Principles of Accounting - Lecture 08

all right we continue with chapter 3 which is adjusting accounts and preparing financial statements you are already familiar a little bit with both of them we spoke a little bit about adjustments we or you already did when and saw statements we do more or less but everyone class begin the first concept is known as the time period assumption and it comes from time period in accounting we divide everything two time periods we divide usually usually into one year when you have one year you call this anyway so if it's a report you call it in your report okay then we typically divide it here into no more talk we divide it into two parts we divide the year into and its length is six times and we call it same and in American scope semi and you are move out too far away you separate just moving okay we first start move so that makes sure that you don't get in child this move too far away and whatever the caramels yeah right unfortunately and that will be for anyone who continuously just a little bit two chairs now just two chairs yes so he gets wait unfortunately but you know what kind of comments I welcome you get on YouTube about the lectures about how bad you are talking during nature's yeah you get that you go get your videos of the rated comments you'll see that the comments are about you constantly keep talking constantly this wrong it's unfortunate but that's why right I guess you got a deal in one way to deal is but lock the door okay and then move out and then out of the classroom unfortunately we got to do this we still have half the semester left and we gotta learn so for the next time five or eight minutes of long that's it okay so sandy AO is time frame between we're in two parts so sometimes it's a video report soon enough you have to separate the two yes that's the two of you then we have what's called quarterly order means one for this one is important means you divide the year in four equal parts and each happens to be three months in last one you have multi so these are the different time periods that we use in western counting system which is now recognized in most places around the world is an annual semi-annually quarterly in a month okay these they call H H means path so this theorem here is called H one in first half here in this is called H 2h 11-page this one is called cute q1 Jews standing for quarterly and this is q2 3q for okay and this sometimes they call em a 1 & 3 & 5 okay the month the field and annually just say 2012 2013 sometime due to shortage of 1234 97 or 98 okay so this is called accounting period every period represents a length of time and as a beginning and has and usually the beginning is the beginning of the month in the enemy okay now the ear we call this fiscal year doesn't have to be from January to June okay it'll be from April till from June future from August to and so this is not necessarily to be only prom Jen when it's from January it's called calendar calendar is the calendar and if it's from March or April that was from whatever the annual report begins it's called disco so fiscal year 2013 could be from March till March okay and sometimes when they have calendar my textbook remind you it's called the natural business natural to business okay accounting has two fundamental types which people usually associate with this one but this is not appropriate as soon as business gets relatively large cash basis means revenue is recognized when you receive a expense recognized birthday so if you pay expense for two years - insurance or some other insurance if you pay for two years insurance in a cash basis you recognize the expense today for two years which means that it over states your expense by the same way someone for example you may plan for example you and to stay visit next year you're going to look like you first you can pay your rent to the door upfront for 15 or 18 months okay and if the university is running on a cash basis it will recognize the revenue today for all the 15 months so the day's rate is going to be big the next month's going to be nothing nothing nothing nothing and that's not right that's not good that's not correct today we prefer to use what's called a global basis accrual means that revenues are recognized when or so the rent for September will be earned during sitting not during July not during October not during the center so the rent will be turned during the same you have to separate it we don't do this and okay you're going to get a lot of comments on the internet again so revenue recognized when you and expensive recognized again went in curved and the trick is that you have to match match expenses with revenues and expenses recognized so that matches the red and when it matches the revenue this is called a matching principle of the explained more and you're going to be getting a lot of exercise next time and example is okay you're going to get a lot more about it so here the key word is her and learn means when the product is delivered or when the services perform or deliver so if it's a rent June read is learned during the 30 days of June that's when you earn all right so if a customer comes to a hotel and he pays beforehand for seven nights this is unfair and he did not turn at the end of the first night you can say we married one night okay so let's say I'm just making a nice round number per night 1,000 bucks okay and the customer pays for five nights five thousand together the first time you can recognize one thousand okay in the word recognize means you actually care reported even counting books so after three nights you can recognize 3000 out so that's what you do our example will be a customer comes forward to make some Christmas what was it being doing some Christmas they come on December 24 and they leave on January 7 for example for two weeks of 15 days and they pay $15,000 okay when the cemetery first come when they pay upfront you say we burn zero we get our revenue which is liability after seven days 24 25 26 27 31 is 80 days you say we recognize eight nights of revenue so eight thousand revenue is recognized the other one ton would be safer in the other remains honor so every day you learn what not and that's upwards same thing we great you pay twelve months rent in advance so when you receive the rent it is unearned revenue again the month you recognize one of the breath again the second one you recognize revenue the third one you recognize again you will see a lot of examples okay so in a rural versus cash basis this means usually not