving it out of"},{"Start":"03:45.610 ","End":"03:48.245","Text":"the revenue and putting it into retained earnings."},{"Start":"03:48.245 ","End":"03:51.770","Text":"Therefore, the closing balances that would appear in our balance sheet,"},{"Start":"03:51.770 ","End":"03:55.520","Text":"assuming there were no other transactions that were taking place in this company,"},{"Start":"03:55.520 ","End":"03:58.265","Text":"we\u0027ve got assets of 1,800,000 or cash,"},{"Start":"03:58.265 ","End":"04:00.395","Text":"the liabilities are 120,000,"},{"Start":"04:00.395 ","End":"04:03.935","Text":"the retained earnings will be 1,680,000."},{"Start":"04:03.935 ","End":"04:12.690","Text":"Remember, these closing balances will be the opening balances in 20X2 Working 3."}],"ID":28558},{"Watched":false,"Name":"Exercise 2 - Part 3","Duration":"2m 53s","ChapterTopicVideoID":27433,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:05.655","Text":"Now let\u0027s do the solution for 20X2 for Ama which we\u0027ll do in Working 3."},{"Start":"00:05.655 ","End":"00:08.775","Text":"Working 3 20X2,"},{"Start":"00:08.775 ","End":"00:11.100","Text":"you\u0027ll notice that we have an opening balance."},{"Start":"00:11.100 ","End":"00:15.750","Text":"These opening balances that you see here of 1.8 million, 120,000,"},{"Start":"00:15.750 ","End":"00:17.265","Text":"and 1.68 million,"},{"Start":"00:17.265 ","End":"00:22.635","Text":"these are all the closing balances from 20X1 which you\u0027ll find in your Working 2."},{"Start":"00:22.635 ","End":"00:23.880","Text":"Now remember in the question,"},{"Start":"00:23.880 ","End":"00:27.660","Text":"we were told that any unearned revenue at the end of 1 particularly year,"},{"Start":"00:27.660 ","End":"00:30.360","Text":"then gets earned in the next year."},{"Start":"00:30.360 ","End":"00:35.420","Text":"We take the unearned revenue that was our closing balance at the end of 20X1,"},{"Start":"00:35.420 ","End":"00:37.055","Text":"opening balance in 20X2,"},{"Start":"00:37.055 ","End":"00:39.260","Text":"thus we take it out of the unknown revenue,"},{"Start":"00:39.260 ","End":"00:40.565","Text":"thus it is in brackets,"},{"Start":"00:40.565 ","End":"00:43.880","Text":"and we transfer that into the revenue account."},{"Start":"00:43.880 ","End":"00:48.110","Text":"Then we\u0027re told in 20X2 that we received 1.2"},{"Start":"00:48.110 ","End":"00:52.595","Text":"million in cash which we\u0027ve recognized initially as revenue."},{"Start":"00:52.595 ","End":"00:55.155","Text":"Put that into your table as well."},{"Start":"00:55.155 ","End":"01:00.695","Text":"We put the 1.2 million in the cash column and the 1.2 million in the revenue column."},{"Start":"01:00.695 ","End":"01:03.680","Text":"We\u0027re then told that at the end of 20X2,"},{"Start":"01:03.680 ","End":"01:08.810","Text":"we estimated 11 percent of the cash received was unearned."},{"Start":"01:08.810 ","End":"01:10.890","Text":"In other words, we had not yet done the work."},{"Start":"01:10.890 ","End":"01:15.300","Text":"We calculate 11 percent of the 1.2 million."},{"Start":"01:15.300 ","End":"01:17.150","Text":"It\u0027s 132,000."},{"Start":"01:17.150 ","End":"01:20.365","Text":"We take it out of the revenue by subtracting it,"},{"Start":"01:20.365 ","End":"01:23.630","Text":"and we move it into the unearned revenue column"},{"Start":"01:23.630 ","End":"01:28.910","Text":"because we now have an obligation to do the work or to refund the cash."},{"Start":"01:28.910 ","End":"01:32.030","Text":"There we have the answer to Part A and B."},{"Start":"01:32.030 ","End":"01:37.775","Text":"A is revenue and B we were asked to calculate the unearned revenue."},{"Start":"01:37.775 ","End":"01:42.575","Text":"The revenue for 20X2 would be 1.188"},{"Start":"01:42.575 ","End":"01:48.820","Text":"million and the unearned revenue in 20X2 would be 132,000."},{"Start":"01:48.820 ","End":"01:50.884","Text":"Not required in the question,"},{"Start":"01:50.884 ","End":"01:52.715","Text":"but of interest, perhaps,"},{"Start":"01:52.715 ","End":"01:54.230","Text":"is a closing entry."},{"Start":"01:54.230 ","End":"01:57.020","Text":"The closing entry is simply to take all income and"},{"Start":"01:57.020 ","End":"01:59.990","Text":"expense accounts and move them into the retained earnings."},{"Start":"01:59.990 ","End":"02:04.510","Text":"Here we have only 1 of those kind of accounts, it\u0027s revenue,"},{"Start":"02:04.510 ","End":"02:05.959","Text":"it\u0027s an income account,"},{"Start":"02:05.959 ","End":"02:10.235","Text":"so we don\u0027t have any other income accounts and we don\u0027t have any other expenses."},{"Start":"02:10.235 ","End":"02:15.500","Text":"We simply transfer the only income out and we pop that into the retained earnings."},{"Start":"02:15.500 ","End":"02:19.480","Text":"Retained earnings is equity or if you like earner\u0027s equity."},{"Start":"02:19.480 ","End":"02:24.695","Text":"The final balances there are the balances that you would see in your balance sheet."},{"Start":"02:24.695 ","End":"02:26.540","Text":"3 million would be our cash."},{"Start":"02:26.540 ","End":"02:30.815","Text":"The 132,000 would be our liabilities, being unearned revenue,"},{"Start":"02:30.815 ","End":"02:35.805","Text":"and the 2,868,000 would be the retained earnings."},{"Start":"02:35.805 ","End":"02:37.310","Text":"That assumes of course that there are"},{"Start":"02:37.310 ","End":"02:40.545","Text":"no other transactions that are occurring in this company,"},{"Start":"02:40.545 ","End":"02:42.665","Text":"but in terms of this particular question,"},{"Start":"02:42.665 ","End":"02:46.430","Text":"all we needed was to calculate the revenue which was"},{"Start":"02:46.430 ","End":"02:51.665","Text":"1.188 million and then the unearned revenue of 132,000."},{"Start":"02:51.665 ","End":"02:53.790","Text":"That\u0027s Working 3."}],"ID":28559},{"Watched":false,"Name":"Exercise 2 - Part 4","Duration":"4m 28s","ChapterTopicVideoID":27424,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.915","Text":"Now, let\u0027s do the solution for Ama 20X3,"},{"Start":"00:03.915 ","End":"00:06.630","Text":"which we\u0027ll do as part of working 4."},{"Start":"00:06.630 ","End":"00:09.630","Text":"Working 4 for 20X3 of Ama."},{"Start":"00:09.630 ","End":"00:12.000","Text":"You\u0027ll notice we have opening balances."},{"Start":"00:12.000 ","End":"00:14.415","Text":"These opening balances on 20X3,"},{"Start":"00:14.415 ","End":"00:19.515","Text":"you will find in working 3 for your 20X2 year."},{"Start":"00:19.515 ","End":"00:25.230","Text":"These opening balances will be found as the closing balances at the end of 20X2."},{"Start":"00:25.230 ","End":"00:28.980","Text":"We\u0027re told in the question that any unearned revenue."},{"Start":"00:28.980 ","End":"00:32.070","Text":"At the end of a particular year becomes recognized as"},{"Start":"00:32.070 ","End":"00:35.740","Text":"revenue in the very next year because the work is done."},{"Start":"00:35.740 ","End":"00:39.680","Text":"We had an opening balance of 132,000 brought forward from"},{"Start":"00:39.680 ","End":"00:45.815","Text":"20X2 that was unearned revenue so it was a liability but we\u0027ve now done the work,"},{"Start":"00:45.815 ","End":"00:47.360","Text":"and therefore, we\u0027re going to take it out of"},{"Start":"00:47.360 ","End":"00:50.900","Text":"the liability and move it into the revenue account."