 Hello in this lecture we're going to continue on smaller type of problems. These are types of problems that could be used in a multiple choice type problem setting so these could be used to study for multiple choice type questions because they are going to use the smaller setting which means we're going to restrict some information and have less information when working problems in this format. Now I'm going to have this over here on this side and I'm going to take a look at the trial balance on this side and the only reason this this is an unrelated trial balance to this problem but the idea being here that it would be a good idea to have the trial balance open or a book open or some kind of cheat sheet I think the trial a trial balance like this is a good cheat sheet because it'll show you the debits and the credits and what type of accounts are debited about counts and what type of counts are credit balance accounts so if you're able to have something open I recommend having some type of trial balance open. So this problem here we have a company's ledger account and their end of period balance before closing entries are posted below what amount will be posted to the capital in the process of closing the income summary account. Okay so we're gonna they're asking for this journal entry the third journal entry of our four step process and closing out the the income summary account and closing and doing our closing process remember that we're gonna close income out first and then we're gonna close all the expenses the income summary and then we're gonna close the income summary to the capital account so note they give us this list it's not in terms of debits and credits so we got to kind of interpret what the debits and credits are and and then work this through this so we could do this with journal entries if we choose to so let's try it that way we're basically gonna do these journal entries so first thing the first journal entry has to do with of course the revenue that's the first thing we get rid of and again we don't know whether the revenue is a debit or credit here but we know on our trial balance over here it has a credit balance we're gonna close that out to the income summary account so therefore it has a credit balance so what we're gonna do is gonna close it out therefore we're gonna do the opposite thing to it we're going to debit revenue so the first entry to close this out would be a debit to revenue of 31,000 and a credit to something the something being the new income summary clearing account so we got the clearing account over here I'm gonna call it income summary this is our four step process first step of the four step process now if we thought about a trial balance for the income summary this is our account this is our T here we're gonna have a T account you know on this side this is gonna be underlined and then our T is over here our T account looks like this and we just credited it so that's on the credit side of our T account like our GL account in the income summary so we have a credit of this amount here I'm gonna make a negative one it's a credit you don't have to do that but that's how I'm gonna represent the credits and just indent this okay the next entries are gonna have to do with the expense accounts these are all expense accounts here once again they don't tell us if they're debit or credit accounts but we know that all expense accounts over here are debits so these are all debits we need to make those go down to zero how do we make something go down we do the opposite thing to it which in this case would be a credit so I'm just gonna copy all these and this would be a credit so I'm gonna skip a line and skip another line because the credits should go on the bottom and there those are and I'm gonna just say this is a negative of these I'm just bringing those numbers down so I'm crediting all these I'm gonna represent credits with a negative you don't have to do that but that's what I'm gonna do and then we need a debit of something to the income summary we're closing out the expenses to the income summary and if we just add these up this plus this plus this plus this adds up to 11 to 15 I'm gonna do that with a formula instead of just typing in there I'm gonna say negative sum of and I'm gonna add them up from the bottom except things in the way or else you can just move this thing if you want this plus this plus this plus this and enter and so now the debits minus the credits equals zero so that's gonna be this journal gene now if we look at what's in the income summary we have the debit and the credit here and if we had a balance account then this is gonna be the balance in row we have this hinted at this time then we have this plus the debit and the credit that brings us to nineteen seven eighty five that's where we're at at this point in time what is that nineteen seven eighty five that's net income because we closed out income expenses that's what's in there now now we're gonna close out income from the income summary net income being in the income summary making this a zero and taking it to the capital account so that's gonna be the journal entry that we're looking for here so when we do that then we need to make this go down it has a credit balance in it therefore we're going to do the opposite thing to it so the income summary is going to be a debit i'm just going to copy that we're going to debit the income summary for the amount that it's in there now one nine seven eight five which is net income and then we are going to credit something and that something will be the capital account in this case i'm just going to call it capital and that would be the process now if you wanted to do this a bit more quickly than that you could