 Hello in this lecture, we will discuss the accounting building blocks and the double entry accounting system at the end of this We will be able to define and describe the double entry accounting system Write down the accounting equation and define each individual part of it define and describe debits and credits Define a balance sheet and list its parts define an income statement list its parts and Explaining the relationship between the balance sheet and the income statement Okay, so starting off every business and accounting software uses the double entry accounting system So the double entry accounting system is kind of like the math behind the calculator Every software is going to use it in order to understand what the system is doing We need to understand the double entry accounting system many people can work in the account department and and start to learn Database programs and how to enter data without understanding the double entry accounting system and that's possible You can learn a lot that way, but you become a lot more valuable and you can become a lot more Attuned to what other departments are doing and how things fit together if you can understand the double entry accounting system Similarly to you get a lot of more understanding if when you punch, you know two plus two into a calculator You understand why the answer came out to wait They came out and that gives you some insight in terms of decision-making and how to help things out So that's what we'll discuss that double entry accounting system as we go So we're going to compare this to a puzzle So I want to think of the double entry kind system being that we're going to compare it to kind of a game here A puzzle we got to first learn the rules of the game how the thing is set up We want to know what the board is. We want to know what the pieces are We want to know how to set the pieces on the board then how to move them Once we know that then it becomes a lot more interesting for us to play the game just as it would be for a game of checkers So a game of checkers is obviously on a spreadsheet We have different colored pieces and we have different colored squares We move those pieces in accordance to a set of rules the set of rules for accounting are that we have a t account So our spreadsheet is not a spreadsheet like checkers It's going to be basically a t account. We'll use various t accounts as we go the rules of the games We're gonna have debits are on the left-hand side credits are on the right-hand side debits and credits aren't inherently good They're just like the black and white or whatever the colors squares are on the board. They have no inherent Goodness or badness. They're just to happen to be this is on the left-hand side debits on the left credits on the right Then we need to know how the pieces line up So what are the pieces assets liabilities and owners equity? So the green accounts are going to be asset type accounts here and notice that they line up on the left-hand side There are debit normal balances for the most part Liabilities are credit normal balances for the most part which I have on the right-hand side And I'm also going to start showing them with brackets and then equity section is generally on The right-hand side includes capital Revenues on the right-hand side and the expenses on the left-hand side then we have the the concept of balancing that you've heard of and That concept means that the total debits equal the total credits There's gonna be different ways that we can think about that balancing concept but that's the board these are the pieces we need to understand and Then we can talk about how to move those pieces and those are the building blocks that we need to know and Understand and basically memorize before we can play the game Just like we have to memorize how to set up the board how to move the pieces in a game of checkers or a game of chess So the other rules that we're going to start to come in to play will be that every business transaction will affect at least two accounts These are our accounts in this case and every transaction will have an equal number of debits and credits Those are the rules Alright, so first we're going to take a look at the balance sheet here Just to note that the balance sheet we've seen that we have assets liabilities and owners equity We can see that this balancing concept that we talked about that total debits and credits can also be expressed in terms of Total assets equal total liabilities and owner's equity so the balance sheet is going to report our information as of a point in time and And so it doesn't have a time frame. It doesn't have a beginning and an end It's as of this point in time It shows our assets liabilities and owner's equity assets are what we're going to own in order to generate revenue in the future We have those to help us generate revenue in the future cash is probably the first thing you want to think of when you think of assets and Then liabilities are something that we're going to owe in the future either Cash owed to the in the future or our services or something in the future for something that we consumed or bought in the past and Equity represents the book value of the company or the amount that's owed to the owner So you can also think of it as the assets are what the company has These are who they owe it to the either a third party or the owner That's why the assets equal the liabilities and owner's equity now. You might be saying Well, I don't see debits and credits in this statement and we just talked about debits and credits being the building block and the reason we don't see debits and credits here is because We're presenting the financial statements generally to people that may not understand the debits and credits So we need to present it in a plus and minus format We're going to use the building blocks of debits and credits to create the financial statements so that we can then show Those financial statements in a different format, which is going to be assets and equal liabilities plus owner's equity It's because that'll be easier for others to understand if we were to look at the balance sheet in terms of debits and credits It would look something like this meaning that the assets are