},{"Start":"00:50.900 ","End":"00:55.075","Text":"Then we\u0027re told in the question that the cash that was received and"},{"Start":"00:55.075 ","End":"00:59.180","Text":"initially recognized as revenue was 1.5 million."},{"Start":"00:59.180 ","End":"01:05.225","Text":"We pop the 1.5 million into the cash column and 1.5 million into the revenue column."},{"Start":"01:05.225 ","End":"01:08.840","Text":"However, we\u0027re then told that"},{"Start":"01:08.840 ","End":"01:14.090","Text":"14 percent of that 1.5 million had not been earned. That was an estimate."},{"Start":"01:14.090 ","End":"01:20.535","Text":"14 percent of 1.5 million is equal to 210,000."},{"Start":"01:20.535 ","End":"01:27.260","Text":"That 210,000 needs to be taken out of revenue and put into the unearned revenue column."},{"Start":"01:27.260 ","End":"01:32.840","Text":"Now, it is a liability to us or an obligation to us because we"},{"Start":"01:32.840 ","End":"01:38.845","Text":"are obliged now to do the work in order to earn that cash received."},{"Start":"01:38.845 ","End":"01:40.830","Text":"Our balances at that point,"},{"Start":"01:40.830 ","End":"01:43.665","Text":"we\u0027ve got 4.5 million in cash."},{"Start":"01:43.665 ","End":"01:48.435","Text":"Unearned revenue is 210,000."},{"Start":"01:48.435 ","End":"01:52.860","Text":"Revenue is 1.422 million."},{"Start":"01:52.860 ","End":"01:57.425","Text":"The revenue of 1.422 million is the answer to a,"},{"Start":"01:57.425 ","End":"02:00.925","Text":"and the unearned revenue is the answer to b."},{"Start":"02:00.925 ","End":"02:05.900","Text":"For completeness, this is the closing entry that would be processed."},{"Start":"02:05.900 ","End":"02:09.820","Text":"We\u0027ll take the revenue out of the revenue account."},{"Start":"02:09.820 ","End":"02:14.150","Text":"We subtracting it and we\u0027d put it into the retained earnings account."},{"Start":"02:14.150 ","End":"02:16.130","Text":"We\u0027re transferring it from revenue,"},{"Start":"02:16.130 ","End":"02:20.105","Text":"which is income, and putting it into retained earnings."},{"Start":"02:20.105 ","End":"02:23.995","Text":"For those who are interested in the debits and the credits,"},{"Start":"02:23.995 ","End":"02:27.165","Text":"remember, cash is an asset,"},{"Start":"02:27.165 ","End":"02:29.315","Text":"an assets of a debit balance."},{"Start":"02:29.315 ","End":"02:34.820","Text":"Unearned revenue is a liability and liabilities have a credit balance."},{"Start":"02:34.820 ","End":"02:36.935","Text":"Revenue is income."},{"Start":"02:36.935 ","End":"02:38.790","Text":"They have credit balances."},{"Start":"02:38.790 ","End":"02:43.330","Text":"Retained earnings is equity and they have credit balances."},{"Start":"02:43.580 ","End":"02:47.870","Text":"First transaction was the unearned revenue from the prior year being"},{"Start":"02:47.870 ","End":"02:51.380","Text":"recognized as revenue in the current year. What are we doing here?"},{"Start":"02:51.380 ","End":"02:55.250","Text":"We are debiting because we are reducing our unearned revenue."},{"Start":"02:55.250 ","End":"02:58.790","Text":"You can see it\u0027s being reduced because it\u0027s being subtracted, it\u0027s in brackets."},{"Start":"02:58.790 ","End":"03:03.925","Text":"Therefore, we must be debiting it because it normally has a credit balance."},{"Start":"03:03.925 ","End":"03:10.955","Text":"Then 132,000 goes into revenue so we\u0027re making it revenue so we must credit it."},{"Start":"03:10.955 ","End":"03:14.300","Text":"The second transaction was the revenue that was recognized."},{"Start":"03:14.300 ","End":"03:16.250","Text":"In other words here, what had happened was,"},{"Start":"03:16.250 ","End":"03:17.855","Text":"we had received cash."},{"Start":"03:17.855 ","End":"03:19.220","Text":"Our cash account went up."},{"Start":"03:19.220 ","End":"03:22.925","Text":"Therefore, we must be increasing our cash, thus debiting it,"},{"Start":"03:22.925 ","End":"03:25.970","Text":"and we are initially recognizing it"},{"Start":"03:25.970 ","End":"03:29.870","Text":"as revenue and revenue as a credit balance. We credit it."},{"Start":"03:29.870 ","End":"03:32.150","Text":"Then the unearned revenue."},{"Start":"03:32.150 ","End":"03:36.440","Text":"The portion of the revenue that we believe was not earned,"},{"Start":"03:36.440 ","End":"03:38.540","Text":"we take it out of the revenue account."},{"Start":"03:38.540 ","End":"03:44.165","Text":"We debit it to reduce the otherwise credit balance and we credit"},{"Start":"03:44.165 ","End":"03:47.000","Text":"the unearned revenue liability because we\u0027re"},{"Start":"03:47.000 ","End":"03:50.619","Text":"making it a liability and liabilities have credit balances."},{"Start":"03:50.619 ","End":"03:53.325","Text":"These now have cash,"},{"Start":"03:53.325 ","End":"03:55.350","Text":"has a 4.5 million debit balance,"},{"Start":"03:55.350 ","End":"03:58.940","Text":"the unearned revenue has a 210,000 credit balance,"},{"Start":"03:58.940 ","End":"04:05.150","Text":"and the revenue has a 1,422,000 credit balance."},{"Start":"04:05.150 ","End":"04:08.150","Text":"Then we close off all our income and expense accounts."},{"Start":"04:08.150 ","End":"04:10.595","Text":"We only have 1 income account, the revenue."},{"Start":"04:10.595 ","End":"04:12.770","Text":"To do that, what we\u0027re doing is,"},{"Start":"04:12.770 ","End":"04:14.750","Text":"we are removing the revenue account,"},{"Start":"04:14.750 ","End":"04:16.410","Text":"which has a credit balance."},{"Start":"04:16.410 ","End":"04:19.580","Text":"Therefore, we need to debited and we"},{"Start":"04:19.580 ","End":"04:23.485","Text":"then credit it to the retained earnings account instead."},{"Start":"04:23.485 ","End":"04:29.340","Text":"Now, you have the debits and the credits if you wanted to process the journal entries."}],"ID":28560},{"Watched":false,"Name":"Exercise 3 - Introduction","Duration":"1m 5s","ChapterTopicVideoID":27425,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.605","Text":"Pour is a service company which started operations in July 20X0."},{"Start":"00:04.605 ","End":"00:07.620","Text":"Its financial year end is 31 December."},{"Start":"00:07.620 ","End":"00:11.535","Text":"That means in the first financial year ended 31 December,"},{"Start":"00:11.535 ","End":"00:16.215","Text":"X0, its financial year would be only 6 months."},{"Start":"00:16.215 ","End":"00:19.830","Text":"Pour purchases an annual insurance policy for"},{"Start":"00:19.830 ","End":"00:24.000","Text":"which payment takes place on the 1st of July of each year."},{"Start":"00:24.000 ","End":"00:27.840","Text":"That\u0027s a payment that takes place on the 1st of July of each year."},{"Start":"00:27.840 ","End":"00:31.470","Text":"The following table shows the amounts paid on"},{"Start":"00:31.470 ","End":"00:35.005","Text":"the 1st of July in each year in respect to this policy."},{"Start":"00:35.005 ","End":"00:41.570","Text":"This is the insurance premium that was paid in each of those 4 years."},{"Start":"00:41.570 ","End":"00:46.430","Text":"Part A, determine the amount of the insurance expense to recognize in"},{"Start":"00:46.430 ","End":"00:52.505","Text":"the income statement of Pour for the years ending 31 December 20X0-20X3."},{"Start":"00:52.505 ","End":"00:54.340","Text":"Remember that\u0027s 4 years."