 Hello, in this presentation we're going to consider the adjusting journal entry thought process. Remember that we are considering the adjusting journal entry thought process that's going to be after the normal journal entries, the normal transactions, the normal bills, the normal invoices, the normal writing of checks that happens throughout the month. We are now within the adjusting process, which is going to happen after that. All these transactions will be as of the same point in time, the goal being to make the adjusted trial balance correct as of the end of the time period so that the financial statements will be as close to an accrual basis as possible. Why would we have a thought process? You might ask, if we fully understand each adjusting journal entry, possibly we don't need a thought process. Now I'm going to argue for a thought process for a few different reasons, one being that it's really going to help us get going. So if we don't understand the process, it'll help us to get started. Oftentimes when we're first learning something, the biggest problem is we run into a point where we don't know where to go any further. And if we don't know where to go any further, we can't go any further. A process will help us to get started. So even if we don't know what we're doing, if we have a process, it'll get us moving. And once we get moving, we can understand better what we're doing. Even if we fully understand the process, we can have that same problem where we just hit somewhere where our head's just not working, we're not moving forward. If we implement a process for moving forward, we will get moving forward. It's also going to make it more efficient. If we know how we're going to do things in a systematic way, a system that works best and is most time efficient, and I believe this system is working best and most time efficient, even when we get proficient at journal entries and fully understand them, we're going to want to continue with the thought process at that point in time. Also when we are learning something new, the process will normally be that we have to do it through rogue memory and just go through the steps of learning something. Even if we don't fully understand the reasoning, once we learn those steps, then we can better analyze and have something to analyze in order to understand the reasoning. The thought process we looked at before for the normal journal entries is something we're going to have to keep distinct in our mind. Remember, this is the thought process here for normal journal entries during the normal business transactions, not where we are now as of the end of the time period, the adjusting journal entry process. This in contrast is mainly dealing with the first item of cash, cash being a major focal point for many of the journal entries in the normal journal entry process. So it's the first question we're going to ask is cash affected when we're thinking about normal journal entries, and then see if cash is going up or down, then consider the second account. If cash is not affected, then we're going to consider what we received, and then consider the second account affected. And the adjusting journal entry process can't do that because cash will not be involved in most of the, in any of the adjusting journal entries. There won't be any cash, and cash is involved in many of the normal journal entries. Therefore, we're going to need another adjusting journal entry process. This, by the way, is one of the rules that we're going to have for the adjusting journal entries, and those rules are what we're basing this thought process on. So if you haven't seen the instructional video on just the rules of the adjusting journal entries, you might want to take a look at that. That's going to be the basis for which we build our thought process, the foundation on which we build our thought process. So keep this thought process distinct. This is for normal business transactions. We're going to have a different one for the adjusting journal entries. The adjusting journal entries, step one, will be to not be cashed. You'll notice it'll be to find the balance sheet account. So we're going to look at our trial balance, and we're going to consider those accounts, which are the balance sheet accounts. You're always going to want to have a trial balance or a chart of accounts in front of you. If a problem does not give you one, go on to our website, find one. We'll not have the exact same accounts, but it'll give you an idea of what the balance sheet accounts are, what the income statement accounts are on a typical chart of accounts, and that'll give you an idea of where the adjusting journal entries will be. Most problems, any problems, are going to have to give you some type of adjusting journal entry, where you're really going to have a key word typically. So the key word, in this case, deals with insurance. So whatever the rest of the problem says, it's going to focus around insurance, or it's going to focus around supplies, or it's going to focus around depreciation, or under and revenue, or wages payable, or accrued wages. It's going to have a key term that almost always names an exact account, and that's going to be something very helpful when we're doing the adjusting journal entry process. So here we're going to look at the balance sheet accounts. Those are the ones above the capital account, and they're always going to be on the top of the trial balance, and we're going to find something related to whatever is given in the problem. In this case, it's something to do with insurance. It's typically going to be painfully obvious once we have the chart of accounts in front of us, the trial balance, what that account will be. We'll just look through them. We see something with insurance and it prepaid insurance. That's how obvious these are usually going to be. It's not going to be something