Accounting Equation :Analysis of Transactions using Accounting Equation Video Lecture - Commerce

okay let's talk a little bit about
analyzing transactions using the
expanded accounting equation well the
first step here is going to figure out
what our expanded accounting it okay so
here's our expanded accounting equation
remember it starts with our ale which is
our and I'll write that down for you I
like to teach students the basic
accounting equation is ale you think
about ginger ale or the alcoholic type
of ale that is the fundamental
foundation for accounting here AR ale
and that stands for assets equals
liabilities plus ah sorry
I shouldn't have a highlight that part
the e for equity so assets equal
liabilities plus equity
and remember assets are things that we
own liabilities are things that we owe
and then equity is the difference
between what we own and what we owe and
equity is actually broken into two
components you can see here common stock
plus retain earnings and then retain
earnings gets further broken down into
common stock plus revenues so we've got
these two components and then retain
earnings gets broken into common stock
plus revenues minus expenses and minus
dividends so expenses decrease our
equity dividends decrease our equity
well in both cases with expenses and
dividends we're paying monies out of the
business which is why our equity is
going down revenues increase our equity
revenues or how a company makes their
money and then comma stock or monies
that come in to us from our investors
and in exchange for that investment we
give them common stock okay so now we
can go ahead with the rest of thee what
okay so here we have an example and we
have some transactions that we need to
analyze so it says Greg invested thirty
five thousand cash and a used truck with
a fair market value of ten thousand
dollars in the business in exchange for
the company's common stock all right so
we need to think in terms again of this
basic accounting equation
in our our ale that has been expanded to
common stock plus retained earnings
which is actually a retain earnings is
our revenues minus expenses minus
dividends okay
so what happened if Gregg invested
thirty five thousand into the cash into
the business well let's stop right there
he invests thirty five thousand dollars
cash into the business what category is
that is that going to be an asset a
liability or an equity
well assets are things company is owned
so cash is going to be an asset for that
particular business so we're going to go
ahead and our assets are going to go up
by thirty five thousand specifically my
cash is going to go up let's take
another look here at he also contributed
a used truck with a fair market value of
ten thousand dollars so he gave cash and
a truck well a truck obviously is the
type of asset and something else that
businesses own so I'm also going to
increase my asset truck for $10,000
and in exchange for that cash and that
truck Gregg is going to get common stock
so my common stock is also going to
increase by in this case $45,000 okay so
we have our basic accounting equation
here assets equal liabilities plus
equity and we can almost draw like a
line right here and sorry my I'm a
little crooked but this side of the
accounting equation the asset side went
up by 45,000 and this side of the
accounting equation went up by 45,000
specifically our common stock okay
hopefully this will get a little bit
easier as we go along all right let's do
the next one
we paid eighteen hundred dollars cash to
purchase office equipment well anytime
you pay cash your assets are going to go
down so that's usually a pretty easy one
if students can figure out what happens
to cash then they know what's happening
on the asset side so if we pay cash my
asset sorry my asset cash is going to go
down eighteen hundred dollars and then
it says to purchase office equipment
well the key here with this accounting
equation is that it has to stay in
balance it doesn't mean all the entries
have to be on one side and the other
side we can have all entries on one side
as long as they balance and that's going
to be the case here in this particular
example cash is going to go down by
eighteen hundred dollars but in exchange
for that eighteen hundred dollars in
cash my asset equipment is going to go
up eighteen hundred dollars so the net
effect on the asset side is going to be
zero those two will cancel each other
out so the basic accounting equation is
going to go ahead and stay in balance
here okay this time we purchase six
hundred dollars of supplies on account
so we think about that six hundred
dollars of supplies on account that we
bought so we're bringing supply
into the business supplies as an asset
so my asset supplies is going to go up
by $600 and then it says on account
anytime you see that phrase on account
you need to understand that means we're
buying it on credit we're going to have
to pay for that later and things that we
owe our liabilities so my liabilities
here are also going to go up $600
specifically accounts payable because it
says we purchased it on account so in
this case now my accounting equation
supplies went up $600 liabilities on the
other side of the accounting equation
went up $600 so we're okay
everything we do in accounting here that
accounting equation has to stay in
balance if it doesn't you're doing
something wrong okay let's do the next
one
it says we perform services for cash
customers and receive thirteen hundred
and fifty dollars so we performed a
service which is what many businesses
are in business to do they either
perform a service or deliver a product
and we got paid cash which is a good
thing so we're going to receive cash any
time we can receive cash we know our
asset cash is going to go up in this
case for thirteen hundred and fifty
dollars and what did they do in order to
get that cash we call that revenue this
particular business provides services or
perform services that's how they make
their money
so my equity specifically revenue is
going to go up by thirteen hundred and
fifty dollars and again we've got a line
here my asset side of my equation went
up thirteen fifty and the right side of
the equation stockholders equity went up