},{"Start":"00:54.340 ","End":"00:58.160","Text":"B, determine the balance of the prepaid insurance on"},{"Start":"00:58.160 ","End":"01:03.155","Text":"the balance sheet of Pour at 31 December 20X0- 20X3."},{"Start":"01:03.155 ","End":"01:06.810","Text":"In other words, it\u0027s 4 years."}],"ID":28561},{"Watched":false,"Name":"Exercise 3 - Part 1","Duration":"7m 26s","ChapterTopicVideoID":27426,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.555","Text":"This is the solution to the exercise on pour."},{"Start":"00:03.555 ","End":"00:05.910","Text":"Here we have the insurance expense,"},{"Start":"00:05.910 ","End":"00:08.870","Text":"which was the answer to part a for each of those years,"},{"Start":"00:08.870 ","End":"00:11.550","Text":"X0 through to X3 and here we have"},{"Start":"00:11.550 ","End":"00:16.353","Text":"the prepaid expense being the solution to part b for each of those 4 years,"},{"Start":"00:16.353 ","End":"00:18.450","Text":"X0 through to X3."},{"Start":"00:18.450 ","End":"00:21.660","Text":"We\u0027ll work through the workings from working 1 through to"},{"Start":"00:21.660 ","End":"00:25.545","Text":"working 4 to show you how we get to those figures."},{"Start":"00:25.545 ","End":"00:30.045","Text":"Working 1 for the year ended 20X0."},{"Start":"00:30.045 ","End":"00:32.910","Text":"Notice that we have a column for assets,"},{"Start":"00:32.910 ","End":"00:34.470","Text":"we have a column for liabilities,"},{"Start":"00:34.470 ","End":"00:36.480","Text":"and we have a column for equity and that is"},{"Start":"00:36.480 ","End":"00:39.200","Text":"because we\u0027re working with the accounting equation,"},{"Start":"00:39.200 ","End":"00:42.560","Text":"assets minus liabilities equals equity."},{"Start":"00:42.560 ","End":"00:45.320","Text":"So we\u0027ve got all the columns there just for completeness sake,"},{"Start":"00:45.320 ","End":"00:48.770","Text":"but we do not have a liability in this particular question."},{"Start":"00:48.770 ","End":"00:51.020","Text":"So we have an opening balance in"},{"Start":"00:51.020 ","End":"00:55.850","Text":"20X0 and we\u0027ve got them all as 0 and the reason for that is because"},{"Start":"00:55.850 ","End":"00:59.210","Text":"the company began operations in 20X0 and therefore there was"},{"Start":"00:59.210 ","End":"01:03.965","Text":"no prior year from which closing balances could be brought forward into 20X0."},{"Start":"01:03.965 ","End":"01:07.490","Text":"That\u0027s why that\u0027s all 0. Then the next line,"},{"Start":"01:07.490 ","End":"01:11.060","Text":"prepaid expense from last year recognized in the current year,"},{"Start":"01:11.060 ","End":"01:14.450","Text":"that will also be 0 because we don\u0027t have a prior year."},{"Start":"01:14.450 ","End":"01:19.040","Text":"Because 20X0, again is our first year of operations."},{"Start":"01:19.040 ","End":"01:22.070","Text":"Then if we go through to the question again,"},{"Start":"01:22.070 ","End":"01:28.465","Text":"you\u0027ll notice that we\u0027re told that we made a cash payment on the 1st of July of 60,000."},{"Start":"01:28.465 ","End":"01:31.730","Text":"This particular question simply tells us that we have a cash payment."},{"Start":"01:31.730 ","End":"01:34.625","Text":"It does not tell us how we recognized it."},{"Start":"01:34.625 ","End":"01:36.980","Text":"In this particular version of the solution,"},{"Start":"01:36.980 ","End":"01:42.305","Text":"we\u0027re going to assume we recognize it initially as a prepaid expense."},{"Start":"01:42.305 ","End":"01:44.135","Text":"We show the cash payment,"},{"Start":"01:44.135 ","End":"01:45.259","Text":"which is an outflow,"},{"Start":"01:45.259 ","End":"01:48.440","Text":"so that\u0027s why we have it in brackets to show that we\u0027re"},{"Start":"01:48.440 ","End":"01:52.910","Text":"subtracting it from whatever cash reserves we might have had in the cash account,"},{"Start":"01:52.910 ","End":"01:55.100","Text":"and then we put it into the prepaid expense."},{"Start":"01:55.100 ","End":"01:57.440","Text":"Now, why are we putting it in the prepaid expense?"},{"Start":"01:57.440 ","End":"01:59.690","Text":"We are purchasing the insurance on"},{"Start":"01:59.690 ","End":"02:04.385","Text":"the 1st of July and the amount that we\u0027re paying is 60,000."},{"Start":"02:04.385 ","End":"02:07.895","Text":"But we\u0027re told that it is a 1-year premium."},{"Start":"02:07.895 ","End":"02:12.650","Text":"This particular premium is going to end on the 30th of June X1."},{"Start":"02:12.650 ","End":"02:19.145","Text":"So this is 1st of July X0 going to carry through until the 30th of June X1."},{"Start":"02:19.145 ","End":"02:23.285","Text":"Now there\u0027ll be no problems at all if our year ended on the 30th of June."},{"Start":"02:23.285 ","End":"02:29.235","Text":"However, our year ends on the 31st of December, X0."},{"Start":"02:29.235 ","End":"02:30.935","Text":"On the 1st of July,"},{"Start":"02:30.935 ","End":"02:35.870","Text":"60,000 is paid covering us for insurance for a 12-month period."},{"Start":"02:35.870 ","End":"02:37.280","Text":"But what we need to show for"},{"Start":"02:37.280 ","End":"02:41.540","Text":"the 31st of December X0 is how much did that insurance cost us for"},{"Start":"02:41.540 ","End":"02:49.130","Text":"the 6 months to the 31st of December X0 and how much was prepaid at that point?"},{"Start":"02:49.130 ","End":"02:50.540","Text":"Well, on the 1st of July,"},{"Start":"02:50.540 ","End":"02:55.970","Text":"the entire 60,000 is prepaid because we haven\u0027t got the benefit of the insurance yet."},{"Start":"02:55.970 ","End":"02:59.270","Text":"As the days progress and turn into months so that\u0027s"},{"Start":"02:59.270 ","End":"03:03.395","Text":"60,000 gets used up until the end of the 30th of June X0,"},{"Start":"03:03.395 ","End":"03:07.060","Text":"we\u0027ve used up the entire 60,000 that we\u0027ve paid for."},{"Start":"03:07.060 ","End":"03:10.800","Text":"From the 1st of July X0 to the 31st of December X0,"},{"Start":"03:10.800 ","End":"03:13.970","Text":"we\u0027ve got 6 months from the 31st,"},{"Start":"03:13.970 ","End":"03:16.565","Text":"December X0 through to the 30th of June X1,"},{"Start":"03:16.565 ","End":"03:18.155","Text":"there are another 6 months."},{"Start":"03:18.155 ","End":"03:20.660","Text":"By the time we get to the financial year,"},{"Start":"03:20.660 ","End":"03:22.205","Text":"end of 31st December X0,"},{"Start":"03:22.205 ","End":"03:24.980","Text":"1/2 of the year will have passed by,"},{"Start":"03:24.980 ","End":"03:29.640","Text":"so 6 out of 12 months that we\u0027d paid for times"},{"Start":"03:29.640 ","End":"03:34.730","Text":"by the 60,000 is the insurance expense that we have incurred."},{"Start":"03:34.730 ","End":"03:37.580","Text":"That portion of the prepayment is now no longer"},{"Start":"03:37.580 ","End":"03:40.960","Text":"prepaid because we\u0027ve actually received the benefit,"},{"Start":"03:40.960 ","End":"03:44.010","Text":"so that works out to 30,000 obviously."},{"Start":"03:44.010 ","End":"03:47.250","Text":"So 30,000 has been used and remember,"},{"Start":"03:47.250 ","End":"03:51.880","Text":"the 60,000 was initially treated as prepaid."},{"Start":"03:51.880 ","End":"03:57.755","Text":"So 60,000 is prepaid and 30,000 is then used over the next 6 months."