used or not allowed distorted in a generally accepted accounting principles anywhere on the world you don't use this it's called non-gaap generally accepted accounting principles the same applies for international standards and this one is which go gap so this one is recognized this is the correct one this is the proper one this is the one you have to use you have to learn this is the one when you go into business that's the one you not baking or when they try to do you to do this one you're going to get a lot of problems as soon as the business grow so it's going to get a lot of problems here okay so this is the appropriate all right so they just give you a simple example our indicators interval you got past normal cell company paid twenty four thousand so to play 400 420 month insurance effectively 100 per month policy beginning December 1 okay so what does it mean so for here in a cash basis you recognize the full amount on this expense on the one end or the other on those who pay say all 24 expense get our ones we gotta take all the political thread but essentially right when the end of December comes the one party will have 100 expense in the animal that read so when there is a payment of stuff like this for the one side it's going to be unlearned for the other side is going to be we call it three pay for the one is going to be asset for the other one is going to be and after one month the acid becomes expense the liability becomes ready okay in that transition from acid too expensive for mobility to revenue is called but just that sleep adjustment so on a cash basis the entire 2,000 would be recognized as insurance expense for those who pay for the insurance company is going to be right again no insurance expense from this policy would be recognized in the next to 2012 2013 that's on a cash basis that's not a lot not good if you're working on a crew you'll recognize expense hundred for December expense hundred for Jenny prepare for mark friend make sure so on all the way to the expired so the 2400 you're separating to 24 months one each if everyone you recognize expensive to the one business insurance company will recognize revenue on the other side okay and that's the accrual basis you do this for rent you have to have to learn all the situations you know so due to this current user this for interest rates okay unit is for insurance unit is for subscription for the University you do this for tuition okay now great pay your rent for the dorm every month or every semester okay if you're very semester do you pay before the semester begins or at the end of the semester before so if you pay before for you it becomes prepaid rent if it's before before all the one saying says printing Ram it's also prepaid tuition for the university becomes an urn read and after tuition and every month they will recognize if it's four months four months they'll recognize one for 25% revenue on tuition 25% revenue on rent okay so that's how it works in every month they will display the recognition is called but just you make under just all right so the revenue recognition principle I already said it you gotta sign is when you deliver a good or service okay so services actually deliver so it's a hotel in the mall you recognize the red okay you need only in the morning when after the customer has sleep same thing with a restaurant after you deliver the meal and usually after the customer needs to be home with them well when you go 7-eleven you're only they delivered to you you actually pick the you know service at the cash register the cash register is if you pay it's yours if you don't pay it will also cellular level so when the moment of payment they you become owner of the group and if you become the other day detective Lee delivered to you it's called the ownership okay see they delivered to you the rent today but today is still do mine if all the strength isn't okay with a product it's when you actually take possession and ownership only then you recognize the same now in the United States this is a very important picture there was a one-way big corporate fraud in 1999 especially between us when major companies futures and technology and Cisco Systems delivered routers and switches all sorts of technology what they did say you recognize the revenue when the truck with the goods leaves poor the customer and leads the gate of the warehouse so when you leave the gate of the warehouse and it goes towards the customer then you recognize the rail so they did a classic fraud okay but it was perfectly legal in the United States can o'clock they will get a few big orders let's say a customer will order equipment for 20 million dollars okay let's say this University will order let's say 1000 for 2005 or 2004 okay each 1000 so for 2 million computers okay then we'll load them on a truck okay and at 10 o'clock at night they will leave they will leave the company the warehouse they say he recognized revenue because the Chuck is going to the customer and what o'clock the order is canceled the truck turns back and delivers back the good work of the returns the well the goods of the customer let's say so at one o'clock you gotta make adjustment returns good but at 11 o'clock at 11 o'clock young revenue and 12 o'clock midnight is the report so you can crease your cells artificially it's a lie it's a fraud but they used it to get a bigger better bones okay so they use this fact that when the truck leaves the gate of the warehouse will be good that's good enough for actually recognizing the red and they use this regulation okay but typically we don't have these problems if you go and pay for the textbook downstairs as soon as you pay and you get your textbook it's yours now they can recognize the weather same thing for 7-eleven you get your teeth and you pay it's yours now so they the rap far so what we have here recognizing revenue and expenses I just explained we have two names here number one is called the matching principle it is also known as the expense recognition present so yeah right artificial principle which is when the good and service is it has expense recognition principle the expense recognition principle is known as the matching prints and the matching principle says that you recognize expense only during the period and only for those of dividends for which you recognize revenue so if you may need to earn revenue you recognize it as an expense example if they pay me now for salary for this month okay evening record they can recognize it as an expense if they recognize you the revenue