Chapters 1-9 Review

0:01 So let's review chapters one through nine. So our first question here uh tells us that Emily Valley is a licensed dentist and during the first month of operation of her business the following events and transactions occurred. So we're going to be given a list of transactions and we will need to journalize these transactions post them into t accounts and then prepare a trial balance. So our first transaction here. We are investing 20,000 in the business. So we need to think about what kind of accounts are being affected by this transaction.

0:48 So when we look at this we can see that the owner is putting money into the business right, so that's going to increase the amount of cash that the business has. So cash is an asset account and to increase an asset we debit our cash account, so we'll make sure that we debit cash in this entry. And then we need to think about okay what kind of account would be credited well so cash is going into the business what is the owner getting the owner's getting more of a stake in the business right, so we call that owner's capital so we credit our owner's capital and now owner's capital goes up with this credit

1:35 and the amount we just toss in the 20,000 that we were told in the transaction. Our next piece of information here April first, hired a secretary a secretary receptionist at a salary of seven hundred dollars per week payable monthly. Now here we need to be careful. Because this employee of ours has only just gotten hired. There hasn't been any work that they've done they haven't earned any money, all that's happened is that you've

2:21 called them up and said congratulations you're hired. So that's not a transaction. And if something is not a transaction there's no journal entry that we would need to record. So we're not going to have any entry required whenever you're told that you just hired an employee. Later on in this problem we'll see when we finally have to pay this employee and that is when we will start recording the expense surrounding their salaries. Now on April 2nd you paid office rent for the month of eleven hundred dollars.

3:12 So here we can think about what kind of accounts are affected because this is a transaction. If we were paying for the office rent for more than just one month like if we were paying in advance let's say for a full year that's when we would use our prepaid rent account. But here we're just paying for one single month, so when you're just paying for one single month we debit rent expense we just count the expense for April here. So that's going to be our debit then we think about our credit. How did we pay for this rent? Well it doesn't tell us that we paid for it on account and so that means that we used cash

4:02 right, whenever you just see the word paid we can think that cash is involved. So we credit our cash here to show that our cash is decreasing by this 1,100 amount. Then on April 3rd purchase dental supplies on account from dazzle company for four thousand dollars. So once again we need to think about what sort of accounts are affected here based off of some keywords that we see in the transaction. So we're buying dental supplies, right so we see the word supplies there and we know that we need to debit our supplies account

4:50 to show that our supplies are increasing, because supplies is an asset and assets go up with debits. And then how did we pay for these supplies? Well it tells us that it's on account. So that on account is telling us that we're going to pay for it later. So we will credit our accounts payable and we'll just toss in the 4,000 there as are amounts all right. So let's move on to April 10th. We perform dental services and build insurance companies for 5,100. So once again we think about what kind of accounts are being affected. There's a few key

5:41 words here. When we see performed services that's telling us that we need to start thinking about service revenue. So we know that service revenue is going to be one of our accounts, and then we see the word build that we build insurance companies so that means that we're going to be getting paid in the future right, people owe us money and whenever people owe us money we can think accounts receivable so our two accounts here are service revenue and accounts receivable and we know they both have to increase and so service revenue is a revenue account and revenue accounts increase with a credit

6:30 so that will be our credited account. Accounts receivable is an asset and assets go up with debits so we'll debit our accounts receivable and credit our service revenue for this 5,100. Now on April 11th received one thousand dollar cash advance from Leah Smith for an implant. So Leah Smith is paying us before we do any of this dental work. So we haven't truly earned this one thousand dollars yet but we're getting this cash right now so we need to show that our cash is going up, we need to show that we're getting this money in. But then our credited account here is

7:20 going to be unearned service revenue, so whenever you get payment before you've earned that money we need to count this unearned service revenue, and unearned service revenue is a liability and liabilities go up with this credit. So we're increasing our cash and we're increasing our unearned service revenue in this entry by that one thousand dollars. Now on April 20th we received 2,100 cash for services performed from Michael Santos. So once again we received cash so any time that we receive cash we can debit that account. Now why

8:12 did we receive this cash? Well we received this cash because we performed services right, so just like i said back on April 10th whenever we see the words performed services that's telling us that we need to count our service revenue. So we'll debit our cash and credit our service revenue for this twenty one hundred dollars. Now on April 30th we're finally paying this employee of ours that we hired back at the start of the month. So this is when we start to count the expense right, because now they have they've done the work for an entire month. So there's something for us