},{"Start":"03:57.755 ","End":"04:00.470","Text":"By the time we get 31st December X0,"},{"Start":"04:00.470 ","End":"04:07.305","Text":"the prepaid is now a net of 60 minus the 30,000 that had been used."},{"Start":"04:07.305 ","End":"04:10.150","Text":"The prepaid is now 30."},{"Start":"04:10.150 ","End":"04:16.640","Text":"The expense that was incurred to the 30th of December 20X0 is 60,000,"},{"Start":"04:16.640 ","End":"04:18.715","Text":"the original prepayment times"},{"Start":"04:18.715 ","End":"04:21.960","Text":"6 months out of the 12 months that we\u0027d originally paid for."},{"Start":"04:21.960 ","End":"04:26.940","Text":"So 30,000 must come out of the prepayment so you can see us reducing"},{"Start":"04:26.940 ","End":"04:32.225","Text":"the prepayment and the 30,000 is put into the expense account, the insurance expense."},{"Start":"04:32.225 ","End":"04:37.040","Text":"What we have left in our asset account is obviously the outflow of cash."},{"Start":"04:37.040 ","End":"04:42.185","Text":"We have a prepaid expense of 30,000 that was the answer to part b."},{"Start":"04:42.185 ","End":"04:45.140","Text":"Then we have the expense of 30,000,"},{"Start":"04:45.140 ","End":"04:47.855","Text":"and that was the answer to part a."},{"Start":"04:47.855 ","End":"04:50.510","Text":"Now in this question, we weren\u0027t asked for closing entries."},{"Start":"04:50.510 ","End":"04:52.100","Text":"But for completeness\u0027 sake,"},{"Start":"04:52.100 ","End":"04:53.705","Text":"let\u0027s show you the closing entries."},{"Start":"04:53.705 ","End":"04:57.485","Text":"If there were no other transactions that occurred in this particular company,"},{"Start":"04:57.485 ","End":"05:00.510","Text":"what one would do is close off all your income and expenses."},{"Start":"05:00.510 ","End":"05:02.360","Text":"Here we only have an expense."},{"Start":"05:02.360 ","End":"05:03.830","Text":"The expense was 30,000."},{"Start":"05:03.830 ","End":"05:05.690","Text":"We need to take it out of the expense account,"},{"Start":"05:05.690 ","End":"05:06.965","Text":"thus we\u0027re subtracting it,"},{"Start":"05:06.965 ","End":"05:09.595","Text":"and we need to put it into the retained earnings."},{"Start":"05:09.595 ","End":"05:12.560","Text":"That would then carry out the expense account so that"},{"Start":"05:12.560 ","End":"05:17.465","Text":"the expense account is now zeroed for the start of the 20X1 year."},{"Start":"05:17.465 ","End":"05:20.195","Text":"For those who are interested in the debits and the credits,"},{"Start":"05:20.195 ","End":"05:22.220","Text":"remember cash is an asset,"},{"Start":"05:22.220 ","End":"05:25.070","Text":"and assets have debit balances."},{"Start":"05:25.070 ","End":"05:29.540","Text":"Prepaid expenses are assets and they have debit balances."},{"Start":"05:29.540 ","End":"05:34.370","Text":"Expenses are expenses, and they have debit balances,"},{"Start":"05:34.370 ","End":"05:36.470","Text":"and retained earnings is equity,"},{"Start":"05:36.470 ","End":"05:38.510","Text":"and they have credit balances."},{"Start":"05:38.510 ","End":"05:42.290","Text":"Now we need to bear that in mind when we process the journal entries."},{"Start":"05:42.290 ","End":"05:44.030","Text":"Let\u0027s look at the first transaction."},{"Start":"05:44.030 ","End":"05:46.265","Text":"There is a cash payment of 60,000,"},{"Start":"05:46.265 ","End":"05:48.020","Text":"that\u0027s an outflow of cash."},{"Start":"05:48.020 ","End":"05:50.180","Text":"That means our asset is decreasing,"},{"Start":"05:50.180 ","End":"05:51.950","Text":"but assets have debit balances,"},{"Start":"05:51.950 ","End":"05:53.690","Text":"so how do we decrease an asset?"},{"Start":"05:53.690 ","End":"05:55.655","Text":"We must credit it."},{"Start":"05:55.655 ","End":"06:00.365","Text":"We then treat that initially as a prepaid asset,"},{"Start":"06:00.365 ","End":"06:02.540","Text":"and assets have debit balances,"},{"Start":"06:02.540 ","End":"06:04.010","Text":"so we debit that."},{"Start":"06:04.010 ","End":"06:05.630","Text":"You have your debit and your credit for"},{"Start":"06:05.630 ","End":"06:08.330","Text":"your journal entry if you want to draw up a general journal."},{"Start":"06:08.330 ","End":"06:10.940","Text":"Then we have the expense incurred of that"},{"Start":"06:10.940 ","End":"06:14.345","Text":"60,000 that we initially treated as being a prepaid asset,"},{"Start":"06:14.345 ","End":"06:17.165","Text":"we realize that 30,000 is now being used,"},{"Start":"06:17.165 ","End":"06:18.980","Text":"so we take it out of the asset,"},{"Start":"06:18.980 ","End":"06:20.630","Text":"thus reducing the asset."},{"Start":"06:20.630 ","End":"06:22.490","Text":"How do you reduce an asset?"},{"Start":"06:22.490 ","End":"06:24.050","Text":"Assets have debit balances,"},{"Start":"06:24.050 ","End":"06:25.310","Text":"so therefore, to reduce it,"},{"Start":"06:25.310 ","End":"06:30.350","Text":"we must credit it and we treat it instead now as an expense."},{"Start":"06:30.350 ","End":"06:34.490","Text":"Expenses have debit balances so we debit the expense account."},{"Start":"06:34.490 ","End":"06:36.665","Text":"Then we get to the closing entry."},{"Start":"06:36.665 ","End":"06:39.140","Text":"How do we transfer an expense out of"},{"Start":"06:39.140 ","End":"06:43.745","Text":"the expense account and into retained earnings while expenses have debit balances?"},{"Start":"06:43.745 ","End":"06:47.315","Text":"If you want to take it out or thus reduce it to 0,"},{"Start":"06:47.315 ","End":"06:49.205","Text":"you have to credit it."},{"Start":"06:49.205 ","End":"06:54.755","Text":"Therefore, the other side of the entry would be to debit it to the retained earnings."},{"Start":"06:54.755 ","End":"06:56.690","Text":"In this particular question,"},{"Start":"06:56.690 ","End":"06:58.250","Text":"if we didn\u0027t have any income,"},{"Start":"06:58.250 ","End":"07:01.070","Text":"our retained earnings would in fact have a debit balance."},{"Start":"07:01.070 ","End":"07:03.530","Text":"Retained earnings account normally has"},{"Start":"07:03.530 ","End":"07:07.100","Text":"a credit balance because equity has a credit balance,"},{"Start":"07:07.100 ","End":"07:08.825","Text":"that\u0027s if the equity is positive,"},{"Start":"07:08.825 ","End":"07:11.120","Text":"but we do indeed get negative equity,"},{"Start":"07:11.120 ","End":"07:13.504","Text":"which is when we are in financial difficulty."},{"Start":"07:13.504 ","End":"07:14.870","Text":"So our retained earnings,"},{"Start":"07:14.870 ","End":"07:16.490","Text":"if we are in financial difficulty,"},{"Start":"07:16.490 ","End":"07:19.145","Text":"would reflect a debit balance."},{"Start":"07:19.145 ","End":"07:21.545","Text":"But if we have positive retained earnings,"},{"Start":"07:21.545 ","End":"07:23.720","Text":"it would be a credit balance."},{"Start":"07:23.720 ","End":"07:26.610","Text":"Now let\u0027s move on to Working 2."}],"ID":28562},{"Watched":false,"Name":"Exercise 3 - Part 2","Duration":"5m 58s","ChapterTopicVideoID":27427,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.805","Text":"Working 2 for 20X1."},{"Start":"00:02.805 ","End":"00:07.410","Text":"We start with all of those closing balances from 20X0 being brought through,"},{"Start":"00:07.410 ","End":"00:08.730","Text":"so we have our cash outflow,"},{"Start":"00:08.730 ","End":"00:11.250","Text":"60,000, the 30,000,"},{"Start":"00:11.250 ","End":"00:13.485","Text":"which was the remainder of the prepaid expense,"},{"Start":"00:13.485 ","End":"00:16.160","Text":"and we have our retained earnings 30,000."