just recognize the fact that of course once we close out revenue and once we close out expenses to the income summary what will be in income summary that the income summary will have net income in it so the answer being in this case is that nineteen seven eighty five we could come to that same conclusion by just trying to figure out what you know net income is because we know what net income is going to be and how you're going to calculate net income it's revenue and we could say the revenue is over here at this thirty one less expenses and we know that the expenses are here so i'm just going to copy these and i'll put them on the inside this what an income statement would generally look like right i'm going to put a colon here and then i'm just going to sum up all the expenses equal to the sum of the expenses so this is total expenses and that gives us net income so net income equals the revenue less the sum of all the expenses and that once again it's going to be that nineteen seven eighty five nineteen seventy eighty five that's going to be the journal entry to post out of the income summary to the capital account so next one we have here at the beginning of the year a company's balance sheet reported the following balances we have assets of two fifteen liabilities eighty eight five equity of one twenty six five during the year the company reported revenue fifty four one expenses thirty five four in addition owners withdrawals for the year total twenty three six assume no other changes to owner's equity the balance and the owner's equity accounts at the end of the year would be so let's just do this more like a financial statement instead of doing it through journal entries we'll just do it as we would basically calculate the statement of equity where we would have basically beginning capital which they gave us in this case would be one twenty six five and that would go up by revenue so then we have well let's just call it go up by net income net income being calculated as revenue minus expenses just like down here revenue minus expenses so they gave us those two numbers so we're just going to subtract those out so during the year reported revenue equal to fifty four one less expenses of thirty five four and there we have that then the last piece to this is less the amount that the owner took out in the form of draws i'm just going to call them draws instead of withdrawals for make a little faster here and then we have twenty three six so that's going to give us our ending capital at the end of the period so that equals the capital we started with plus the net income which would increase capital less the draws here and that's going to give us the one twenty one six couple things to note here note that the draws were actually greater than the net income that's okay you can't do that forever of course but we could do that in this case because we still had income that was retained that's still in there and had accumulated from prior periods also note that there is sometimes that is this capital count up here could be affected if there was other investments in here notice they told us in the problem that there were no other activity in the capital count what other activity could there be other than draws well it could be that there was added investments hopefully that's not going to happen because they're drawing money out rather than putting more money in so the next one we have at the beginning of the year company balance sheet reports total assets of two ninety four total liabilities one thirteen five during the year the company reported revenues of three forty seven expenses of two sixty eight five also owner withdrawals during the year totaled seventy assuming no other changes owner's capital the balance in the equity account at the end of the year so note what they did not give in this problem that we have seen in previous problems they gave us the total assets the total liabilities they didn't give us the the beginning equity but we can figure that out with the accounting equations so we're going to say assets we need to first start off with the beginning equal liabilities i'm just going to say plus equity or say owner's equity that's our accounting question assets equal liabilities plus equity now they gave us the assets here so we're going to say the assets are two ninety four thousand equals the liabilities which they gave us of one one three five plus the equity that's the unknown that's x so first we got to get that beginning number x therefore we got to get rid of this uh one thirteen five on those sides i'm going to subtract from both sides one one three five on this side i'm going to subtract from the side one one three five and then that will leave us with the one uh two ninety four plus the negative it's going to be a subtraction problem but in excel i'm saying plus the negative so all i did was say this minus this gives us the uh one eighty five that's what we have that now equals and then of course uh the liabilities we just reduced that to zero we took it down plus x and of course that's going to be the same thing as just the uh one eighty equals zero plus x and if we rewrite that we can say well if one eighty five equals x then x equals the one eighty five and we know that x is equity equals the one eighty five hundred so now we have the beginning balance and we could do the same thing that we did in prior problems we can say well how do you calculate equity at the beginning capital and now we just figured that out to be the one eighty thousand five hundred then we're going to put in net income net income is calculated to be revenue less expenses so they're going to tell us what those are hopefully up here during the year company reported revenue