9:01 to actually record now, so we debit our salaries expense because expenses go up with debits, and then we'll credit our cash because we are giving money to this secretary receptionist. And so that means that our company's cash is decreasing, and we'll just toss in the 2,800 that we were given. Another one here on April 30th we paid 2,400 to Dazzle for accounts payable due. So if we think back to earlier in this problem when we purchased supplies on account

9:52 we increased our accounts payable on that day. On this day we are paying back some money, we are paying Dazzle 2,400 dollars, uh so that way we don't owe them as much anymore so we're going to want to show that our cash is decreasing and we're going to want to show that our accounts payable is decreasing because if we are paying them back we need to show that we don't owe them as much money as we did previously. So accounts payable decreases with a debit because it's a liability account so we debit our accounts payable and we credit our cash for twenty four hundred dollars. Okay again

10:40 if there's if there's any questions at any point um feel free just to interrupt me otherwise i'm just gonna keep on talking right so just let me know if you have any questions uh at all. So now that we have all of these journal entries over on the left side of our screen right now, we can now post these into t accounts. So we could post them into a ledger or we could post them into t accounts, either way what we're trying to do is we're trying to keep track of these account balances right, because if i asked you right now how much cash do you have after these

11:30 eight to ten journal entries that we just recorded, you're not you're not going to know that answer right off the bat right, so we we use these t accounts to figure out these balances. So if we just look at our t account here, and let's just take a look at this cash one first, so at the top of our t account we have the account name right, the left side of the of the t account will be the debit side. So anytime that you debit cash we put that amount over on the left side of our t account. Anytime that we credit cash we toss that amount over on the right side. Ao the left side is the debit side the right side of is the credit side.

12:18 So we'll go through entry by entry and post them into the t accounts and then at the end we can go through and figure out what the ending balance is in each of these accounts. So our first journal entry that we had we debited cash for 20,000 and we credited owner's capital for 20,000. So we can toss that 20,000 on the debit side for cash and the 20,000 over on the credit side for owner's capital. Our next journal entry we debited rent expense and credited cash for eleven hundred. So we toss those in to the t accounts and notice how cash the debit of 20,000

13:08 is over on that left side the credit of 1100 is over on the right side. Now our third entry we debited supplies and credited accounts payable for four thousand. So we throw those into our t accounts. Then we debited accounts receivable and credited service revenue for 5,100 go into their t accounts. Next we debited cash for a thousand and credited unearned service revenue for a thousand. So we post those. Then debited cash 2,100 and credited service revenue 2,100.

13:58 We can put those into their t accounts. Then we debited salaries expense and credited cash 2,800. And then our last entry we debited accounts payable and credited cash for 2,400. so now we've posted all of our entries into these t accounts. Now that we do that we can find the balances in each of these accounts. Now you'll notice a lot of them right the accounts receivable supplies owner's capital all those have just one single entry in them, so finding their balances will be really simple because we just

14:49 take the one entry that we had. But something like cash is going to be a little bit trickier. So we have six different entries that affected cash. So there's a few different ways that we can attack this here we could add up each side so add up the debit side out of the credit side subtract those two amounts and put that balance on whichever side had more. Or we could also look at it from an account per account basis, cash is an asset so those three debits to cash make your cash account go up.

15:37 Your three credits to cash makes your cash account go down. So if we take the 20,000 plus the 1,000 plus the 2,100 and then subtract out our three credits so minus 1,100 minus 2,800 and minus 2,400 We're left with a debit balance of sixteen thousand eight hundred. So that's how much cash you have after the month of April and all of these transactions that happened. Now like I said accounts receivable that's going to be much easier, that's just going

16:25 to be our 5,100 because we didn't have any other entries that affected it. Supplies just the 4,000. Then we come to accounts payable. Accounts payable once again we have multiple entries affecting that account. Now we could just take the difference and put the balance on the side that had more, or we can look at it from the accounts payable point of view right. Accounts payable is a liability liabilities go up with credits and go down with debits. So that 4,000 is a positive amount we subtract out the 2,400 and we are left with 1,600 as a balance over on the credit side.