},{"Start":"00:16.160 ","End":"00:18.920","Text":"Notice that our expense opening balance is 0"},{"Start":"00:18.920 ","End":"00:22.825","Text":"because we closed off all of our income and expenses in the year prior."},{"Start":"00:22.825 ","End":"00:27.694","Text":"First thing we do, if we first treat it as a prepaid expense,"},{"Start":"00:27.694 ","End":"00:31.880","Text":"is we transfer that prepaid expense into the expense account."},{"Start":"00:31.880 ","End":"00:35.567","Text":"Remember, a prepaid expense has a debit balance,"},{"Start":"00:35.567 ","End":"00:38.779","Text":"so now we\u0027re taking it out of the prepaid expense."},{"Start":"00:38.779 ","End":"00:44.630","Text":"We must credit it and we put it into the expense account instead by debiting it."},{"Start":"00:44.630 ","End":"00:48.290","Text":"Just to remind you, and we showed the timeline on the previous slide,"},{"Start":"00:48.290 ","End":"00:49.820","Text":"but let\u0027s show it again here."},{"Start":"00:49.820 ","End":"00:54.535","Text":"This is to do with the payment that we made on the 1st of July X0,"},{"Start":"00:54.535 ","End":"00:59.165","Text":"that would cover us for insurance to the 30th of June X1."},{"Start":"00:59.165 ","End":"01:04.905","Text":"Our initial year-end was the 31st of December X0,"},{"Start":"01:04.905 ","End":"01:09.200","Text":"and that\u0027s what we accounted for in the previous working, Working 1."},{"Start":"01:09.200 ","End":"01:12.335","Text":"We had initially paid 60,000,"},{"Start":"01:12.335 ","End":"01:16.100","Text":"which we had treated as a prepaid asset."},{"Start":"01:16.100 ","End":"01:20.675","Text":"Then we realized that we\u0027d used up 1/2 of it in the first 6 months,"},{"Start":"01:20.675 ","End":"01:25.780","Text":"so that we treated as an expense and that left us at the 31st, December X0,"},{"Start":"01:25.780 ","End":"01:30.305","Text":"with 30,000 balance in our asset account,"},{"Start":"01:30.305 ","End":"01:35.150","Text":"60,000 asset, this is the amount we took out to treat as an expense,"},{"Start":"01:35.150 ","End":"01:38.315","Text":"leaving us with a balance of 30,000 in the asset account."},{"Start":"01:38.315 ","End":"01:40.130","Text":"Now what we\u0027re doing here,"},{"Start":"01:40.130 ","End":"01:42.455","Text":"with this transfer out of the prepaid expense,"},{"Start":"01:42.455 ","End":"01:43.715","Text":"into the expense account,"},{"Start":"01:43.715 ","End":"01:47.495","Text":"is we\u0027re now saying, that 30,000 that we started the year with,"},{"Start":"01:47.495 ","End":"01:50.865","Text":"so the closing balance at 31st December X0,"},{"Start":"01:50.865 ","End":"01:55.165","Text":"being our opening balance on the first of the first X1,"},{"Start":"01:55.165 ","End":"02:00.310","Text":"is now going to be treated as an expense because another 6 months has gone by."},{"Start":"02:00.310 ","End":"02:01.970","Text":"At the 30th of June,"},{"Start":"02:01.970 ","End":"02:06.935","Text":"which is halfway through our current financial year ended 31st December X1,"},{"Start":"02:06.935 ","End":"02:10.655","Text":"our asset has now dropped to 0."},{"Start":"02:10.655 ","End":"02:14.555","Text":"We had an opening balance in the asset account of 30,000,"},{"Start":"02:14.555 ","End":"02:19.205","Text":"and we subtract the 30,000 to treat that as an expense,"},{"Start":"02:19.205 ","End":"02:22.460","Text":"and now our asset is sitting at 0."},{"Start":"02:22.460 ","End":"02:25.625","Text":"The next thing we do is we make a payment."},{"Start":"02:25.625 ","End":"02:31.650","Text":"The question tells us that we make a payment on the 1st of July X1,"},{"Start":"02:31.650 ","End":"02:34.670","Text":"which is roundabout here on the timeline,"},{"Start":"02:34.670 ","End":"02:38.350","Text":"1st of July, X1."},{"Start":"02:38.350 ","End":"02:40.895","Text":"We start the timeline all over again."},{"Start":"02:40.895 ","End":"02:42.590","Text":"Now we\u0027re making a payment."},{"Start":"02:42.590 ","End":"02:44.135","Text":"The insurance\u0027s gone up,"},{"Start":"02:44.135 ","End":"02:47.945","Text":"due to inflation obviously, 72,000,"},{"Start":"02:47.945 ","End":"02:50.540","Text":"and we\u0027ll once again assume that when we make"},{"Start":"02:50.540 ","End":"02:54.110","Text":"that payment of 72,000 we\u0027ll treat it as an asset."},{"Start":"02:54.110 ","End":"02:55.955","Text":"Let\u0027s have a look at the table below."},{"Start":"02:55.955 ","End":"02:58.160","Text":"The cash payment was 72,000,"},{"Start":"02:58.160 ","End":"03:02.975","Text":"so you can see our asset is being reduced by 72,000 because it\u0027s an outflow of cash,"},{"Start":"03:02.975 ","End":"03:05.910","Text":"and we\u0027re treating it as an asset,"},{"Start":"03:05.910 ","End":"03:07.790","Text":"a prepaid expense,"},{"Start":"03:07.790 ","End":"03:10.130","Text":"so we debit the asset account,"},{"Start":"03:10.130 ","End":"03:12.290","Text":"and we\u0027re crediting the cash."},{"Start":"03:12.290 ","End":"03:15.380","Text":"Now this second payment that we make of 72,000,"},{"Start":"03:15.380 ","End":"03:19.560","Text":"carries us through to the 30th of June X2,"},{"Start":"03:19.560 ","End":"03:26.120","Text":"but our financial year-end that we\u0027re dealing with is the 31st of December X1."},{"Start":"03:26.120 ","End":"03:31.875","Text":"The 72,000, carries us through for 12-month period."},{"Start":"03:31.875 ","End":"03:34.845","Text":"That\u0027s 6,000 a month, if you like."},{"Start":"03:34.845 ","End":"03:43.725","Text":"72,000 divided by 12 months is equal to 6,000 per month,"},{"Start":"03:43.725 ","End":"03:47.800","Text":"6 months have gone by since we made the payment on the 1st of July,"},{"Start":"03:47.800 ","End":"03:50.415","Text":"through to 31st December,"},{"Start":"03:50.415 ","End":"03:53.235","Text":"so if we multiply that by 6 months,"},{"Start":"03:53.235 ","End":"03:55.980","Text":"you get to 36,000,"},{"Start":"03:55.980 ","End":"03:59.650","Text":"so 36,000 has been used,"},{"Start":"04:01.550 ","End":"04:05.390","Text":"and when we use up that prepayment,"},{"Start":"04:05.390 ","End":"04:10.140","Text":"we\u0027re going to treat it as an insurance expense."},{"Start":"04:10.460 ","End":"04:13.330","Text":"At 31st December X1,"},{"Start":"04:13.330 ","End":"04:18.610","Text":"the amount left in our asset account is going to be 36,000."},{"Start":"04:18.610 ","End":"04:22.260","Text":"Being the original 72,000 being put into the asset account,"},{"Start":"04:22.260 ","End":"04:25.670","Text":"there\u0027s a 36,000 that was taken out and treated as an expense,"},{"Start":"04:25.670 ","End":"04:29.520","Text":"leaving us with that asset of 36,000."},{"Start":"04:29.630 ","End":"04:34.295","Text":"This is the transfer out of the prepaid asset account."},{"Start":"04:34.295 ","End":"04:37.130","Text":"Remember, prepayments are assets."},{"Start":"04:37.130 ","End":"04:39.025","Text":"Assets have debit balances,"},{"Start":"04:39.025 ","End":"04:40.975","Text":"so to reduce an asset,"},{"Start":"04:40.975 ","End":"04:42.160","Text":"you credit it,"},{"Start":"04:42.160 ","End":"04:44.345","Text":"and we\u0027re treating it as an expense,"},{"Start":"04:44.345 ","End":"04:48.935","Text":"so we debited because expenses are also debits."