 Hello, and welcome to the session. This is Professor Farhad. In this session, we will analyze business transaction using the accounting equation. Now, if you don't know what the accounting equation is, I did cover this in the prior session in detail, so you wanna make sure you are familiar with the accounting equation, because the assumption here is, you know what your assets are, your liabilities, equities, which are these accounts here. If not, please review the prior session. This topic is usually covered in a financial accounting or introductory financial accounting course. Obviously, you need to know this for the CPA exam by, but this is really basic material, but it's always good to go back and review if need be to make sure you know the basics. As always, I would like to remind you to connect with me only then, if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance, and tax lectures. I don't only cover financial accounting, I cover many other accounting courses, so please subscribe. If you like this recording, like it, share it. If it's helping you, it means it might help other people, so share the wealth, it's free. On my website, you'll have additional resources, such as True False Multiple Choice, CPA questions, CPA quasi-CPA simulations. If you're studying for your CPA exam and you're serious about success, I have 2,000 plus practice questions. Let's go ahead and start to analyze transactions and what do we mean by analyzing transaction? Let's learn some rules about analyzing transaction. All what analyzing transaction means, it means you read the transaction and you know what happened. So the first thing you wanna know is, and if you're not copy this down, you want to ask yourself what happened? Simply put, you read a statement, do you understand what happened in that statement? If you don't understand, then that's it, you are stuck, you are lost, okay? Two, then you have to, once you understand the transaction, then you have to identify the accounts, and I put accounts plural because we're gonna have at least two accounts. We could have more than two, but we're gonna have at least two accounts, so that's the second thing you have to do. And when you identify those two accounts, you have to tell us the type of the account. What is the type? Is it an asset? Is it a liability? Is it revenue? Is it expense? Is it common stock? Or is it dividend? So the account will fall under one of those six categories for now, either an asset, a liability, a revenue, and expense, a common stock and dividend. And the third thing you have to know is did the account go up or did the account go down? So remember, you identify two accounts. What happened to each account? Did it go up, one go up, one went down, both went down, it could be that both went down, or they both went up. So one could go up, one could go down, both go down, both go up. It could be any combination of these. So this is how we analyze transactions. Make sure you copy these notes as I'm gonna go through them real quick after each transaction. And after each transaction, we confirm the decounting equation holds. Let's look at the first transaction. C-Taylor invests $30,000 cash to start a corporation named Fast Forward. So first thing is what happened? What happened is this? C-Taylor, this individual, decided to start a company called Fast Forward. So to start a company, you need to invest money. So what did C-Taylor did? C-Taylor invested $30,000 cash. Now, which accounts are involved? Obviously, and here's a tip for you when you are starting to learn this. If you see the word cash, if you see the word paid, if you see the word received, mean you paid cash, received cash or the word cash, it means cash is involved. So that's the first account. So that's easy, but I already identified one account, cash. What is the other account? Well, when the owner invests money in the business, so the owner gives cash, what do they get in return? Cash is considered contributed capital. It's there mean they're investing in the company as we learned about in the prior session. They get in return common stock. What is common stock is ownership interest. So the company's cash will go up and the company's common stock will go up because the company would issue more cash. I'm sorry, will issue more stocks. They would receive the cash. Therefore, the accounts involved is cash. Cash is the account. Asset is the type of the account. It's an asset and it goes up. Common stock is the account. Equity is the type. Okay, now we could also call it common stock because remember under equity, if you remember from the accounting equation, remember under equity, we have four accounts. We have common stock, one, dividend two, dividend two, three is revenues, four is expenses. Now, you can call all these four equity, equity account. I like to have their own classification. For example, they're gonna send equity. I would like to say common stock equity, dividend equity, revenue equity, expense equity, but I like to name them by their own account. So what you do now, what the company would do, now we're gonna keep track of these accounts. Now, if you are working and you would like to follow this example, the best thing to do is to have an Excel sheet where you have cash, supplies, equipment, accounts payable, notes payable and common stock, something like this, a grid like this, or you could do this in Excel if you want to. It's up to you, it's up to you, but make sure you have, those are the accounts we're gonna be using. So make sure you have enough space so you can work because we're