17:19 Unearned service revenue it's just that 1,000 as a credit. Owner's capitals just 20,000 as a credit. Then we get to service revenue. Service revenue we have two credits right if you just have two credits or just two debits what you'll do is just add those up. So we could just take 5,100 plus 2,100 and we'll take the 7,200. Now if we look at this from the revenue perspective revenues go up with credits right, so that was a positive 5,100 plus another 2,100 and that's how we end up with this balance

18:10 of 7,200. Now rent expense and salaries expense those just had single entries affecting. Those so we just bring those balances down. So now that we have all of our account balances in these t accounts, We can then create a trial balance. So a trial balance is going to look like this: you have the company name, you have trial balance, and you have the date that you prepare it. And then we see a column for our accounts and then we see a debit column and a credit column.

18:56 What we're going to do is we're going to list out those nine accounts that we had in our t accounts that we just solved for. We're gonna list those out and their balances here on this trial balance. And now there's a specific way that we want to list out these accounts. We list out our accounts based on the expanded accounting equation. So that's your assets, then your liabilities, owner's capital, owners drawings, revenues, and then expenses right we list them out in that order.

19:46 And then our assets. Our assets have to be listed out in a specific order themselves and we call that the order of liquidity, the order of liquidity is how quickly we can turn that asset into cash or how quickly we're going to use up that asset. So the first asset that you'll always list is cash itself because cash is the most liquid because it's already cash. And you'll notice we take that 16,800 amount that we found in the t accounts, and we put that balance under the debit side because it's a debit balance in cash.

20:34 After cash we list out our accounts receivable that had a debit balance of 5,100. Then we have our supplies that had a debit balance of four thousand. That was the end of our assets in this example. So then we would move on to our liabilities we had two different liabilities we had our accounts payable which had a credit balance of sixteen hundred and we had unearned service revenue which had a credit balance of one thousand. So then we're done with our liabilities. After your liabilities you list out

21:19 your owner's capital. So we had owner's capital with a credit balance of 20,000. After your owner's capital you would list out your owner's drawings. Now we didn't have any owner's drawings in this example problem but if we did we would list our owner's drawings and owners drawings has a normal debit balance so that balance would go under the debit column. Then after your owner's drawings you list out your revenues we had one revenue account here just our service revenue so we put our service revenue and the credit balance of 7,200.

22:05 After your revenues we list out our expenses. We had two different expense accounts we had our salaries expense with a debit balance of 2,800 and we had our rent expense with a debit balance of 1,100. Then now that we have all of our accounts and their balances listed out the next step in a trial balance is to add up your debit column and add up your credit column. Because we want to make sure that our debits and credits equal, right so when we add up our debits and add up all of our credits we will see that we get total amounts here of 29,800 for both the debit column and the credit column.

23:01 Now i want to go over a few things just in case your debits and credits don't don't equal, right the first step is I would want you just to re-add up your debits and credits, uh the vast majority of the time you just probably plugged in a number wrong into a calculator, um maybe instead of 1,100 for your rent expense you accidentally just put in 1,000. And that messes up your total amounts there right so just make sure that you didn't make a uh just a math error while calculating your totals.

23:48 Now if you go through and you realize nope I didn't make a math error there's a few things that you can do, let's say that our debits and credit total amounts are off by 1,000. If there's a one thousand dollar difference between your total debits and your total credits we would take that one thousand and we would divide it by two so we would have 500 then right, and we would take a look in our trial balance itself for an account that has a balance of 500 and if we can find a an account that has a 500 balance in that trial balance

24:34 we might have just put it on the wrong side. We might have put it on the credit side when it's supposed to be on the debit side we might have put it on the debit side when it's supposed to be on the credit side, right so that's that's step number one. If that doesn't work we can see if the difference between your total debits and your total credits is divisible by nine, right so let's say total debits and total credits have a difference of 900, right 900 is divisible by 9. So then we're looking for a transposition error. So we would have to reference all of these balances

25:22 back to our t accounts or back to our ledger and see if we just flipped around some numbers. So maybe for salaries expense it wasn't supposed to be 2,800 maybe it was supposed to be 8,200. Right so that's a way to uh pick up on any sort of transposition errors. Now if it's not a simple math error if you don't have a balance in the wrong column if it's not a transposition error and your debits and credits still don't equal then you have to go back to your ledger or to your t accounts and see maybe you miscalculated something there.

