Fowler – Accounting Transactions

Okay students, I’m back and this is the
second video for Chapter One. We’re going to talk about how
transactions affect the accounting equation. A transaction is simply an
economic event that changes the financial position of the company.
What we’re going to do today is set up an imaginary business. We’re going to
do a photography business because that is a service organization and it will be
owned by one person. Okay, so the very first thing I need to do if I’m going to
set up this photography business is to put in some money. What I’m doing
here at the top before we even start the transactions. I have put the accounting
equation back in and I have expanded it to show the pluses and minuses that we
talked about in the first video. Now I’m going to put some money in and I’m
going to – let’s say – to put in about twenty thousand dollars. I’m
going have a plus here under cash. What we’re going to do here is show how
all of these transactions affect the accounting equation, and there’s one
thing you need to know about a transaction. That is that there are always two
sides, okay? So if I put money into the business, I’m giving the business twenty
thousand dollars but I also have equity in that twenty thousand or in the
business, so I’m going to go over here and put plus twenty thousand under
capital. Now you can see even at this point that the accounting equation is in balance and it must always be in balance. All right, now that I
have some money, I’m going to buy some equipment because I need some
photography equipment. So I’m going to say I’m going to buy about – maybe ten thousand
dollars worth of equipment. However since I only put in twenty
thousand in, I don’t want to use that money so I go out and purchase the
equipment on account or I charge it. We call that accounts payable. So I
get the equipment for ten thousand and I also have a liability – I have to pay it
back – an obligation to pay it back – for ten thousand.
Okay, I’m gonna draw an imaginary line here – well it’s not imaginary – but
that way we can keep the two sides of the equation separate. All right, we still
have the accounting equation is in balance. Now I’m not going to put the balances in
on this chart like you have in your textbook, simply because I don’t have the
room but in your textbook and in your problems, you need to put a balance after
every transaction. What we have here – you would have 20,000 in cash, we have 10,000 in
equipment, we have 10,000 in accounts payable and 20,000 in capital. So you can
see that both sides do equal because you would have 30,000 on each side. Now
that I have some equipment, I probably need some supplies so I’m going to purchase
about 5,000 in supplies. That may seem like a lot, but I’m trying to keep the
numbers round so it makes it easier. And I’m not going to charge that because
I’m going to spend my cash for that. So I’m going to say – let’s pay for the supplies in
cash which means I’m decreasing my cash. Now we still see that the
accounting equation is in balance. You’ve got thirty thousand here and thirty
thousand here. But something happened that’s different this time than before
because before we had something happening on both sides of the equation;
whereas here both sides of the transaction were on the same side. And
that’s okay because what we did here was decrease one asset and increase the
other asset, but we’re still in balance. All right. Now I need a location so I’m
going to go out and rent a studio or some type of building or a room in a
building. Let’s say the rent for a month is about $1,000. So I’m going to
say I’ll spend that money. That’s one thousand – again these numbers don’t
have to be anywhere near correct – I’m just coming up with round numbers. I am
making this up as I go. All right, so that’s going to
be an expense – that’s my first expense, okay, because I have to have expense in
order to generate revenue. So I have a thousand dollars here, then I’m going to come
over here and put that under expense, but remember we subtracted expense from
owner’s equity so that’s going to be a minus here, okay?
Also when I go out and make pictures I need somebody to stay in the office to
answer the phone. So I’m going to hire a receptionist for two thousand dollars a
month and we’ll pay upfront. And that’s also going to be an expense – that
will be a salary expense – so that’s going to go over here as well. We will decrease cash and
we’ll add that to our expenses over here, which decreases owner’s equity. Okay. Now,
I go out and take some pictures and I make some money. So I take in – let’s say –
ten thousand dollars. I take that in cash but now there’s revenue so I’m going
to go over here and put this under revenue. Remember revenue is a plus
to owner’s equity, so we add it over there. When I get to the end of the month –
this is my first month of operation – I get to the end of the month and I
realize that I’ve used some of my supplies. I don’t have five thousand in
supplies anymore. I’ve checked my supplies and only have four thousand,
which means I’ve used a thousand in supplies. So if we don’t have five
thousand in supplies, we don’t have five thousand in an asset. We only have four
thousand. We need to take that off of the asset, and any time we use up an
asset as we do with the expense or with supplies then we’re going to charge it
to expense. So this will be a decrease to the asset and over here we’re going
to add it to our expenses. Remember expense is a minus to owner’s equity
so we will subtract it. All right, now one other thing I need to do before
we finish this scenario and that is show you how the owner
will take money out of the business. We talked about that in the first video –
that the owner has to take money out in order to survive and pay their own house
payment or rent for themselves. So the owner can take money out. Let’s say the
owners decided to take out 2,000 per month so we’re going to take out 2,000
here in cash, and over here we’re going to add it to withdrawals and remember
withdrawals is a minus. Now what I’m going to do is see if we can come up
with some totals here, and I’m not really good at drawing straight lines so just
just know that. Let’s see how much we have in cash. We’ve got 20 plus 10 that’s
30 minus 5 that’s 25, 24, 22, 21,19 in cash. Now I’m just hoping – I’m making this up
as I go – so I hope it comes out. If it doesn’t we will figure out why. We have
10,000 in equipment and we have now 4,000 in supplies so if we add those
numbers up we have 19,000, 29,000, 33,000 total. Okay, what do we have on the other side?
We have 10,000 in liabilities plus 20,000 in capital plus 10,000 in
revenue minus one, two, three, four thousand in expenses and minus 2000 in withdrawals.Now,
let’s see if that comes out to what it should .10 20 30 40 minus 6 is 34 – I’m
off. Ten, twenty, thirty thousand minus 4 is 36 minus 2 is 34, so I’ve made a
mistake, probably on the other side. Okay, let’s take a look at it. 20 thousand
minus 5 is 15, 14 ,12, 22 , 18, no 20. So this is 20.
Now if I add 20, 10, and 4, I do get the 34,000. It’s okay to make
mistakes – that’s how you learn, and certainly when I make something up I
never know how it’s going to come out. So what we have here is 34,000 on this side
and 34,000 on this side. Every transaction does affect the accounting
equation. What we’re going to do in the next video is talk about how this
information would go into the financial statements. I will show you how to put
together the financial statements which are prepared at the end of a
period, either the end of the month , the end of the quarter or end of the year. But that’s
all for now. Thank you.

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