revenue equals the three forty seven thousand less expenses equaling two sixty eight five and then we're going to say i think that's right we're going to say this revenue equals the three forty seven thousand minus a two sixty eight five that looks more right and then we're going to say less draws and draws happen to be seventy thousand and that's going to be our ending capital so any so the capital then would be calculated as one eighty thousand five hundred plus the net income seventy eight five minus the draws of seventy thousand next one says that after preparing the post posting the closing entries for revenue and expenses the income summary has the debit balance of thirty two thousand the entry to close the income summary account so this is the this is the only tricky thing about this is that they're kind of jumping into the third step of the four step process and so we have to just basically realize we're kind of down here meaning there's already something in the income summary we did the first two steps we closed out income to the income summary we closed out all the expenses to the income summary so what is in the income summary right now net income and it's good to realize that because later on problems might start talking about the income summary being allocated to different partners and we got to realize that the income summary is just basically the books way or it's a lot of books way of saying that's what net income is that we need to now allocate instead of calling it net income they'll call it what's in the income summary before we allocate it to partners and stuff like that so we know that that's what needs to be allocated out that's kind of what's in net income in the income summary that we now need to put to the capital account so the income summary then would have a credit balance of net income in it and we would have to then debit it to make it go down so we would debit the income summary for the amount in there of 32 000 and then we would credit the capital account what would that do to the capital account increase it which makes sense so it's a credit balance we're going to credit it doing the same thing to it which would make it go up this makes sense because uh we we owe the owner more money of course because the company made money and therefore owes it to the owner next one says company accrued wages of 7650 that were earned by employees unpaid at the end of 2014 assuming company uses reversing entries provide entry for reversing their cruel wages at the beginning of 2015 so what happens as of December as of the cutoff date these are these are the adjusting entry process we had to adjust wages because there were some wages where the employees were working but the payday happened after the year end and therefore we had to recognize that we owed this amount of money before the year end even though we're not paying them till after the year end so if we if we think about that uh let's think about what that journal entry would be and then what the reversing would be so if we think about the adjusting entry adjusting entries always have a balance sheet account and an income statement account and we know that the income statement account year is going to be wages expense because that's what's going to be related to wages or something or salaries expense or something like that so we're going to say okay it's the wages or salaries or whatever related to payroll expense is going to be debited six five seven six five zero why is it debited because expenses are always debited so the expenses are always for the most part go up obviously not in the closing process when we're closing the whole thing up but generally expenses only go up the employees don't pay us and then we're going to credit something and so the credit then would be something in the upper half of in the balance sheet portion up here and that would be wages payable and that's a liability representing that we owe money to the employees that we're not going to pay until payday happens which isn't going to happen till next year after the cutoff date after we make our financial statement so we need to make this journal entry so that our financial statements are right on an accrual basis as of the cutoff date on uh 12 31 2014 but we don't want to leave this payable on the books until the payday happens because if we do that then the payable department has to take into account our accrual and we're assuming these are different departments so we don't want the payroll we want the payroll department to basically be on their kind of cash basis or on their on their time schedule not on our accrual time schedule so we are going to make it easy on the payroll by simply reversing this as of the day after the financial statement date so we're just going to take this exact journal entry just to reverse it so we're going to say all right well we'll just uh copy and paste we're going to debit the 7650 and we're going to credit wages expense and that will bring the payable back down to zero and it'll actually have a negative expense and again this should look funny we shouldn't be crediting wages you know wages expense why would we do that and and again it it won't make sense until the payroll posts their half of the payroll because whatever the payroll is uh they're going to post it for the time period of 2014 and 2015 and post an expense for that entire time period which is going to be something larger than this 7000 let's say it was like 10 000 and if it was if the entire payroll was 10 000 after they post the payroll the 10 000 less the 7650 is will then be correct as of that point in time after they post the payroll so what we're doing is is not making the payroll department deal with our uh adjusting entry