},{"Start":"04:48.935 ","End":"04:52.625","Text":"Here we have the answer to part a,"},{"Start":"04:52.625 ","End":"04:55.489","Text":"which was what is the insurance expense?"},{"Start":"04:55.489 ","End":"04:57.515","Text":"Well, it\u0027s 66,000,"},{"Start":"04:57.515 ","End":"05:00.095","Text":"and what\u0027s the answer to part b?"},{"Start":"05:00.095 ","End":"05:02.350","Text":"What\u0027s the prepaid expense balance?"},{"Start":"05:02.350 ","End":"05:07.670","Text":"It\u0027s an asset, so it will appear in the balance sheet and the answer is 36,000."},{"Start":"05:07.670 ","End":"05:10.790","Text":"Purely for completeness, we\u0027ll do the closing entry,"},{"Start":"05:10.790 ","End":"05:12.245","Text":"but it was not required."},{"Start":"05:12.245 ","End":"05:15.635","Text":"We take the expenses out of the expense accounts,"},{"Start":"05:15.635 ","End":"05:17.660","Text":"and we take the income out of the income accounts,"},{"Start":"05:17.660 ","End":"05:20.000","Text":"and we transfer them to retained earnings,"},{"Start":"05:20.000 ","End":"05:21.680","Text":"so our expense has a debit balance,"},{"Start":"05:21.680 ","End":"05:22.790","Text":"so how do you take it out?"},{"Start":"05:22.790 ","End":"05:26.025","Text":"Well, you must credit it to reverse it to 0,"},{"Start":"05:26.025 ","End":"05:30.605","Text":"and we\u0027d put it on the debit side of the retained earnings account instead."},{"Start":"05:30.605 ","End":"05:33.800","Text":"Now, assuming we didn\u0027t have any other transactions at all,"},{"Start":"05:33.800 ","End":"05:36.560","Text":"remember our retained earnings account was already in a debit balance,"},{"Start":"05:36.560 ","End":"05:38.405","Text":"as at the end of 20X0,"},{"Start":"05:38.405 ","End":"05:42.830","Text":"so our debit balance has grown to 96,000."},{"Start":"05:42.830 ","End":"05:45.970","Text":"Our prepaid expense has a debit balance,"},{"Start":"05:45.970 ","End":"05:48.560","Text":"and our cash has a credit balance,"},{"Start":"05:48.560 ","End":"05:51.305","Text":"which is, we are in overdraft,"},{"Start":"05:51.305 ","End":"05:55.175","Text":"which is not good, so we have a net outflow in our bank account."},{"Start":"05:55.175 ","End":"05:58.380","Text":"Now let\u0027s move on to Working 3."}],"ID":28563},{"Watched":false,"Name":"Exercise 3 - Part 3","Duration":"5m 39s","ChapterTopicVideoID":27428,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:01.100 ","End":"00:03.285","Text":"Here\u0027s our Working 3."},{"Start":"00:03.285 ","End":"00:08.145","Text":"I\u0027m going to repeat the transaction timeline from Working 2."},{"Start":"00:08.145 ","End":"00:11.160","Text":"On the 1st of July X1,"},{"Start":"00:11.160 ","End":"00:13.710","Text":"we made a payment of 72,000,"},{"Start":"00:13.710 ","End":"00:18.045","Text":"which we assumed we initially treated as an asset."},{"Start":"00:18.045 ","End":"00:22.740","Text":"This carries us through to the 30th of June X1,"},{"Start":"00:22.740 ","End":"00:25.935","Text":"which is halfway through our current financial year,"},{"Start":"00:25.935 ","End":"00:29.415","Text":"which ends on the 31st of December X2."},{"Start":"00:29.415 ","End":"00:34.380","Text":"The last financial year that we worked on for Working 2 was"},{"Start":"00:34.380 ","End":"00:40.110","Text":"the year ended 31st of December X1."},{"Start":"00:40.110 ","End":"00:42.510","Text":"In the 31st December X1,"},{"Start":"00:42.510 ","End":"00:44.820","Text":"we treated 36,000,"},{"Start":"00:44.820 ","End":"00:49.949","Text":"1/2 of it or 6 months out of 12 months, as an expense."},{"Start":"00:49.949 ","End":"00:54.185","Text":"That meant that at 31st December X1 in our asset account,"},{"Start":"00:54.185 ","End":"00:57.805","Text":"we now had a balance of 36,000 left over,"},{"Start":"00:57.805 ","End":"00:59.670","Text":"72 entered into the asset,"},{"Start":"00:59.670 ","End":"01:01.680","Text":"36,000 came out of the asset,"},{"Start":"01:01.680 ","End":"01:05.075","Text":"and we\u0027ve got 36,000 left over in the asset account."},{"Start":"01:05.075 ","End":"01:09.320","Text":"You can see our opening balances in our 20X2 financial year,"},{"Start":"01:09.320 ","End":"01:11.960","Text":"in other words, on the 1st of January 20X2,"},{"Start":"01:11.960 ","End":"01:15.350","Text":"we\u0027ve got our opening balances being the closing balances"},{"Start":"01:15.350 ","End":"01:18.925","Text":"at the end of 31st December 20X1."},{"Start":"01:18.925 ","End":"01:22.370","Text":"We had a prepaid expense of 36,000 brought forward."},{"Start":"01:22.370 ","End":"01:24.740","Text":"We obviously, also had a net outflow of"},{"Start":"01:24.740 ","End":"01:28.895","Text":"132,000 and we had our retained earnings of 96,000."},{"Start":"01:28.895 ","End":"01:33.170","Text":"Now, that 36,000 opening balance is this 36,000"},{"Start":"01:33.170 ","End":"01:37.739","Text":"that you see on our timeline on the 31st of December X1."},{"Start":"01:37.739 ","End":"01:40.310","Text":"Now, remember that 72,000 we paid on the 1st of"},{"Start":"01:40.310 ","End":"01:43.460","Text":"July carries us through into the 30th of June X1."},{"Start":"01:43.460 ","End":"01:46.940","Text":"That means the remaining 36,000 that we\u0027d"},{"Start":"01:46.940 ","End":"01:51.425","Text":"paid for halfway through last year is now going to be used up."},{"Start":"01:51.425 ","End":"01:55.910","Text":"We must take it out of that asset account and treat it as an expense."},{"Start":"01:55.910 ","End":"01:58.555","Text":"At the 30th of June X1,"},{"Start":"01:58.555 ","End":"02:02.015","Text":"our asset is now sitting at 0."},{"Start":"02:02.015 ","End":"02:03.860","Text":"We had an asset of 36,000."},{"Start":"02:03.860 ","End":"02:09.695","Text":"We\u0027ve taken 36,000 out and treated it as an expense, so now it\u0027s sitting at 0."},{"Start":"02:09.695 ","End":"02:15.350","Text":"That transfer out of the prepaid expense account being the asset account is shown here."},{"Start":"02:15.350 ","End":"02:20.090","Text":"Last year\u0027s prepaid expense recognized as an expense in the current year."},{"Start":"02:20.090 ","End":"02:25.550","Text":"We\u0027re taking the 36,000 out of the asset account and treating it as an expense."},{"Start":"02:25.550 ","End":"02:28.985","Text":"For those of you who are interested in the debits and credits,"},{"Start":"02:28.985 ","End":"02:31.820","Text":"the prepaid expense is an asset and therefore,"},{"Start":"02:31.820 ","End":"02:35.150","Text":"it has a debit balance so if you want to reduce it,"},{"Start":"02:35.150 ","End":"02:36.995","Text":"you\u0027re going to credit it."},{"Start":"02:36.995 ","End":"02:39.330","Text":"Expenses have debit balances,"},{"Start":"02:39.330 ","End":"02:41.090","Text":"so if you want to create an expense,"},{"Start":"02:41.090 ","End":"02:42.260","Text":"you need to debit it."},{"Start":"02:42.260 ","End":"02:46.885","Text":"There you have the debits and credits for the first transaction."},{"Start":"02:46.885 ","End":"02:48.355","Text":"Then if you look at the question,"},{"Start":"02:48.355 ","End":"02:50.495","Text":"you\u0027re told that in 20X2,"},{"Start":"02:50.495 ","End":"02:53.810","Text":"on the 1st of July X1,"},{"Start":"02:53.810 ","End":"02:58.720","Text":"you have a payment that is made of 84,000."