by thirteen hundred and fifty dollars
alright moving right along on the 15th
of May we incurred in paid salaries with
six hundred and twenty-five dollars to
the
receptionist okay well we know again
think about any time we pay cash what
are we doing my asset cash is going to
go down thirteen hundred and fifty
dollars that was cash and this is for
salaries it says pay our employees so
what kind of account do you think that
would fall under in this case that's
going to go ahead and fall under our
expenses salaries expense so this is a
little different let me explain so my
expenses are actually going to go up by
thirteen hundred and fifty dollars but
the expenses decrease my equity so we're
going to put that as a negative right
now
13:52 salaries expense again we're
taking money out of the business to pay
for those salaries that's going to
decrease my equity specifically salaries
expense
okay so expenses decrease my equity so
my asset side of my equation is going to
go down as well as my stockholders
equity side it's going to go down
alright keep going here on the sixteenth
we sold the company truck for $10,000 so
if you think about that you sell a truck
for $10,000 what's happening you're
going to receive cash $10,000 so how
would we enter that in this case that
means my cash is going to go up which is
an asset for $10,000 and what else is
happening when that happens
well my asset in this case truck is
going to go down so all of our
transaction is happening on the asset
side those two will cancel each other
out and increase in a decrease for the
same amount will be a zero effect and
the accounting equation remains in
balance all right we've had a few more
signs a note payable for thirty six
thousand two hundred dollars to purchase
a new truck signed a note payable for
thirty six thousand two hundred dollars
to purchase a new truck so we created a
new liability liabilities or things we
owe when we sign a note we take out a
loan we're going to increase our
liabilities here so we know that and in
exchange for that liability we're going
to buy a new truck
and a truck is an asset it's something
we own so my assets are also going to go
up so let's go ahead and do that
thirty-six thousand two hundred dollars
is going to be increased two notes
payable a note is a formal written
promise to pay it's a little bit
stronger than an Accounts Payable which
is what we would have with our suppliers
and then my assets truck is going to go
up by thirty six thousand two hundred
dollars so in this case both sides of
the accounting equation are going to go
up by the same amount and the equation
still stays in balance so we're okay and
when I'm drawing that line I'm just
drawing it on the equals so you can see
the two different sides of the equation
performed $4,500 of services on account
for a local hotel chain so in this case
again that we provided services remember
we did that back in on the 12th as well
so you could always go back and refresh
your memory there we provided services
and if you don't recall we increased our
revenues by the amount that we provided
services for in this case is going to be
$4,500 and it says we provided those
services on account that means that they
didn't pay us right now we need to send
them a bill that's going to be an
accounts receivable to us which is an
asset so my asset accounts receivable
that's when customers owe us money we've
sent them a bill not to be confused with
accounts payable accounts receivable is
an asset and that will be for $4,500
so my assets going to go up $4,500 and
my stockholders equity is going to go up
4,500 revenues increase our stockholders
equity
okay just a few more paid $300 of the
amount owed from the purchase of
supplies on May 7th we paid $300 of the
amount owed from the purchase of
supplies on May 7th okay so anytime we
pay that's going to be a decrease that
cash and that would be for $300 we did
up here we purchase $600 of supplies on
account so when we purchase those
supplies we we would have increased our
liability accounts payable so we're
going to pay that liability off here
which means that I need to decrease my
liability accounts payable by hmm let's
see the amount it's $300 so my assets
going to go down $300 and my liability
specifically accounts payable is going
to go down for $300 now we receive
$2,200 on account from credit customers
anytime they receive money our asset
cash is going to go up and that was for
$2,200 and then on account so that would
have been an accounts receivable that's
when our customers owed us money so that
was already an asset so we're going to
decrease our asset accounts receivable
by $2,200 so the asset side of my
equation is going to stay in balance
cash went up 2,200 my accounts
receivable went down $2,200 okay we
receive the utility bill for the month
of May 740 dollars the bill is not due
until June 15th we receive the utility
bill for the month of May okay so what
we have is a liability we now have an
obligation to
pad utility company 740 dollars so my
liabilities here accounts payable is
going to go up by seven hundred forty
dollars and my expense my utilities
expense is actually also going to go up
by seven forty but remember we said that
decreases our stockholders equity so we
need to go ahead and decrease our equity
by seven hundred and forty dollars to
our sorry my little the writing tool
here isn't working very well two
utilities expense
okay so utilities expense hopefully you
can read that utilities expense is going
to decrease my stockholders equity by
seven forty and my accounts payable is
going to increase seven forty both of
those are on the same side of the
accounting equation and that's okay
they're going to offset each other the
net effect will be zero let's do the
final one here is paid twenty five
hundred dollars in dividends to the
shareholders Greig Richards so anytime
we pay we know our asset cash is going
to go down twenty-five hundred and in
exchange we're going to pay them
dividends
and that's decreases you see the minus
sign there so my stockholders equity is
going to go down five twenty five
hundred dollars for specifically
dividend okay so hopefully that will get
you started analyzing these basic
transactions