generally Debits here's our t-account again, and we would see that the we can see that the assets add up to 78 And the credits are generally liabilities and owner's equity This is a simplified system later on so some assets will be credits But for the most part this is how it would line up assets are all debit balance accounts in this example And so we can see the double entry accounting system in a few different ways We can see that the debits equal the credits Here and we can also see that the assets equal the liabilities plus the owner's equity and we can express that in terms of Debits we can express the double entry accounting system in terms of the debits equal the credits or The assets equal liabilities plus the owner's equity or the balance sheet is in balance So there are three ways we can say basically the same thing notice that the balance sheet is Assets liabilities and owner's equity the balance sheet is the double entry accounting system It has all the components of the accounting equation the accounting equation being assets equal liabilities plus owner's equity We can also write that accounting equation as three different ways Algebraically we can subtract Liabilities from each side and that would be assets minus liabilities equals owner's equity This is a useful way to write it because it tells us That this owner's equity is the book value if the if the company has seventy eight thousand they owe someone else ten Then owner's equity is sixty eight thousand the owner if it's one person Theoretically could sell the business of walkway with sixty eight thousand Income statement shows the profitability of a company over a year or other time frame So notice the income statement the big thing you want to note here is that It has a time frame in this case the month ended here So that means December 31st that means the time frame is from December 1st to December 31st And the way you want to think about that is is the income statement It's kind of like how did you do over time similar to running a race and when you when you run a race It has to have a beginning and an end or if we were to ask someone how much money do you make? They would have to make an assumption. Are you talking about a year? Are you talking about a month? Are you talking about a pay period? We need a time frame in order to answer those types of questions because the income statement itself is Dealing with how are we doing over a certain time? Notice we have revenue and we have expenses here and how do we calculate it? We say how much did you make how much did it cost to? Generate that revenue in terms of expenses therefore revenue minus expenses gives us our net income and So there's our net income once again You don't see debits and credits on the finance statement because we're going to give it to people that may not know debits and credits If we were to look at the debit and credit format of an income statement We can see that credits are actually the income is actually a credit And here's our T account again and the debits are expenses So we can see that the credits in this case are beating the debits by The net income and you might be saying well, that's kind of weird What we we thought that the debits and credits have to be in balance in order for the double entry accounting system to work Is there something wrong with this statement? Why is it that I don't see the double entry accounting system having an equal number of debits and credits on the income statement? And why is it I don't see the any of the Equation accounts here. I don't see assets liabilities or owners equity all I see is revenue and expenses How is it that the income statement? Fits into the double entry accounting system and is part of the double entry accounting system And the answer to that is that the whole income statement is part of the balance sheet So we got to remember that the balance sheet is as of a snapshot as of a point in time So as of this point in time you are watching this video if you can't change that it is what it is It's there if you want to know how you got to this point in time watching the video Well, we then have to go back in some time frame and say well you woke up at this point in time We we did that we did the other thing and we ended up watching this video for whatever reason That's the story of how it came to be in this case We're saying that the assets minus the liability means we have a book value of 68,000 here That is what it is can't change it as of 1231. It is what it is can't change it If we want to know how we got there then we tell the story we can say well You know last month we made a hundred thousand of revenue and we had to extend 60,000 in order to do it. So last month we earned forty thousand that's 68,000 right there includes 40,000 from last month if you want to know more of the story then we'll have to go back to the prior month And look at the income statement for the prior month We can go back years and look at the story in terms of how are we performing Year over year in order to get to the place that we are currently at Now if we if we broke down this number a little bit more you notice this number We're just breaking down this number into its history basically in terms of of income generation And if we look take this back to the trial balance the trial balance is what we generate what we use to generate The financial statements we can see that this capital account includes the beginning capital That's what was owed to the owner before the time period being in this case November 30th the end of last time period because this time period began on December 1st to December 31st So this is what was owed to the owner before we started and then we had the the revenue Minus the expenses so we got the beginning balance plus the revenue minus the expenses That's how we're getting to our ending capital number So if you think of this in terms of the balance sheet you notice we have our assets which would add up to the assets on the balance sheet the liabilities and Then really this whole thing is is the equity section if we added up this whole blue area That would be the equity section on the balance sheet here and part of that equity is the income statement there on the trial balance