26:10 If not then you go back to your journal entries make sure that there's no errors there right so we would just go back one step at a time throughout this entire process. But as long as our debits and credits equal we're good to go and we can move along in our accounting cycle. Now question two here says that Okabe company ended its fiscal year on July 31, 2017. Using information from the company's trial balance we need to calculate net income or net loss, total assets, total liabilities, and ending owner's capital. Right so we're given our

26:57 adjusted trial balance here and we know that our net income or loss is our revenues minus expenses. So let's first figure out our revenues. So our revenues are the service revenue that we were given of 64,000 and our rent revenue that we were given of 6,500. Have a bit of a typo here so our total revenues should be 70,500 right we just add up our two revenues. So you add up your two revenues and you find your total revenue amount.

27:44 Then we have expenses we have three different expense accounts here we have our depreciation expense, salaries expense, and utilities expense. We would find our total expenses then and once we have our total revenues and we have our total expenses we can then take those amounts and subtract them to find that we have a net loss. Right so if your expenses are greater than your revenues you're going to have a net loss. If your revenues are greater than your expenses you have a net income. So remember that we would find this

28:35 amount on an income statement, right the first of the four financial statements that you prepare. Then we can go through and find our total assets. So our total assets the best way to do this is to take a look at your adjusted trial balance and just figure out which of these accounts are assets. So we just talked about while preparing a trial balance your assets are listed firstS right so we go to the top of our adjusted trial balance here and we see that we have cash well cash is an asset, accounts receivable that's another asset,

29:20 equipment that's another asset, and then we get to accumulated depreciation equipment. That's going to be a contra asset. So you guys also probably just learned about another contra asset called allowance for doubtful accounts, right so these are still going to be included while calculating your total assets. But instead of adding them we're going to subtract a contra asset because it takes away from our asset accounts. And then on our adjusted trial balance the next account is accounts payable. We know accounts

30:08 payable is a liability. So we've accounted for all of our assets here we just have these four and we can add the first three and subtract out our accumulated depreciation, to find a total asset amount of 27,120. Then we need to find our total liabilities. So we take a look back at our adjusted trial balance and we already said that accounts payable was a liability so we can toss that in, and then we have unearned rent revenue, and this is one where students get tripped up a lot. Unearned revenue is not a revenue account. If it's unearned revenue it will be a liability.

31:06 So we take our accounts payable we take our unearned rent revenue we see that the next account listed on our adjusted trial balance is owner's capital, right so we are now done with our liabilities. It's just payable and unearned revenue. We add those up and we get a total liability amount of 6,020. Now ending owner's capital. We're going to go about this one by creating a uh owner's equity statement. Right so if we think about preparing owner's equity statements,

31:54 an owner's equity statement is going to begin with your beginning owner's capital. Your owner's capital at the start of the month at the start of the year whatever the time period is that you're preparing the statement for and that's that 45,200 that were given on this adjusted trial balance, Then there's a few different things that would be added to your owner's capital on an owner's equity statement right there would be investments and there would be net income. Well we weren't told anything about investments here for Okabe company and when we calculated our net income or net loss before we saw that we had a net loss instead of a net income.

32:47 So in this example we don't have anything that's going to be added to our owner's capital. We do have some things that are going to be subtracted. So we're going to first subtract our net loss that was the amount that we found when we took our revenues minus expenses. That's not the only thing that would be subtracted though. The other piece that's subtracted on an owner's equity statement are your owner's drawings, and we see our owner's drawings there on the adjusted trial balance and there's 16,000. So we want to combine those uh those two pieces

33:32 that we're subtracting out so we add up our net loss in our drawings to see that we need to subtract a total of twenty five thousand one hundred. And that will give us an ending owner's capital then of twenty thousand one hundred. We take our beginning owner's capital minus that twenty five thousand one hundred to give us this ending owner's capital amount of twenty thousand one hundred. So now let's think about uh some of the other chapters right we we really just focused there on a lot of chapter one and two stuff. So if we move on to chapter five, chapter five you started

34:21 you started learning about merchandising companies, so companies that would sell sell inventory sell goods rather than services like we dealt with in the first four chapters. So in merchandising companies whenever they make a sale they're gonna have two different entries. So the first entry whenever a merchandising company makes a sale is to record the credit sale or the cash sale itself. So this entry is dealing with the amount that you charged your customer. So here Summer company sold a thousand dollars of merchandise to Wilkes company.

