Principles of Accounting - Lecture 09

everyone so we just covered for prepaid expenses I just gave you an example of prepaid insurance where prepaid insurance is a prepaid everyone prepaid insurance is a prepaid expense with 100 credit in the asset and 100 debit in big expense I already explained a gave you example with bottled water this one is now expense it was already consumed nothing okay so the bottled water is a expense we also have markers when the marker goes bad and I throw it in the garbage it becomes expense okay so I just gave you example of water bottle water supply or marker supply another very common sub this is paper you got a 500 cheese pack or a stack of paper and as the paper gets consumed you it's called expensive you will recognize it as expensive so purchased where 9700 dollars of supply I gave example with bottles of reported expenditures in the SS account supplies okay on the cemre account of supply was in thousand six hundred and seventy so you'll use that 1112 1,050 1,050 so what is the adjustment of the end of the month it justit is simple David supplies expense they will expense credit supplies these phases of their calculated and credit supplies okay hey you will then transfer here the originally bought and after the adjustment you get eight six seventy just as many as you can okay so after they just number two and that's it it's very easy this nothing and other prepaid expenses okay father prepaid expenses are and I gave you an example many times prepaid rent okay we discussed this many times exactly the counted as insurance and I suppose it what's wrong always keep talking we just keep talking okay that's not the way it's done right but no okay next time you're out lift our okay I love a bad guy right no I yeah yeah don't have never known other things and try to explain you study okay so sometimes you may have pre-made expense which is not only paid for but used within the same period making a vine learning don't line up coffee okay and when we use up the coffee in the middle of a month then the coffee is so good at coffee supply which becomes an end of the month completely expense okay so the previous one was only partially expense this one it can expense it completely okay same thing for example okay a company made a monthly rent on the first day of each month the thing creates a prepaid expense of the first day the full expired yet that can happen a lot in that case you can just recognize it as an expense right you can do that up front especially if you're expecting if you expect to use it by the end of the month it's okay too expensive at the beginning that's why I had a student coming to the office and asked me but she can do it this way or that way and I try to explain that both are correct and she said what how is it possible to be very simple it's possible so you can do it as directly it is an expense okay or you can do it at the beginning of mountains as an asset and at the end of the month you can make an adjustment as an expense the end result is the same but you can do it two different ways so sometimes you may have different transactions and they will be correct okay but sometimes when you get the expense the expense have to be always one number okay and last one in these special cases we can record the cash we'll add ed to the expense account directly so we buy a little bit of coffee I'm going to use it by David come on you can say the coffee is an expense right that the purchase okay same thing for the rent you paying one more gram for example was my motorcycle name one month crap okay so for me I can paint I can say hey it's immediately an expense any other business can say it's an immediate you ready now technically you will have to say on the first of the month I'm alright revenue and at the end of the month you have to make an adjustment and make it burn bread but he can make an exception especially if it's a multiple chemicals within the month you can make that exception it's okay all right and we get to a very important concept you will need you will need a lot in any business that you do and you're needed in your final scores in anything to be depreciate in depreciation is actually two different things that's why it's confusing depreciation the main economic meaning is the loss of better of an asset because of this it's called we're in here because of its would say normal use you normally use the motorcycle it has depreciation of a dad it loses it just use it all the time adjust again this is a pen but I use it as I write you lose this van okay maybe after one we forgot a throwaway same thing with a laptop I'm using a life the laptop zone pillow lasts forever just going to use it maybe for years okay so every month it's losing a little bit of them because it gets old we say appreciated okay depreciated it means it gets oh okay and used up same applies right taxi is the cop car which arrived that's for a motorcycle grandpa oh yeah the same applies for airplane me you don't use airplanes forever you just use my ten years and if year you'll say depreciate same thing for table we don't always use of people for so thank you okay so in accounting depreciation is the process of allocating you allocate the cost of the plant passive well rejected any any guess to say long-term passive for work is used like so let's display this plan asset the same as long-term casting in accounting the difficult period is one year in we consider long-term passive any asset which will be used more than one year if it's more than one here it's a long-term passive the example will be the projector calm music by LinkedIn here's the tail how to use upon 10 or 20 years the monitor five years the computer made five years this chair maybe this particular piece it could be those boards the white board okay glass could be used for 20 years okay what about the air conditioning one here no problem is it okay so when I say five years their speed is this is called the useful life air-conditioning usually have five people per user they male may reveal it with the inside talk refrigerant every two years so you estimate you decide what's the useful life let's say put this one ten years with air-conditioning ten years and for this monitor let's say five