from tradition so there has to be some revenue generation in order to have the expensive going on here is an example where expense is not an expense it's actually dominance that's explained you are building a hotel and when you build a hotel you say order let's say more dirt but bricks and you put the bricks together start building the cost of the bit up of the bricks is not an expense it's part of the building of hotel then you pay salaries for workers when it pays hammers workers that's not an expense it is part of the value of the hotel so the bricks there the hotel the workers whether the hotel the windows pipes air conditioners lights switches everything that you spend on the building is not expensive it's an investment okay it is part of building of the cost of hotel let's provide a simpler easy exam easy example is you got a little restaurant with six tables and you want to buy a nice luxury high-quality table that can easily cost item two thousand five thousand ten thousand I will invite the table for ten thousand baht which you're going to use for five years okay you're not going to say expense of ten thousand bucks okay you're going to say purchase table okay and then every year the table value you will it's called depreciate that's why the same thing which we do when you buy equipment like a computer we don't say equipment expense we say credit equipment it's the machine okay and then you say oops are a dead equipment in credit cash okay so when you buy something which is a long term asset something that you're going to use for a long time like in rippln like desk chair like table I'm going to use it for more than a year including insurance you will not recognize and expensive you will recognize this expense using okay example you got right to cross the street the little business which is renting motorcycles okay when they purchase one motorcycle which they will use to rent okay is it an expense in the answer's no it is not an expense because there was no revenue coming for the purchase of it when you buy all you do is you increase the number of motorcycles and increase your cash if you say this motorcycle out we're ending let's say for three years and the cost is thirty six thousand okay when you rent it the first month you're going to have an expense of three whose it was it for three years it's going to be to go 3,000 right so it's okay 36 months of sorry 36 months yes thirty-six thousand five so it's going to be $1,000 per month that's going to be the cost of the business so going to recognize one thousand expense when he rents it to me for two thousand - he will recognize two thousand five hundred revenue and for that one month of use he will recognize my passion as an expense and she will recognize an end of the month at the end he will recognize the difference between 2,500 revenue and 1000 expense he recognizes up profit from renting the so at the purchase of the bike there is no expense again that the first month when she rents it and gets a random he'll recognize nails same thing when you buy the table for five years when you put it in the restaurant at the end of the first month you will recognize the expense now the expense on a long term asset like motorbike like car for a taxi like chair or table or projector is called depreciation depreciation is the loss of value of an asset because it was used as normal so ya motorcycle directing after three or four months motorcycles was gone it's depreciation and from depreciation you have installed and here's the keyword depreciation expense so we are motorcycle we can equipment gotta have depreciation expense in depreciation expense comes with based on the matching principle with using it as you use it to generate ready so as you generate revenue you recognize the usage of that computer laptop or projector or whatever it is okay so back to adjustments you have a number of adjustments you have four types of adjustments all adjustments are just four times okay we already know and have example so first adjusting entry is required to bring the asset or liability to its proper the mammals okay example will be you have here let's use this one let's use this one this is water okay University I'm just making a younger they just bought 1000 bottles of water when they buy 1000 they put it in there in the world okay is it an expense not an expense it is a supply of water supply that 10,000 bottles I'm taking a number 10 Bob each probably under thousand Bobby's water supply okay so expense becomes as we crank it when we consume it that's an expensive at the end of the month they will count the number of bottles and they say we got eight thousand bottles of ale or does it need to have eight thousand bottles level it means because you were to stand and you have eight you concealed so when you consume two at the end of the month you will recognize X pants for two thousand bottles at ten each you're going to recognize for twenty thousand expensive for that particular month so they are not going to account for every single bottle every minute okay it's too much cost at the end of the mantich is going to come to say oh we got two thousand consumed and again after that they will make adjusting entry because he asked was a thousand bottles at the beginning of the month if you want to bring it to its proper amount because the proper amount is eight thousand just because you and me are drinking water from time to time just because it's same thing about these nice little markers that we use okay they probably buy 50,000 at the beginning of the semester in every month they will wear in three months whatever six months they will count and the difference will be expense okay an expense will come through an adjusting entry to bring the in this case the asset that was to its proper amount okay so it's very simple and very easy all adjustments fall into two major categories is it called categories and you have four types you know all this that's everything okay you just remember them all well is pay cash before and if it's an asset I already explained to you calling pre-paint okay so it is an asset to say prepaid expense remember prepaid expense is not an expense prepaid expense is an asset like the water all right for like your head or like the tuition okay and if it's prepaid on the other side you say earn rebel so when you pay tuition for in advance for union work for you is prepaid expense which is an asset for university is an unearned revenue which is a liability okay remember every transactions have two parties and have