35:08 So we need to say that we made sales of a thousand dollars so that's why we're crediting our sales revenue for this one thousand, and then we're also saying that wilkes company owes us this one thousand. Now how do we know that it's accounts receivable and not cash? Because we take a look at those terms we're given terms here which replace the the words on account that we were used to previously, right so whenever we see terms like that we know that this was a sale that was made on account. So Wilkes owes us this one thousand dollars. Now there's another entry that's required

35:58 from the point of view of Summer company here and that's recording what these goods cost the seller. So they have to record their cost of goods sold and their inventory amounts here. Cost of goods sold is an expense account, so we're increasing our cost of goods sold with this debit of 650 and then we credit inventory 650 because we need to show that we don't have as much inventory anymore, right because our inventory is going down because we just sold some to Wilkes company. So we don't have as much inventory so we decrease our inventory account.

36:46 So those will be the entries whenever a merchandising company makes a credit sale. Remember that we have those two entries that are required. Now there's a few other points in uh in this transaction information here that I wanted to go over. First fob shipping point. We're either going to see fob shipping point or fob destination. What that's telling us is who has to pay for shipping who has to pay for the freight costs right so fob shipping point is saying that the transfer of ownership happens at the point of shipping so then it's the buyer's responsibility

37:37 so the buyer has to pay for shipping when it's fob shipping point. So in this case Wilkes company would be the one responsible for paying for all of the freight costs. The other option is fob destination meaning the transfer of ownership doesn't happen until the goods reach their destination. In that case the seller is responsible for all of the freight costs. Now we have these terms right terms 2/10 net 30. What that's telling us is that

38:25 there's going to be a two percent discount if Wilkes company pays back within 10 days, or Wilkes company has to pay the net they have to pay everything that they owe within 30 days. So what Summer company is trying to do here is they're trying to give Wilkes company a little extra incentive to pay early because Summer company wants to have that shorter operating cycle they want to get their cash as quickly as possible because then they can use that cash to buy more inventory or they can use that cash to invest it somewhere else.

39:16 So they're willing to give Wilkes company that little two percent discount if it means that they get their cash earlier. Right so sometimes these terms will change uh it could be 4/10 net 30, it could be 1/10 net 30 They could completely change up these numbers right so just remember that the way that this is written is the percent discount if they pay it in a certain amount of days so two percent if they pay it within 10 days or they have to pay the net within a certain amount of days so here the net amount is due within 30 days.

40:06 Chapter 6 brought on perpetual inventory. Now we don't have enough time to go through FIFO LIFO and average cost problems. But we do have time to talk about what all of these methods uh and cost flow assumptions mean right so FIFO it's first in first out meaning the first inventory that you bring into the warehouse those are the ones that you're pushing out first. LIFO last in first out so the most recent inventory that you just purchased those are the ones that you're pushing out first.

40:52 And then average cost is when we combine all of our inventories together find this weighted average unit cost and uh and we don't really keep them separate like we do for FIFO and LIFO. Now there's gonna be some pros and cons for these different uh cost flow assumptions right so FIFO is going to give you a lower cost of goods sold. So that sounds good right because we just talked about how cost of goods sold is an expense. So we're going to have a lower cost of goods sold which means we have a higher net income so things are sounding real great for FIFO right we want

41:39 we want to be able to say that we have a higher net income so FIFO sounds pretty good right now. LIFO gives you a higher cost of goods sold and a lower net income. On the surface doesn't look real great right saying that you made less money over the year, that's not going to make your stockholders real happy right but what this does is it lowers the tax burden. Right so if you have a lower taxable income you have to pay less in taxes. If you have a higher taxable income like in FIFO you're going to be paying more in taxes.

42:31 Now average cost is going to be just somewhere in between the cost of goods sold won't be as low as FIFO and won't be as high as LIFO. The net income won't be as high as FIFO or as low as LIFO. And then the tax amount will be somewhere between FIFO and LIFO as well. Now a company can not just switch up all the time right there's a lot of work that goes into making these changes they have to go back multiple years and re-prepare all of their financial statements if they want to switch from one cost flow assumption to another so they're not going to just be constantly making these changes. So a company is going to pick one and stick with it.

43:25 Now one other piece to remember here is that these assumptions that we just made right that your net incomes higher under FIFO and your net incomes lower under LIFO that is only true if prices are increasing. Right now typically prices of goods increase over time right the amount of money that it cost to buy a gallon of milk back in the 1940s is a lot less than what it is today. So the price of goods tend to increase over time, and we have to use that assumption in order for this information to be true.