gonna have, we're working eight or nine transaction. So what happened in this transaction, cash went up. Therefore, this is the transaction number one, cash went up, okay? What else went up? Common stock, common stock went up. Now, we now we need to run the balance. How much cash do we have? This is the balance line, this is called the balance. You have $30,000 in cash, the business has $30,000 in cash. And how much equity? The balance is 30,000. Is 30,000 of assets equal to 30,000 of liabilities plus equity? And the answer is yes, the account and equation holds, assets equal to liabilities plus owner's equity. We just analyze our first transaction. Let's look at transaction two. The company which is fast forward, purchase supplies, paying 2,500 cash. So ask yourself what happened? We went to an office supply store and we bought supplies. How much supply is worth? 2,500 and we paid cash. Good, so cash is involved. Cash is an asset, cash is gonna go down. What did we buy? We buy office supplies. So here's what happened. We gave them cash, they gave us office supplies. This is what happened. So the accounts involved is cash, cash is an asset, cash is gonna go down. Office supplies, supplies is an asset, we have more supplies, supplies gonna go up. Okay, so let's take a look now on the grid to see how this all fits together. Now, from the prior transaction, remember we have $30,000 in cash, $30,000 in common stock. Now we're gonna look at transaction two. In transaction two, notice cash is negative. Notice the parentheses to reflect it's negative and supplies went up. So cash went down, supplies went up. Now we need to run the balance. Now, 30,000 minus 2,500 equal to the balance of 27,500, 2,500 plus zeros, 2,500. Zero equipment, zero. Accounts payable zeros, notes payable zeros, common stock, we still have 30,000. Now we need to make sure our assets equal to liabilities and equity. Is this plus this equal to 30,000? Yes. Is 30,000 plus zero equal to 30,000? Yes. So the accountant equation hold and remember those are the balances. This line here, let me highlight the balance line. This is the balance. It means how much you have of things. This is the balance, okay? Transaction three, we purchased equipment for cash. We purchased equipment and we paid $26,000 cash. It's quite an expensive piece of equipment, okay? We paid cash. So which accounts are involved? Easy, cash is involved. Cash is an asset, cash is going down. So we gave cash, what did we get in return? We got equipment. So cash is gonna go down, equipment's gonna go up. Cash will go down, equipment will go up. They're both assets. So we exchange one asset into the other. Let's take a look at the grid now. Now this is the prior, this is transaction one, this is transaction two, now we're working on transaction three. Cash will go down 26,000, equipment will go up. Cash went down, equipment went up. Let's look at the cash balance now. The cash balance now if we take 30,000 plus minus 2,500 minus 26,000, the cash is 1,500. Supplies, 2,500. Now we have equipment balance of 26,000. No accounts payable, no account, no notes payable. And we still have common stock of 30,000. Now we add all the assets equal to 30,000. We add liabilities and equity equal to 30,000. Okay, so far so good. All that we did is we contributed money to the company. Then we took this money and we bought supplies and we bought equipment. Let's take a look at this transaction. We purchased supplies, which is, I guess we need more supplies of 7,100. And here's how we did it on credit. So this is extremely important here. On credit means what? It means we did not pay for the supplies. And this is what happened in the real world. In the real world, you buy some stuff, you buy material and you don't pay. It's called you bought it on credit or on account. Sometimes it's on credit. Sometimes it says on account, on credit or on account. Now, which accounts are involved? Obviously you bought supplies, supplies is an asset. So here's what happened. You bought supplies. You have more supplies, they gave you supplies. What did you do? Did you give cash? And the answer is no, you did not pay cash. What did you give? You gave them promise to pay. You say, I'm gonna pay my bill. Don't worry, I'm gonna pay my bill. You gave them a promise. That promise is called accounts payable. That promise is a liability because you have to pay it in the future. It becomes a debt. So supplies is an asset, supplies goes up and accounts payable is a liability. Now we have more liabilities. We have more promises to pay, liabilities go up. Let's take a look at how this all fits together on the grid or on the running the balance. So these are my, this is transaction one, transaction two, transaction three, transaction four, I'm gonna have more supplies and I'm gonna have for the first time a liability called accounts payable. Now let's run the balance. We take the cash still as the prior balance 1500. Now we have more supplies. We have 9,600 of supplies, 26 of equipment, 7,100 of accounts payable. So this is new. We have no notes payable and we still have common stock of 30,000. Now if we add all the assets equal to 30,100, if we add the liabilities in equity, if we add the liabilities in equity, 37,100. So notice now we have more assets but we have more liabilities too. So now what we did is we generated more asset. We bought more asset but that asset came from a liability. Is this good? Yeah, not bad. But we wanna generate more assets from revenues, okay? Now let's take a look at transaction that affects revenues, expenses and