},{"Start":"02:58.720 ","End":"03:04.685","Text":"As I say, we\u0027re assuming we initially treat that as a prepaid expense, which is an asset."},{"Start":"03:04.685 ","End":"03:11.440","Text":"Now, that payment is going to cover us until the 30th of June X2."},{"Start":"03:11.440 ","End":"03:19.560","Text":"But we\u0027re working on financial year ended 31st of December X2."},{"Start":"03:19.560 ","End":"03:24.940","Text":"That 84,000 is initially treated as a prepaid expense."},{"Start":"03:24.940 ","End":"03:26.275","Text":"We got cash paid,"},{"Start":"03:26.275 ","End":"03:29.540","Text":"84,000 comes out of the cash column."},{"Start":"03:30.110 ","End":"03:32.790","Text":"Remember, cash is supposed to be an asset,"},{"Start":"03:32.790 ","End":"03:34.745","Text":"so if you want to reduce your cash asset,"},{"Start":"03:34.745 ","End":"03:37.225","Text":"you\u0027re going to credit it."},{"Start":"03:37.225 ","End":"03:40.220","Text":"Then we\u0027re going to treat it as an asset."},{"Start":"03:40.220 ","End":"03:41.720","Text":"Assets have debit balances,"},{"Start":"03:41.720 ","End":"03:43.640","Text":"so therefore, we\u0027re going to debit it."},{"Start":"03:43.640 ","End":"03:48.080","Text":"The next thing we do is we realize that if we\u0027ve made the payment on"},{"Start":"03:48.080 ","End":"03:54.740","Text":"the 1st of July X1 and we\u0027re doing the financial period ended 31st December X2,"},{"Start":"03:54.740 ","End":"03:59.225","Text":"1/2 of that prepayment asset has not been used up."},{"Start":"03:59.225 ","End":"04:02.530","Text":"That means 42,000,"},{"Start":"04:02.530 ","End":"04:06.080","Text":"6 out of 12 months or 1/2 of the year,"},{"Start":"04:06.080 ","End":"04:09.755","Text":"has been treated or must be treated as an expense."},{"Start":"04:09.755 ","End":"04:12.640","Text":"Therefore, on the 31st of December X2,"},{"Start":"04:12.640 ","End":"04:14.480","Text":"our current financial year end,"},{"Start":"04:14.480 ","End":"04:22.225","Text":"we\u0027re going to have the remaining 42,000 shown in our asset as its closing balance."},{"Start":"04:22.225 ","End":"04:25.305","Text":"The expense incurred 84,000,"},{"Start":"04:25.305 ","End":"04:27.135","Text":"1/2 of it is now been used up,"},{"Start":"04:27.135 ","End":"04:29.330","Text":"so we take 1/2 of it out of the asset account."},{"Start":"04:29.330 ","End":"04:30.500","Text":"How do you reduce an asset?"},{"Start":"04:30.500 ","End":"04:33.095","Text":"You credit it and you"},{"Start":"04:33.095 ","End":"04:36.330","Text":"take it out of the asset account and put it into your expense account."},{"Start":"04:36.330 ","End":"04:37.940","Text":"How do you create an expense account?"},{"Start":"04:37.940 ","End":"04:39.190","Text":"Well, they have debit balances,"},{"Start":"04:39.190 ","End":"04:41.115","Text":"so therefore, you must debit it."},{"Start":"04:41.115 ","End":"04:42.885","Text":"Our prepaid expenses,"},{"Start":"04:42.885 ","End":"04:44.510","Text":"we started off with 36,000."},{"Start":"04:44.510 ","End":"04:46.910","Text":"We took it out to treat it as an expense."},{"Start":"04:46.910 ","End":"04:48.425","Text":"We put 84,000 in."},{"Start":"04:48.425 ","End":"04:50.615","Text":"We took out 1/2 of it, 42,000,"},{"Start":"04:50.615 ","End":"04:53.500","Text":"so we now have a balance of 42,000."},{"Start":"04:53.500 ","End":"04:56.135","Text":"That 42,000 is the answer to b."},{"Start":"04:56.135 ","End":"04:57.725","Text":"If we add up the expenses,"},{"Start":"04:57.725 ","End":"04:59.780","Text":"we put 36,000 in,"},{"Start":"04:59.780 ","End":"05:01.475","Text":"then we look at the expenses."},{"Start":"05:01.475 ","End":"05:05.340","Text":"We put 36,000 in and then we put in 42 000,"},{"Start":"05:05.340 ","End":"05:08.110","Text":"so we have a total of 78,000."},{"Start":"05:08.110 ","End":"05:09.870","Text":"This is the answer to a."},{"Start":"05:09.870 ","End":"05:12.990","Text":"For those who are interested in completeness,"},{"Start":"05:12.990 ","End":"05:16.640","Text":"we then transfer our income and expense accounts to retained earnings."},{"Start":"05:16.640 ","End":"05:18.170","Text":"Well, we don\u0027t have any income accounts,"},{"Start":"05:18.170 ","End":"05:19.550","Text":"but we\u0027ve got an expense account,"},{"Start":"05:19.550 ","End":"05:21.140","Text":"so it has a debit balance."},{"Start":"05:21.140 ","End":"05:22.760","Text":"To get rid of the expense account,"},{"Start":"05:22.760 ","End":"05:27.240","Text":"you credit it and you debit it to the retained earnings."},{"Start":"05:27.240 ","End":"05:29.125","Text":"At the end of the year,"},{"Start":"05:29.125 ","End":"05:31.590","Text":"31st December 20X2,"},{"Start":"05:31.590 ","End":"05:34.515","Text":"our expense account would have a 0 balance."},{"Start":"05:34.515 ","End":"05:39.240","Text":"Let\u0027s move on to 20X3, Working 4."}],"ID":28564},{"Watched":false,"Name":"Exercise 3 - Part 4","Duration":"5m 57s","ChapterTopicVideoID":27429,"CourseChapterTopicPlaylistID":254925,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.490","Text":"I\u0027ll start by putting in the timeline from"},{"Start":"00:02.490 ","End":"00:05.925","Text":"the prior table so you can see it on this table."},{"Start":"00:05.925 ","End":"00:14.850","Text":"We paid on the 1st of July X2 an amount of 84,000 which we"},{"Start":"00:14.850 ","End":"00:24.105","Text":"initially treated as an asset in ahead of financial year ended 31st of December X2."},{"Start":"00:24.105 ","End":"00:28.140","Text":"During the period 1st of July X2 to 31st December X2,"},{"Start":"00:28.140 ","End":"00:30.840","Text":"6 months had gone past or half of a year."},{"Start":"00:30.840 ","End":"00:33.930","Text":"Remember, the 84,000 covers us for a full year."},{"Start":"00:33.930 ","End":"00:40.205","Text":"We took 42,000 out of there and we treated that as an expense."},{"Start":"00:40.205 ","End":"00:48.940","Text":"What was left is 42,000 asset at the end of the last financial year, 31st December X2."},{"Start":"00:48.940 ","End":"00:56.925","Text":"This prepayment of 84,000 covers us through to the 30th of June X3."},{"Start":"00:56.925 ","End":"01:04.830","Text":"Now, the financial year that we are busy with now is 31st of December X3."},{"Start":"01:04.830 ","End":"01:06.810","Text":"Let\u0027s start with,"},{"Start":"01:06.810 ","End":"01:11.905","Text":"we\u0027ve got an opening balance on the 31st December X2 or 42,000."},{"Start":"01:11.905 ","End":"01:14.000","Text":"We can see this on our table."},{"Start":"01:14.000 ","End":"01:19.560","Text":"These are opening balances on 1st of the first X3 prepaid expense,"},{"Start":"01:19.560 ","End":"01:22.770","Text":"42,000, that same 42,000."},{"Start":"01:22.770 ","End":"01:24.285","Text":"By 30th of June,"},{"Start":"01:24.285 ","End":"01:26.910","Text":"that 42,000 will have been used up,"},{"Start":"01:26.910 ","End":"01:31.790","Text":"so would have taken 42,000 out of that asset account and treated it as an expense,"},{"Start":"01:31.790 ","End":"01:33.605","Text":"and the 30th of June X3,"},{"Start":"01:33.605 ","End":"01:38.990","Text":"we\u0027ve got nothing left in our asset account because it had a balance of 42,"},{"Start":"01:38.990 ","End":"01:41.090","Text":"we\u0027ve taken it out, treated it as an expense,"},{"Start":"01:41.090 ","End":"01:43.120","Text":"there\u0027s nothing left in the asset account."