 Hello on this lecture. We'll take a look at a problem that will be very similar to the homework. The numbers will change. The format will remain much the same. We got the two objective objectives here of working these types of problems. One to be learning the accounting concepts, two to be understanding the Excel and learn some basic formulas within Excel. Remember, this is really the place where you're going to get most of your Excel 90% of what you use Excel for here. Then you want to pick up some more tips and tricks within an Excel class to make your Excel sheets more presentable and use some more advanced type of functions. So we're going to do the adjusting process again here. If we take a look at our worksheet, we're saying that our accounting equation assets equal liabilities plus owner's equity is up top. We can see that we have the unadjusted trial balance right there. And that represents assets and green liabilities in orange. And then we have the equity and the income statements, income and all the expense type accounts. This account is blue to distinguish the difference between the cutoff between the balance sheet accounts up top, the income statement accounts below. We are in the adjusting process. So we're going to call this one the unadjusted trial balance. And remember where we are at at this point in time is that the accounting department has now entered all the information for the month or a year. Now as before we close out the year before we create the financial statements, we're going to make any adjustments we need to do as of the cutoff date. So in the adjusting process, the adjusting department, we are now going to make these adjusting entries. Once again, the account department hasn't made any errors necessarily in order for the adjusting department to still need to make adjustments. These are accounts that generally always need to be made adjusted as of the cutoff date, because it's not practical to do it beforehand. So we have the unadjusted trial balance where all the transactions have been entered. We will then make our adjusting entries in this column. Then we will have our adjusted trial balance there. That's the one that we will then use to create the financial statements. So we will take these transactions, these adjustments here, then we'll post those journal entries or record those journal entries right here. Then we will host those journal entries into the adjusting column. We can use this worksheet to do any calculations that may need doing. Remember that the normal rules for journal entries being that there's going to be two accounts for every journal entry and every journal entry is going to have an equal number of debits and credits still applies. For only the adjusting journal entries, we also have the rule that we're generally going to have one balance sheet account above the blue line, not including cash. We're not going to be using cash in the adjusting process for the most part. And we're going to have one income statement account below the blue line. And we already know that the income statement accounts only go up. So if you apply that rule to the adjusting process, then we can often see which way the accounts will be going, debited or credited without knowing much else, then we'll have to analyze the rest of it. So that's where we will start. So we have as of the cutoff date, the end of the time period in this case has been done work has been done for which an invoice has not yet been sent out. The invoice was sent out in the following month, but the work was done before the cutoff date. So what we're saying is as of the cutoff date, the end of the year or the end of the month, the invoice was not sent out. It was sent out next month. So but the work was done this month. Why would that happen? Well, if it was a service company or something like that, then we're going to have to add up the time, make the invoice, send it out. It could well happen that that happened after the cutoff date, after the cutoff date in which the work was done. So that wouldn't generally be a problem for the most part, except that we want to be on a perfect accrual basis as of the cutoff date being the end of the month or the year. So therefore, we're going to pull that invoice back into this time period. So that means that when an invoice is created, what's usually the accounts that will be affected? What will be the balance sheet account up top? Usually it's going to be accounts receivable, unless we did it for cash, but usually it's going to be accounts receivable. So we're going to right click, I'm going to make that green indicated that's one of the account that will be affected. The account below here, what's the account affected when we send out an invoice? Usually revenue, we earned revenue. So I'm going to right click, I'm going to make that green and we can see that the revenue account is an income statement account below the blue line and it generally only goes up. So how do we make revenue go up? Well, it has a credit balance. We're going to make it go up by doing the same thing to it, which in this case is another credit. So I'm going to right click. I'm going to copy that. I'm going to put it on the bottom under A to put it on the bottom because credits generally go on the bottom. Then if the only other account is affected is receivable, I'm going to copy that and I'm going to put it on the top. Now, this entry is one of the ones that are more confusing actually