withdrawals and what are these account called? Equity account. The only thing that's not there is common stock and we already work with common stock. The first transaction was common stock. So let's take a look at the first transaction. Provided consulting services to a customer and received 4,200 right away. Excellent. So what happened is we did some work. We provided consulting work to one of our customers and guess what? They paid us 4,200. So which accounts are involved? If they paid me cash, I received cash of 4,200. What did I give in return? I provided a service. What do we call this? We call this revenue. So I gave them revenue, they gave me cash. So cash will go up and revenue which is an equity account will go up. Now you're saying I gave them revenue. Yes, but I record the revenue. I have more revenues now which is good. Revenues go up, okay? So cash went up, revenues went up and this is called an equity transaction. Why it involves an equity transaction? Because it involves an equity account which is revenue. Now let's take a look at our balances. Remember this is the prior balance from the prior screen. This is what we had the prior screen. 1,500 cash, 96 supplies, 9,600 equipment so on and so forth. Now we're gonna have more cash which is good and now we're gonna have more revenues for the first time 4,200. Now our cash is 5,700, supplies is 9,600, equipment 26,000, accounts payable, common stock and revenues. Again, if we add up all the assets, now we have more assets, 41,300. If we add liabilities and equity, we have 41,300. Now we have more assets but part of it is because we were generated more revenues which is good. This is what we want to do. We want to generate more revenues. Paid rent of $1,000 and salaries of $700. Now we paid, once you have the word paid it means we paid cash. So what happened? We paid cash, okay? So we gave cash and what did we get in return? We in return the employee worked for us and we have a rental prompt. We have a rent, we have a rent, okay? So we received rent and employee services. So cash will go down obviously. Cash as an asset will go down. And now please note our expenses which is an equity always go up. So make sure you know this. Expenses write this down. Expenses always increase. Now expenses reduces equity. Remember we talked about this in the prior session. Expenses reduces equity. So don't confuse this arrow going up to this arrow going down. The arrow going up is for the account. Your expenses don't go down. Your expenses always go up. They stop but they don't go down. As you have more expenses your equity goes down, okay? We have rent expense and salaries expense. Now remember that the balance in the expense account actually increase always. But the total equity decrease because expenses reduces equity. So let's take a look on the grid about this transaction. So cash is gonna go down 1,000. Expenses will go up 1,000. Now this negative is for equity. Cash will go down by 700. Expenses will go up by 700. Now we run the balance again. Now we have cash of 4,000. Supplies of 9,600. Equipment of 26,000. Accounts spable 7,100. No notes spable. Common stock revenues and expenses. Now when we net these we take 7,100 plus, plus 30,000 plus 4,200 minus 1,700 and it's gonna give us 39,600. Notice our assets went down from the prior transaction. Notice the prior transactions from the prior balance. We had assets of 4,1300. What we did now is we spent some of our assets on expenses and as a result our assets went down which has made sense. Now we provide services and facilities for credit. So here's what happened. We provided consulting services which is good of 1,600 and we provided rent facilities for 300 to a customer. However it was on for credit or on account. What does that mean? It means we provided more consulting services. However the client says I'm not gonna be able to pay you now, I'll pay you in the future. So here's what we did. We gave services. We gave services. Our services, our service revenue will go up. I mean we provided a service in return. We received a promise to be paid. We received a promise to be paid in the future. Now what do we call this promise to be paid because we provided the service? We call this accounts receivable which implies that we are going to receive money in the future. That's what implies. It implies we are going to receive money in the future. So this is the new account. This is a new account, account receivable. Account receivable is an asset. It's gonna go up and we have consulting revenue. Revenue is an equity and we have rental revenue because we have two type of revenue. We provided consulting services and we provide rental services as well. So consulting services go up which is equity, rental revenue goes up which is equity. Now, let's take a look at the grid here. So our account receivable go up. These are the prior balances from the prior screen. If you're not sure, go back. Okay, here's what happened here. Account receivable goes up and we have two type of revenue. We have consulting revenue and rental revenue. Now cash 4,000, account receivable 1,900, supplies 9,600 equipment, accounts payable, common stock. Now we have more revenues and expenses 1,700. We do the same thing. We add up all the assets. This is the balances. We add up liabilities and owners equity. Remember to deduct the expenses, they're the same. And notice our assets went up. Why? Because we provided a service. Let's look at transaction nine, transaction nine. Client in transaction eight pays. What did they pay? They pay us cash 1,900 for the