},{"Start":"01:43.120 ","End":"01:45.930","Text":"Surely it showed that in our table,"},{"Start":"01:45.930 ","End":"01:47.940","Text":"so last year\u0027s prepaid expense,"},{"Start":"01:47.940 ","End":"01:52.480","Text":"42,000 is now recognized as an expense in the current year."},{"Start":"01:52.480 ","End":"01:55.835","Text":"Remember, prepaid expenses they are assets,"},{"Start":"01:55.835 ","End":"01:58.145","Text":"therefore, they have debit balances."},{"Start":"01:58.145 ","End":"02:03.725","Text":"To get rid of it, we must credit it and we\u0027re treating it as an expense,"},{"Start":"02:03.725 ","End":"02:08.615","Text":"we know expenses have debit balances so that\u0027s why we\u0027re debiting it."},{"Start":"02:08.615 ","End":"02:12.185","Text":"On the 1st of July X3,"},{"Start":"02:12.185 ","End":"02:14.960","Text":"the question tells us that we make a payment of"},{"Start":"02:14.960 ","End":"02:19.295","Text":"90,000 which we\u0027re going to assume we initially treat as an asset."},{"Start":"02:19.295 ","End":"02:22.910","Text":"Now, this payment on the 1st of July X3,"},{"Start":"02:22.910 ","End":"02:28.845","Text":"is going to carry us through until the 30th of June X4."},{"Start":"02:28.845 ","End":"02:34.200","Text":"But bear in mind we\u0027re doing a financial year, 31st December X3."},{"Start":"02:34.200 ","End":"02:37.620","Text":"The last year we did was 31st December X2,"},{"Start":"02:37.620 ","End":"02:40.930","Text":"so we\u0027re doing 31st of December X3."},{"Start":"02:40.930 ","End":"02:46.130","Text":"Before we get into how much of that asset has been used up by the 31st of December X3,"},{"Start":"02:46.130 ","End":"02:48.035","Text":"let\u0027s process this payment."},{"Start":"02:48.035 ","End":"02:50.705","Text":"When we make the payment of 90,000,"},{"Start":"02:50.705 ","End":"02:52.070","Text":"our cash account which should be"},{"Start":"02:52.070 ","End":"02:55.070","Text":"an asset account which should normally have a debit balance,"},{"Start":"02:55.070 ","End":"02:56.945","Text":"well, we credit it."},{"Start":"02:56.945 ","End":"02:59.090","Text":"We\u0027re then treating it as an asset,"},{"Start":"02:59.090 ","End":"03:03.169","Text":"which is a debit to be the prepaid expense."},{"Start":"03:03.169 ","End":"03:05.630","Text":"Now let\u0027s go back to the timeline."},{"Start":"03:05.630 ","End":"03:09.815","Text":"As you can see, we\u0027ve made a payment of 90,000 the 1st July X3,"},{"Start":"03:09.815 ","End":"03:12.995","Text":"and only 6 months later is our financial year end."},{"Start":"03:12.995 ","End":"03:18.530","Text":"That 90,000 covers us for 12 months to the 30th of June X4."},{"Start":"03:18.530 ","End":"03:24.200","Text":"So 90,000 divide by 12 gives you the monthly insurance,"},{"Start":"03:24.200 ","End":"03:32.785","Text":"costs us 7,500 for the 6 months to the 31st of December X3 is 45,000."},{"Start":"03:32.785 ","End":"03:34.370","Text":"Alternatively, you can simply,"},{"Start":"03:34.370 ","End":"03:36.440","Text":"if you look at the table,"},{"Start":"03:36.440 ","End":"03:38.825","Text":"90,000 is for the full year,"},{"Start":"03:38.825 ","End":"03:42.970","Text":"that\u0027s for 12 months so you simply multiply that by 6/12."},{"Start":"03:42.970 ","End":"03:46.730","Text":"We have 45,000 coming out of our asset account and being"},{"Start":"03:46.730 ","End":"03:50.585","Text":"treated as an expense and by the 31st of December X3,"},{"Start":"03:50.585 ","End":"03:54.595","Text":"our asset account will then have 45,000 left in it."},{"Start":"03:54.595 ","End":"03:56.385","Text":"Put 90,000 in,"},{"Start":"03:56.385 ","End":"03:58.620","Text":"take 45,000 out,"},{"Start":"03:58.620 ","End":"04:00.060","Text":"treat it as an expense,"},{"Start":"04:00.060 ","End":"04:02.675","Text":"you have 45,000 left in the asset account."},{"Start":"04:02.675 ","End":"04:07.205","Text":"Let\u0027s process that transfer out of the asset into the expense account."},{"Start":"04:07.205 ","End":"04:08.900","Text":"Well, the prepaid expense,"},{"Start":"04:08.900 ","End":"04:10.370","Text":"remember, is an asset."},{"Start":"04:10.370 ","End":"04:13.054","Text":"If it\u0027s an asset and you want to reduce the asset, which is what we doing,"},{"Start":"04:13.054 ","End":"04:16.440","Text":"we\u0027re taking something out of the asset, you must credit it."},{"Start":"04:16.440 ","End":"04:18.470","Text":"You\u0027re going to put that to the debit side of"},{"Start":"04:18.470 ","End":"04:21.815","Text":"the expense because expenses have debit balances."},{"Start":"04:21.815 ","End":"04:23.435","Text":"Our prepaid expense,"},{"Start":"04:23.435 ","End":"04:26.200","Text":"if add you that up, it\u0027s 45,000,"},{"Start":"04:26.200 ","End":"04:29.750","Text":"that\u0027s the answer to part B and then the expenses column,"},{"Start":"04:29.750 ","End":"04:33.155","Text":"we\u0027ve got 87,000 and that is part A."},{"Start":"04:33.155 ","End":"04:34.820","Text":"For those of you who are interested in"},{"Start":"04:34.820 ","End":"04:39.785","Text":"the closing entries which were not required as part of this question,"},{"Start":"04:39.785 ","End":"04:43.340","Text":"closing entries are processed at the end of the year to clear out"},{"Start":"04:43.340 ","End":"04:46.880","Text":"all of your income and expense accounts and put them into retained earnings."},{"Start":"04:46.880 ","End":"04:48.470","Text":"We don\u0027t have any income accounts,"},{"Start":"04:48.470 ","End":"04:49.880","Text":"but we have expenses."},{"Start":"04:49.880 ","End":"04:51.680","Text":"To reverse an expense,"},{"Start":"04:51.680 ","End":"04:53.455","Text":"and the expense is a debit balance,"},{"Start":"04:53.455 ","End":"04:55.585","Text":"we must credit it."},{"Start":"04:55.585 ","End":"05:00.365","Text":"We\u0027ll put that thing on the debit side of your retained earnings."},{"Start":"05:00.365 ","End":"05:05.900","Text":"If these were the only transactions that had occurred over the 4 years,"},{"Start":"05:05.900 ","End":"05:08.405","Text":"that means that at the end of the fourth year,"},{"Start":"05:08.405 ","End":"05:10.100","Text":"31st December 20X3,"},{"Start":"05:10.100 ","End":"05:15.940","Text":"we would have an outflow or net outflow or overdraft in our cash account of 306,000,"},{"Start":"05:15.940 ","End":"05:20.020","Text":"so it\u0027s sitting in as a liability, temporary hopefully,"},{"Start":"05:20.020 ","End":"05:25.220","Text":"we would have had a prepaid expense of 45,000, that\u0027s an asset,"},{"Start":"05:25.220 ","End":"05:30.590","Text":"and then we have expenses of nothing because they go through"},{"Start":"05:30.590 ","End":"05:38.495","Text":"our income statement and we have retained earnings of 261,000 that has a credit balance."},{"Start":"05:38.495 ","End":"05:41.965","Text":"That\u0027s the end of the exercise 4."},{"Start":"05:41.965 ","End":"05:49.760","Text":"Just for interest, that 306,000 if we were running a constant overdraft,"},{"Start":"05:49.760 ","End":"05:52.115","Text":"that would not be under an asset column,"},{"Start":"05:52.115 ","End":"05:54.110","Text":"it would actually go under the liabilities."},{"Start":"05:54.110 ","End":"05:58.290","Text":"It would be shown in your balance sheet as a current liability."}],"ID":28565}],"Thumbnail":null,"ID":254925}]

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