sometimes for the adjusting process because of the fact that this is such a normal journal entry that we do through the accounting process. So once again, the reason why it would be here on the adjusting process is simply a timing difference, meaning the invoice did go out, the accounting department did send the invoice, but they sent it after the cutoff date. So now we're pulling it back in to this timeframe. So what's the amount going to be? It's just going to be the amount of the invoice. In this case, 4,900. So we're going to increase receibles 4,900 and we're going to increase revenue by the 4,900 like so. And then we'll just post this out just as we would if we were creating an invoice. And we're going to go to H6. I'm going to say equals. And then we're going to point to that 49. This is a debit. That's a debit. That's going to make this go up in the debit direction to 36,9. We're now out of balance by the 49. We'll then post the revenue down here. So I'm in cell H16. We're going to say that equals, we can then point to the credit. This is a credit. That's a credit. That's going to make the credits go up in the credit direction, put it back in balance, make net income go up. So net income is going up. That's calculated by the credits minus the debits. Revenue went up. Therefore, net income went up in the credit direction. Next transaction. So I'm going to unhighlight these so we can take a look at the second transaction in the same type of way. We have depreciation expense for the period is 1,100. Now, once again, before we even know what depreciation is, we could just figure out which accounts will be affected and go from there. So what will be the balance sheet account related to depreciation? If we look through it, we see depreciation in this account. So accumulated depreciation might be one that would be affected. If we look on the income statement, what account has depreciation? Well, we see depreciation expense. So it's either an income or expense account. Those are the accounts in the income statement. In this case, it's going to be an expense account. And we know that expense accounts only go one way. They go up. So these are all debit balance accounts because they're expenses, and they're going to go up. How do we make something go up? We do the same thing to it, which in this case would be another debit. So this expense account, I'm going to assume is a debit. So I'm going to put that on top. And if that's the debit, and this is the only other account affected, it must be a credit. So I'm going to copy that. I'm going to put that on the bottom. So once again, we can know what accounts are going to be debited and credited if we can figure out which accounts are going to be affected without even really knowing what's going on. Now let's try to think about what's going on. So what is accumulated depreciation? Accumulated depreciation is going to relate to some type of property planning equipment, in this case, equipment up here. So in this transaction, we can see that the equipment was purchased for $135,300. We purchased it for $135,300. It could be multiple pieces of equipment. $135,300. We purchased it for $135,300. It could be multiple pieces of equipment or one piece of equipment. And what we're going to do with equipment is we're going to put it on the books as an asset, similarly to how we put supplies on the books as an asset. And then we want to expense it as we use it. But unlike supplies where we could count how much we used and we can say, hey, we used this many rings of paper. Therefore, I can see how it went down. Let's just write down the supplies by the amount that has been used. Obviously, a building or like a forklift or something like that, we couldn't just write down because after time has gone by, we know that the forklift went down in value, but we still have one forklift. It's not like we can count the forklift and now we have less than one forklift. So that means that we're going to have to depreciate some other way, some other estimated way. And we'll talk about estimates at a later time. The simplest type of estimate would just be to divide it over the number of years. That's called the straight line method. But whatever method we use, we want to tell a reader two things. We don't want to just write down the equipment account. Because if we did so, then they wouldn't know how much we bought it for. And because it's such an estimate, we want to tell them how much we bought the stuff for and how much we're estimating it to be written down by. Therefore, what we've done here is we've kind of cut the t account in half. So it's like the debit side and then the credit side. So here's the debit side. And here's the credit side. We're end up therefore with a contra asset account, meaning this account is the credit half of the equipment account. Therefore, it's a credit even though it's green. And that means it's an asset. It's an asset with a credit balance. Most assets have debit balances. And that's why it's a contra asset account. So before we post this, we can see that we bought it for this amount minus this amount adds up to 37 350. That's the book value. Now we're going to increase the amount that it's going down by increasing the credit, which will decrease the book value. So that's what's happening here. And then the depreciation is what it represents is the devaluation of the property, plant and equipment. In this case, the equipment, it represents the