that the problem's going to try to trick you. It's going to say exactly what we'll be dealing with. So we're going to mark that down and we're going to say that's going to be one of the accounts we deal with. Then the next question, find the income statement account. Every transaction is going to have one balance sheet account, one income statement account in the adjusting process, not normal journal entries, but in the adjusting process. Therefore the income statement accounts are the ones below the owner capital. So have your trial balance in front of you, and then again it'll be painfully obvious. In this case, it being insurance expense. If the problem said something like utility, it'll say something wage is expense, supplies, depreciation, all painfully obvious here, what the account will be. It will pretty much say it in the name when we're dealing with these adjusting journal entries. You may be asking what happens in practice. In practice we're typically, we're going to get used to knowing which accounts are going to need these adjusting processes. And we're going to be able to look at last time period to see what happened last time, and that'll give us a good indication. But typically we have a good idea of which accounts need the adjustments, and we're pretty much going to audit all the accounts. And by looking at the balance sheet accounts, because the adjusting journal entries have a balance sheet and income statement account, that can kind of be a shorthand way for us to see which accounts are going to be needing adjustment. We can just kind of test all the balance sheet accounts. Next step, step three, determine whether we debit or credit the income statement account. Now that we know the two accounts, we're going to focus in on the income statement. Why? Because income statement accounts only go one way. They only go in one direction. They go up. So if we're dealing with a revenue account, it's going to be credited. Why? Because they only get credited or they always go up in the credit direction, revenue just increases. How about if it's an expense, all the rest of the income statement accounts, they only get debited. So if we're dealing with an expense, it's always going to be debited because that's what we do to expenses. They just get debited. So we know that this one is an expense. Therefore, we're going to debit it by its nature of being an expense. That's why we're going to focus on the income statement account first. Then we can start constructing our journal entry. We can put the expense on top. We already knew the two accounts before this, but we didn't know which one was going to be debited or credited. Now we do, we indicate that by putting this account on top. Then step four, record the necessary debit or credit to the balance sheet account. Now that we know which way the income statement account is going, in our example, the expense is going up with a debit, then we're going to credit whatever the other account was that we determined in step one, in this case, prepaid insurance. If we had done something to the revenue account, we would have to credit it, then we'd be debiting the other account. Now we know by default what's going to happen to the balance sheet account. We're going to write that down. Notice steps one through four get us all the way to this point. We know the two accounts. We know which ones are going to be debited. We know which one is going to be credited. Only thing we do not know is the dollar amount. That, of course, is step five, assess the dollar amount of the transaction. That's going to be a step that depending on the adjusting journal entry, we're going to need to know more about the adjusting journal entry. We're going to have to look at that on a case-by-case basis and understand a bit more about the process before we assess the dollar amount. But even when we do that, even if a problem only asks you for the dollar amount, you want to go through steps one through four because that'll give you a process. That'll tell you which accounts are being debited and accredited, and it'll give you a clue and idea, even if you don't know why we're doing this, more about why we're doing this, and it'll give you a clue as to how to find the dollar amount therefore. So those are going to be the five steps. Remember, step one, find the balance sheet account above the blue line, above the equity section. All trial balances are going to be in order in terms of balance sheet accounts and then income statement accounts. Then we're going to find the income statement account, and that's going to be below the blue line. So it's going to be, of course, the revenue and expense accounts related to whatever's been given in the problem. And it'll be painfully obvious. In our case, it was something related to insurance. Step three, determine whether we debit or credit the income statement account. So we're focusing now on this income statement account rather than the balance sheet account. Why? Because income statement accounts only go up. They only go on the direction that they go in, expenses go up in the debit direction, and revenue goes up in the credit direction. If we're dealing with an expense as we were, we're going to debit it. Then in step four, record the necessary debit or credit to the balance sheet account. Once we know what happens to the income statement account, we know that the balance sheet account is going to be the opposite. So if we debit the income statement account, we're going to credit the balance sheet account. If we credit a revenue account, then we're going to debit the, I mean, sorry, if we credit the income statement account, then we're going to debit the balance sheet account. Step five, assess the dollar amount of the transaction and that of course will be one where we need to understand the process more and that will be taken on a case-by-case basis.