44:21 Because if prices were to be decreasing over time then everything would be flipped. Let's talk about special journals now. So in chapter seven uh you learned about these special journals so we had our sales journal, we had our purchases journal, we had cash receipts, and cash payments. And then if they didn't if a transaction didn't fit in any of those four special journals we toss them into the general journal. So we're gonna go through a few transactions here and figure out which special journal they should

45:07 go into uh but the the way that I want you to be thinking about this is the first question you should ask yourself is is cash involved? Because if cash is any way involved in a transaction you know it's either going to be the cash receipts or the cash payments journal. If cash is not involved then we know that we can think about the sales journal purchases journal or the general journal. So our first transaction here cash sales. So we see that word sales there

45:54 and the first thought might be the sales journal, right that would that would make the most sense. However the sales journal is only for sales of merchandise on account. So this is where asking ourselves that initial question of is cash involved is really going to come into play here. So is cash involved in cash sales yes so then we can think about are we getting cash or are we paying cash. So if we make cash sales that means that we are the one receiving this cash

46:42 so if we're the one receiving this cash we would record that in the cash receipts journal. Now our next one here credit sale of merchandise. So we can ask ourselves is cash involved. The answer is going to be no right because it's not a cash sale of merchandise it's a credit sale so it's a sale on account. So if you made a sale of merchandise on account that's the definition of what goes into the sales journal. Now make sure that for something to go into the sales journal it fits all of that criteria: it has to be a sale,

47:29 it has to be of merchandise, and it has to be on account. All three of those must be true. Now our next one owner withdraws cash so once again we can ask ourselves is cash involved? Yes, right so once again we narrow it down into either the cash receipts journal or the cash payments journal. Here we're looking at this from the perspective of the company. The company is losing cash in this transaction so if the company is losing cash in this transaction

48:20 it's going to go into the cash payments journal. Our next one purchase of merchandise on account. So we ask ourselves is cash involved. Well we don't see cash anywhere in that transaction, right so we know that cash is not involved here. So we've eliminated the cash receipts and the cash payments journal. Instead we can think it's it either the sales journal the purchases journal or the general journal. Well your purchases journal is to record a purchase of merchandise on account.

49:12 So it's kind of the other side of the sales journal, right the sales journal was to record a sale of merchandise on account. Well your purchases journal is for purchases of merchandise on account. And again it has to fit all three of that criteria, if it does we can toss it into our purchases journal. Now cash purchase of land. So we might get a little uh a little sloppy here and see the word purchase and think purchases journal, right but again it's not of merchandise and it's not on account.

50:02 So we ask ourselves that first question is cash involved? The answer is yes, right so we know it's either the cash receipts journal or the cash payments journal and if we are purchasing land with this cash that means that we are paying for that land so it's going into our cash payments journal. Our last one here equipment depreciates. So if your equipment is depreciating we can ask ourselves is cash involved? No, right if we think back to our adjusting entries back in chapter 3 to

50:50 record depreciation we would debit depreciation expense and credit our accumulated depreciation, right so there's no cash involved in that in that entry in that transaction. So we know it's not cash receipts or cash payments. And then we can ask ourselves is it a sale of merchandise on account? No. Is it a purchase of merchandise on account? No. So it's not the sales journal it's not the purchases journal since it doesn't fit into any of those this is one that goes just into your general journal, right it doesn't fit into a special journal it just falls into your general journal.

51:40 Now your general journal is going to be used for things like you're adjusting entries like this one. You're closing entries like when we close revenue to income summary and close owner's drawings to owner's capital, right those closing entries that we learned about in chapter four, and then it would also be used for your correcting entries. So you're adjusting closing and correcting entries so we can think of that as acc just like accounting, right those are what would fall into your general journal. Then chapter eight rolled around and we learned about bank reconciliation. So bank reconciliation

52:28 is done so in that way the amount on your bank statement matches your amount in your ledger, right what we're doing is we're adjusting our cash balances to make up for either some errors or some some time lags right. So we take a look at this example that we're given and it says that Terry Davidson was unable to reconcile the bank balance because Terry made some mistakes right so we need to correct the errors that Terry made in this bank reconciliation that we're given. So what Terry did was he put numbers into the wrong or uh

53:20 put the adjustments into the wrong sections right so that NSF check it's not supposed to be added on the cash balance per bank, deposits and transit are not supposed to be subtracted from the per book side, right so we need to move those around to fix this bank reconciliation. So we're gonna set up our framework like this. So we start off with our cash balance per bank. That's the amount that's on our bank statement itself that's 3,560.20 and now we need to think about what would be added to the cash balance per bank so this this is something that will increase

54:05 the amount in your bank account but the bank doesn't currently know about it. So we take a look at our options over there and our option that we're going to choose is our deposits in transit. So a deposit in transit you can think of it this way you own a company and you've recorded in your books that you've you've deposited 530 dollars and then you tell one of your employees hey here's 530 dollars drive this down to the bank for me and deposit it in our account.