two parties whatever's on the one side it should be the opposite if it's a rather than the one it should be expensive them if it's an acid on the one's heart should be a liability here the pre-made stuff is an asset for the expense another meaning of liability and that's easy we've done this a lot of times a lot of example subscription you want to be getting let's say health magazine or for the guys are going to be motorcycle magazine right and you pay your subscription and twelve months they're paying you're sorry they're sending you a magazine every month they send you a magazine okay for that case you have a prepaid expense and for them when they get the subscription is hunkering right and every month they will be recognizing one twelve in the other is when cash be spanked after the expense is recognized okay and same thing forever so you're going to happen crude okay let's clarify the word accrued but proved again means the cash is paid after the event example with the hotel I just gave you the guy comes on Christmas yes 25th and these on January sell for 15 nights but his not pain visual war he's paying on the last day and if he is paying on the last day on December 31st you have as a hotel a crude revving ready let's provide another example that happens here in Thailand is where is Bulgaria married and every other country in the world it's called accrued taxes approved taxes taxes are accrued usually on December 31st practically everywhere in the world we send the 31st you're going to look with us if you gotta pay your tax okay oh but you don't have to pay on December 31st okay from January 1 to December 31st is called the tax year okay but you don't pay it on December 31st you don't here in January 1 you may like April 15 for the United States in Bulgaria the day is April 30 okay so you have three four four three months okay so again here if your little business little restaurant okay the tiny little restaurant you made I know while we need about profit okay and one minute but you gotta get eight percent profit tax you have to take hundred thousand government tax okay if that's the case December 31 you're going to have include it's going to be tax expense and include tax expenses of liability which may be you in January maybe factory maybe March okay by the day given by the government okay before they've given by God okay so at the end of December you will have it's called a tax liability and the tax liabilities go accrued or accrued tax okay so you have these taxes which you gotta pay for the pre so you pay your cash the text after okay the government is the other side they will have a crude grammar for them they will be expected from your business the money if they know it will probably get okay but I learned them together in January 1 no one's going to pay their January 1 people in the West are drunk they're not going to compare they are sleeping till lunch no one's going to go up in tax in January 1 they usually wait until April if you wait the last week the deadline so same thing applies to interest for example we have some bond or you have some account ok on the bank account or have some gone that's a purchase bond July 1 and they gotta pay you interest every 12 months on every 12 months then they gotta say I'd say 10% so you buy four million in the interest for the whole year that wasn't and for the six months they got a value let's say 50 now okay that is accrued revenue for you you're not going to get you earned it okay you lend the money you wait for six months you've earned the money they're gonna take tomorrow we're going to paint after six months because that's done so in that particular case you have the Prairie so stop associated with taxes stuff associated with the interest rate will be example sexually very easy to learn all the examples are about fifteen point examples associated with these four particular types of adjustments all right they have a little bit more already explained prepaid expenses okay and that's what they say hey here's a check for my 25 by month insurance policy okay well is a prepaid expense in on the other side is a good read and here's what happens you have let's say unadjusted balances prepaid expense okay that's the in then you have an adjustment and this is the adjustment so remember adjustments for prepaid expenses are always like this so if you have a prepaid insurance again the one month you're going to say credits prepaid insurance 100 and you say debit insurance expense okay so remember that's very simple and very easy you always have an asset in expense account it'll be honest I never liability in revenue account the way to remember that all of these adjusted take a balance sheet account in Google State every adjustment must get on the one side balance ship he has a piece of a machine in here expensive revenue is the income statement and that's it that's all the rest of it and if it's a prepaid j-just the dissolve is the same david expense credit ask that's just same thing with the water supply okay in a water you got water supply okay this is drinking Bonnie so it's going to be bottled water supply and thousand and for the month will be David bottled water expense credit bottled water okay same thing with these markers okay separate and that's all the risk so resources fake being before receiving the edge okay so you're gonna buy the water but met if it will come over the next three four five months you're going to buy the markers but the man that's going to come in you are going to pay for the tuition now but the benefit of learning so I come over the next three four five months okay so that's what it makes it they'll even say an example with prepaid insurance each 2400 prepaid insurance is an asset here you have insurance expense and the adjustment is amazingly simple then insurance expense credit that's the adjustments are actually this is the shortest and easiest chapter in the textbook I'm thinking of taking a break in our dragon

Channel: Krassimir Petrov

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Keywords: adjusting accounts, time-period assumption, calendar year, tax year, tax basis, accrual basis, earned revenue, the matching principle, GAAP, non-GAAP, prepaid insurance, revenue recognition principle, matching principle, expense-recognition principle, depreciation, depreciation expense, adjusting entry, prepaid expense, unearned revenue, accrued expense, accrued revenue, unadjusted balance, adjusted balance

Id: GhOaJ4ZlJXQ

Length: 41min 32sec (2492 seconds)

Published: Tue Jul 09 2013