years okay and then you depreciate okay and appreciate means you allocate the cost of the purchase so you if you buy this for okay and you have a useful life of ten years you will say the first year you expense any call it depreciation expense that that secondly depreciation expenses and started depreciation expense again picking a number for this HP monitoring this HP monitor cost $5,000 okay and we say useful life of five years at the end of the first is a depreciation 1000 next year depreciation one next year depreciation one so at the first year when you buy it it's going to have full megabyte down then the second year is going to have a very important three times 2,000 1,000 and the end of five years meaning at the end the tool useful life is going to have a better of zero okay so you have a strength one depreciation straight line this is the most common one you'll need is the simplest and easiest is exactly what I gave you is when depreciation where every year you depreciate the same amount so if it's hundred down first you get up ten times ten times ten top Delta Delta so when you depreciate exactly the same amount same year for the monitor 1000 1000 1000 1000 1000 so if you depreciate the same amount it's called straight-line depreciation you have scald up purchase price and that represents the asset cost okay that's how the purchase price at the end of the useful life you have a value again at the useful life it's not all this worth serum it's sometimes worth maybe five thousand okay you can sell it for the metal inside okay so SEL de faire is the value you can get at the end of the useful life when you're not going to use it anymore the example rental motor side you use it for five years you keep generating read and at the end of five years motorcycle is broke you're not going to use you're not going to repair okay you're not going to have it anymore is rent but it doesn't mean it's very we see okay maybe you're tired you can sell hold it and get a little bit of money okay maybe you can sell it for a scrap metal to get a little bit of money okay make it you can get the breaks okay or the brake pads on the front and get a little bit of mine so after you stop using it doesn't mean the pad is pure zero it's probably a little bit of that maybe thousand two thousand we can just say for the metal inside okay or some other part maybe the time maybe the engine still works maybe something else works they're going to sell so that's not salvage there now in these examples that I gave you I do a self in travel zero it's nice it's clean it's easy we just use salvage value zero where Adam purchase he has cost this hundred thousand salvage value is zero useful life is 10 so total value is hundred thousand you divide by ten years and again and thousand per year here you got five thousand is the monitor for five years you get 1,000 is going to become depreciation expense and this is what is the straight-line depreciation expense this is what we call the annual depreciation expense if it's even divided by ten years okay you can divide it by 120 months depreciation Wow okay so a few more concepts which we have as you are depreciating somehow these slides are not good they're not good enough they are not detailed so let's continue when you have five thousand is the SM cost with the purchase price after you depreciate at the end of the first year 1000 the value becomes four times this value called book fan Book value is the bed of the asset cost minus the total depreciation total depreciation is called accumulated depreciation you need a textbook here and we need to see where is the page here because that's important stuff to get this depreciation stuff this depreciation accumulated depreciation that's on page 101 and every one you add the depreciation there okay so that account is called culture account contra account that's one paid one one it's unfortunately not in the textbook but you need 101 the contract is here okay contra camp is here so culture account is an account which goes together and all this goes together with another account and has the opposite balance so a machine will have a debit balance and the depreciation accumulated depreciation is a contra capital always have credit so the book value will be the initial we call it purchase price or s and cost usual cost minus the depreciation Victoria accumulated the accumulate so the accumulated depreciation is the asset and you have a depreciation expense with those every year it adds up let's see what else we have here depreciation time of us pretty much booked them sometimes instead of book that they say carrying them and sometimes they say net amount so for example if this is now three years if we say 100,000 is the purchase price of 10000 is the annual depreciation expense now the book value will be after three years seventy seventy you still say equipment hundred thousand accumulated depreciation thirty thousand and the book value is 100 mil - thirty is seven or under in revenues through expenses I see this one accrued revenues with disgust links to financial statement that's on page 107 and it's very simple every adjustment links the balance sheet account to an income statement okay so it's going to be an asset usually with an expense in a revenue so a liability with rent and let's see if you have anything else if not a difference aha one last piece the last piece is called adjusted trial balance so remember we have a trial balance which gives you all assets and all expenses all right things and all now what the complete list of all accounts and their debit and credit balances which must have well now you're going to have instead of trial balances the adjusted you get the original trial balance in between you put adjustments and then you can be adjusted trial balance and this is all coming in the examples all right

Channel: Krassimir Petrov

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Keywords: depreciation, depreciation expense, asset cost, straight-line depreciation, salvage value, useful life, plant asset, total depreciation, accumulated depreciation, contra-account, carry value, net value, adjusted trial balance

Id: jGhKmvk1_aE

Length: 20min 18sec (1218 seconds)

Published: Tue Jul 09 2013