depreciation, the use of the decline in value, the use of the equipment in the same time period as to help us generate revenue. So we're going to post that here. And they're just going to have to give us the number. So although this is probably the most difficult conceptual adjusting entry we've had so far, it's actually the easiest one to post if you just kind of memorize it because right now we're going to have to give you the number of 1100. And we're going to credit 1100. And then if we post that out, then we can go to depreciation expense down here in cell H 21 equals and point to the debit. That's a debit balance account. That's debit. It's going to bring the debits go up, puts us out of balance, brings net income down. Then we'll go to the accumulated depreciation in H 11. Say that equals the credit. The credit is going to go up in the credit direction. So the contra asset goes up, which brings the book value, which is this minus this down. So the book value went from here, 25 to sorry, here, 37, 350 down to here, these two accounts, 36, 250, which of course is the difference of 1100. Okay, so I'm going to unhighlight these and do the last one here. So we're going to unhighlight these. Alright, C then says when the accounting department pays insurance, the account that is debited is prepaid insurance. As of the cutoff date, prepaid insurance is calculated to be 6000. So once again, let's go through our method and see which accounts might be affected. We have one balance sheet account above the blue line related to insurance. In this case, it's going to be prepaid insurance. So I'm going to make that highlight that to show that that will be affected one account below the blue line, either revenue or some type of expense. In this case, some type of expense that expense called insurance expense. We know that expenses all have debit balances. We know that they only go up in the debit direction. So how do we make something go up? We do the same thing to it, which in this case would be another debit. So I'm going to copy this, going to make sure that that is a debit right on top because the debit generally go on top. If the only other account affected is prepaid insurance, then that should be a credit. So I'm going to copy that, put that on the bottom and make that prepaid insurance. So once again, we can kind of see which way it's going without really understanding what's going on. So now let's talk about what's going on. So what is prepaid insurance? How did it get there? When we pay for insurance by definition, we're getting something in the future. So we can't pay for insurance after an accident happens if we're paying for car insurance or something like that because that's not how insurance works most of time. Might work that way now for health insurance. But for car insurance, you generally have to pay before the accident. So then what that means is when we buy it, we have an asset and then we should then expense that asset over the coverage of the insurance. So we're going to put it on as an asset, then we're going to expense it as of the coverage of the insurance. So this is the amount that the account department has put on there. We have now determined that we have consumed part of that and the amount that is left is $6,000 in this case. So what we're saying is this is what we have on the books so far and we now think that we have consumed some of it and the amount that is left is $6,000. Therefore, we're going to have to, what do we have to bring this down by in order to bring it to $6,000? The amount that we have determined, that's going to be a subtraction problem of $12,000 minus the $6,000 in this case. So we've got to bring this down by $6,000 to bring it to what we determined it to be, which is $6,000. Now, there's two ways that we could ask this question. Note that in this format, we're saying as of the cutoff date prepaid insurance is calculated to be, meaning we're saying what discount this account should be and in this case, it should be $6,000. We could also format this and say that this is the amount of prepaid insurance that has expired, that has been used throughout the time period. If we said that, then we would just be saying exactly what the expense should be. So in this case, it happened not to matter because it's $6,000 or $6,000 either way. We used $6,000 and there will be $6,000 left. We used half of it, but if it's not in that proportion, be careful that the question could be asked either way. We could say, do the calculation say this is how much is still prepaid or we can say how much this should go down by saying how much has yet has been consumed. So in this case, we're going to say it's $6,000 and credit of $6,000. And once we post that, we assume that this will go down to what we calculated it to be, which in this case is $6,000. So let's post this. I'm going to go down to H19 and equals and we'll point to the expense. The expense will go up, put us out of balance and bring net income down. So remember net income is the income revenue here minus all revenue here minus all of the expenses, which is that's the 83,980, 83,980. This is income, not a loss. Then we'll be up here in H8. We're going to say this equals and we'll point to the credit that's a debit, that's a credit, that's going to be the opposite, which will make this go down puts us back in balance here. And we now see that this is the $6,000, which matches what we think and what we calculated it to be.