54:54 In the company's mind they already have that money. So the the books side already knows about it, the bank on the other hand has no idea that someone is on their way to the bank to make this deposit. It's a currently a deposit in transit right so that's going to be maybe the easiest way to just imagine what a deposit in transit is. Now what's going to be subtracted on the per bank side? Well we have three options left right we have the NSF check, the bank service charge, and outstanding checks. So let's go piece by piece in NSF check an NSF check is a not sufficient funds

55:46 check right it's a check that bounced. So this is a check that a customer wrote you and you thought it was a good check, right you're gonna trust your customer that they have the money but once you gave it to the bank the bank realized that customer doesn't have the money right they tried to get that money and the check bounced. So the bank already knows about that, they were the one that discovered that there weren't enough funds in your customers account. Right so the bank already knows, so we don't need to make this adjustment to the per bank side. Then we look at the bank service charge, well the bank is definitely going to know

56:36 that they're charging you a service charge right they're the ones that decided to charge you a $25 service charge so they they already know about that. Then we're left with outstanding checks right process of elimination we know that outstanding checks is going to be the piece that falls in here under the less section on the per bank side. But why? Well an outstanding check is when you as a company write a check but the person that you wrote it to has not taken it to their bank yet. Right so if you wrote me a check because you love

57:22 this review so much and you wanted to pay me 730 let's say. I'm busy for a little bit still so I might not be able to take it to the bank immediately so on your books you would say well yeah I definitely paid Steven 730. But your bank has no idea that you wrote me a check for 730 until I take it to my to my bank right until I put that into the bank account. so while it's still out there in the world it's considered an outstanding check. That would take

58:08 away from your balance in your bank account so we have to subtract it from our cash balance per bank. So if we take our cash balance per bank that we have add in our deposits and transit subtract out our outstanding checks we can see that our adjusted cash balance per bank equals three thousand three hundred and sixty dollars and twenty cents. Now we can take a look on the per books side so we know there's two pieces left right we have the NSF check and we have the bank service charge. Those are both going to go on the per book's side of a bank reconciliation we need to think about okay is it going to increase or decrease

58:58 our cash balance. So let's start with an NSF check an NSF check like we said was a not sufficient funds check to check that you thought that you had you thought you had to already receive the payment but then the bank comes along and tells you nope that person didn't have the money. So you are then going to have to subtract that out from your cash balance per books, because you had already recorded that you received payment of 490. But reality is you never got that money because your customer didn't have that money to give you.

59:47 So we're subtracting out this NSF check here. Then we come to the bank service charge. Well if the bank charges you a service charge that's going to mean that you have to pay them money, right so that's also getting subtracted out here. So you'll notice we don't have anything under the ad section on the cash balance per books one common piece that could be added would be the collection of a note. So the bank sometimes acts as like a middleman for you and they'll collect a note receivable on your behalf. If that happens that would be added on the per book side of a bank reconciliation.

1:00:38 We just don't have that here so we have the two pieces that we need to subtract to find our adjusted cash balance per books. So to find that we take our cash balance per books that 3,875 that was the amount that was in our ledger before we did any of this. We subtract out our NSF check we subtract out our bank service charge and we see that our adjusted cash balance for books is hundred and sixty 3360 and twenty cents. So where do we see that we see that our two adjusted cash balances the per bank and the per books equal it's not a coincidence it's the reason that we do this. We're doing a bank reconciliation

1:01:29 so in that way our adjusted cash balance per bank equals our adjusted cash balance per books, because you have a definitive amount of cash in your possession, there can't be two separate amounts right you either have the money or you don't so in this case you have three thousand three hundred and sixty dollars and twenty cents and now that's what your bank will know and that's what your company's books will know. So now the last piece that we're going to go over here tonight the allowance method. So we use the allowance method to help estimate an uncollectible amount. So in a perfect world

1:02:23 we would be able to collect all of the money that our customers owe us. In reality that doesn't always happen, right sometimes people don't pay back the money that they owe us. So a company will use the allowance method to help them estimate some some uncollectible amounts. Uh so we're told here that the ledger of Preston company at the end of the year shows balances in accounts receivable of a hundred and seventy five thousand dollars balance in sales revenue of 550,000 and a balance in sales returns and allowances of 35,000.