consulting services. Excellent. So they paid us. So what happened to our cash account? Well, we received cash, okay? Which is good. Cash is gonna go up, cash is an asset. Why did they pay us cash? Because for transaction eight. What happened in transaction eight? We provided consulting and rental revenue. Now they promised to pay. Well, guess what? They gave us cash. We're gonna have to remove the promise. So the account receivable has to go down. We have to remove the receivable. We can no longer say you still owe us money. Why? Because they paid the full balance. So cash will go up and account receivable, which is an asset, will go down. So they're both assets. One go up, the other one goes down. Let's take a look at the grid here. I have more cash. I have less account receivable. Now, notice I did not change my revenue. My revenue is still the same. Now I have more cash. What is my balance and receivable now? Nothing, zero. Supplies, equipment, accounts payable, common stock, revenue still the same and expenses still the same. Again, nothing have changed from the total asset did not change. All what happened this 1900 became cash. K became cash, which is good. We like cash. Payment of accounts payable fast forward pays 900. What do they pay? They pay cash as a partial payment for supplies purchased in transaction four. So let's go back to transaction four. Just to kind of show you what happened in transaction four. In transaction four, this is what happened in transaction four, we bought supplies, but we bought them on credit. We bought 7,100 on credit. So we have the supplies, but now we have to worry about the payment. Guess what? We are going to make a payment. Are we gonna pay the full amount? No, we are not gonna pay the full amount. How much are we going to pay? We're gonna make a partial payment. We decided to pay, we decided to pay. Let's see, let's see how much we decided to pay. We decided to pay, let's see transaction 10, I believe. There we go. We decided to pay 900 dollars. So it's only, we owe them 7,100. We're only gonna pay 900. Okay. So what happened to the cash? Cash will go down. So we gave them cash. And as a result, we are going to reduce our liability accounts payable. So this is what we receive in return, the benefit of reducing the liability. So here's what's gonna happen. Cash will go down. Cash will go down. And the liability will go down as well. Now let's run the balance. Cash is 5,000, receivable zero, supplies 9,600, equipment 9,600. What is our balance and accounts payable? 6,200. So we still owe 6,200. Common stock is the same, revenue the same and expenses are the same. Notice our cash went down and our liabilities went down. Therefore our assets went down and our liabilities went down by the same amount. Therefore the account on equation holds. Transaction 11, payment to cash of dividend to owners. Owners withdraw $200 for personal use. So the owner took money out. Do you remember C. Taylor invested money in the company? Now they took the money out. So cash is gonna leave the business, $200. Cash is gonna go down. And what's gonna happen, the owner's gonna get a payment for personal use. The payment for personal use is called dividend. Okay, so let's take a look at this. So cash will go down. Obviously cash will go down and dividend equity and dividend equity like expenses, equity like expenses as an account it will always go up. It will always goes up as an account but as a result it would always reduces equity. So as an account it will go up in regards to equity it comes down. Remember that dividend actually increase just like expense but total equity decrease because dividend causes equity to go down. Now this is the, let's run the transaction. Cash will go down by 200. Dividend will go up by 200. Let's run the balances. Now cash is 4,800, receivable zero, supplies 96, equipment 26. Accounts payable 62, common stock. We have now 200 of dividend, 6,100 of revenues, 1,700 of expenses. Total assets equal to total liabilities plus equity. Obviously our asset went down because we paid off, we paid dividend. Now, these are this column here, this column here we call the balance. This is the ending balance of each account. So if I ask you how much cash do I have? Well you would say your balance in cash is 4,800, zero in accounts receivable 9,600, 26,000 in equipment, 6,200 accounts payable, 30,000 common stock, 200 dividend, 200, not negative 200, 200, 6,100 revenue and 1,700 expenses. Now we're gonna summarize, this is everything that we did. This is the transaction, transaction one, transaction two balance, transaction three balance, transaction four balance, transaction five balance, transaction six balance, transaction seven balance. And this is the ending balance for that period. That period could be a month. I don't know what that period is, could be a year. It doesn't matter. Here are the balances. Now, what's the next step? What's the next step after you have your balances? Once you have the balances at the end of the period, the next step is to prepare financial statements. So in the next session, I'm gonna be using these balances to show you how to prepare financial statements. So as always, I would like to remind you to like the video if you like it, share it. I strongly suggest you visit my website for additional resources. If you're studying for your exam or studying for your CPA exam, you wanna invest in your career, you wanna invest in your education, check out my website that might help you. Good luck, study hard, accounting is worth it. It's challenging, but it's worth it.