1:03:12 Then if your allowance for doubtful accounts has a credit balance of twenty one hundred dollars in the trial balance journalize the adjusting entries at december 31st assuming bad debts are expected to be first one percent of net sales, and then we'll do this whole problem assuming that bad debts are expected to be 10% of accounts receivable. So under the allowance method we have these two different ways that we can go we can go under the percentage of sales basis, that's what we're going to do first or the percentage of receivables basis. There's going to be some steps and some pieces that will look similar, uh but the way that we figure out our numbers that changes between the two different bases.

1:04:03 Right so let's start here with this one percent of our net credit or our net sales. We don't know our net sales right so we're given some information where we can find our net sales and then we can talk about what one percent of that is. So your net sales in this case will be your sales revenue minus your sales returns and allowances right sales returns and allowances is a contra revenue account so it gets taken out from your revenue. So we take our 550,000 minus our 35,000 of our returns and allowances and we see that our net sales is 515,000.

1:04:51 So that's step one, right because if we need to take one percent of our net sales we need to know first what our net sales even are. Now we can find what one percent of it is. So one percent of our net sales we take the 515 that we just calculated and we multiply that by one percent or in decimal form that's 0.01 and we get 5,150. So now that we have one percent of net sales, that's that's the amount that we are assuming or estimating will be the uncollectible amount, right we're sitting here saying

1:05:37 we think that we won't be able to get uh five thousand one hundred and fifty dollars, that's just gonna be an amount that we'll never collect. So we need to journalize that the way that we journalize that under the allowance method is we debit our bad debt expense and then we're going to credit our allowance for doubtful accounts. So the good news in the in the allowance method is that whether you're working in the percentage of sales like we are in this part or the percentage of receivables like we'll do next the framework of this journal entry is going to be the same. You'll debit your bad debt expense and you'll credit your

1:06:26 allowance for doubtful accounts whenever you are estimating uncollectible amounts. Now our number. We found our one percent of net sales to be 5,150, we're also told that our allowance for doubtful accounts has a credit balance of 2,100. That credit balance only comes into play when we're doing the percentage of receivables basis. So we'll talk about in part two of this problem how we bring in that twenty one hundred dollar credit balance. But here when we're doing the percentage of net sales we found that one percent to be 5,150.

1:07:21 Do that's the amount that we're going to toss into our journal entry. So we debit our bad debt expense for 5,150 and we credit allowance for doubtful accounts for 5,150. Now let's work on the percentage of receivables. Right so what this is saying is that 10% of our accounts receivable will be uncollectible, right so once again we're going to need to figure out what ten percent of our accounts receivable are. So we take our accounts receivable balance that we were given up above of a hundred and seventy five thousand dollars. We multiply that by our ten percent or our point one zero.

1:08:12 So we see that ten percent of our accounts receivable is seventeen thousand five hundred. Now unfortunately we can't just throw that number into our journal entry, there's going to be another step here, and that's when we want to create a t account for our allowance for doubtful accounts. If we do that it's going to be the easiest way to visualize what's happening. So we see that we have an initial credit balance of 2,100 so we put that credit balance there in our t account. And we just found that we want the ending balance to be seventeen thousand five hundred.

1:09:03 This entry that we're preparing here on December 31st is going to be for the amount that would fall in that red circle. How do we get from a credit balance of 2,100 to an ending credit balance of 17,500? Well to find that amount we're going to subtract our two numbers that we're given so 17,500 minus 2,100 and we see that we need to credit an additional 15,400 to our allowance for doubtful accounts. So we debit our bad debt expense and credit our allowance for doubtful accounts just like last

1:09:52 time, but this time it's for that fifteen thousand four hundred so we are increasing our allowance for doubtful accounts by this fifteen thousand four hundred because remember allowance for doubtful accounts is a contra asset and contra assets are going to increase with a credit.