 Hello! In this presentation, we will work a problem where we will focus in on the accounts payable or purchasing cycle. We will be recording transactions related to the accounts payable or purchasing cycle, meaning that we will be purchasing items on account or services on account, and then be paying them in a future time. It's useful to look at processes by cycle as in the accounts payable cycle, the accounts receivable cycle, the payroll cycle, rather than just by looking by date, because it really focuses in on those particular cycles, how they will work, and also those will obviously be types of areas where people tend to work in larger accounting departments focusing in on these particular cycles. It is, however, useful also to work some problems, more comprehensive problems just by date, rather than by cycle, which I recommend we will do at a later time as well. These transactions will be recorded here in the general journal, which is just going to be this space on the left hand side. That's where we will record the journal entries. We will then post those journal entries, not to a general ledger this time, but just to this worksheet. And the reason is that this worksheet will give us a quick view of what is happening to these particular accounts when there are only a few transactions. It gives us a really good idea of what is going on. Later on, we'll take a look at transactions posted to the general journal, to the GL, the general ledger, and then posted to create the trial balance. That being a bit larger process, it's not as easy to see all in one area, and therefore it's more difficult to see what actually is going on in terms of what's happening to assets, what's happening to liabilities, what's happening to equity, what's happening to revenue, and what's happening to expenses. So this is going to give us an idea of the big picture. Then we'll go through the full process and see the posting to the GL and then the creation of the trial balance. We'll also look at the accounting equation and see the effect on the accounting equation. Therefore, we will see what happens in terms of debits and credits, and we will see what happens in terms of the accounting equation. So let's go down and take a look at the first activity. We have a purchase supplies on account. So we're going to purchase supplies on account. We're going to go through our thought process. First question, as always, is cash affected? And in this case, we're going to say, no, we purchased something on account. And therefore, we paid for it with kind of like a credit card, we can think of it. Now, we might be thinking, hmm, that's going to be our accounts payable account. That's what we will be working with. But note that we might not be as clear as to whether we should be debiting or crediting the accounts payable. And therefore, that's why I suggest going to the second question, if cash is not affected, to think about what the thing is that we received, often being easier to understand what we should do with the thing we received. We know where it's going to go up because we received it. And then we need to know whether we debit or credit it. So in this case, we bought cat and we bought supplies. So we know that this is a supplies account. We can see it here. We can see it next to all the other assets. Therefore, it's going to be an asset account. And we know that it's going up because we bought more of it. Like other assets, supplies has a normal debit balance. In order to make something go up, we do the same thing to it, which in this case would be another debit. So I'm going to go ahead and debit supplies. I'm in cell E seven E seven. I'm going to right click on that cell and copy and then put that in our first section of our journal entry in cell B five, right clicking and pasting, not the values or not the formulas and the values, but just the values. So just the values. And there we have that. So we could just type that out there as well. But this copy and pasting is good practice. Now note that we're going to increase that with a debit. As we said, 585. You may be asking, Hey, supplies sounds like an expense to me. Why aren't we expensing supplies? And note that supplies is typically going to be our introduction to the in to inventory. Basically, we're going to treat supplies kind of like we will inventory for the same reason that being that if supplies is significant, we need to put it on as an asset because we haven't yet consumed it in order to help generate revenue definition of an expense, something that we have used or consumed in order to help us achieve the goal of the business revenue generation. The assets on the other hand are something that we have that we expect to consume sometime in the future in order to help us generate revenue. These supplies then at the time of purchase are something we have not yet consumed but will consume in the future. Therefore, an asset, not an expense. We will expense them at the time we consume them. And that'll be in the adjusting process, which we'll talk about later. So if we debit supplies, then we will credit something. I'm going to represent credits with brackets or negative numbers in Excel. You can show the negative number by just putting negative 585 or use this formula of negative and then point to the cell Excel seeing this negative and using it as it would in a similar fashion to an equal sign and then it's going to take what's in that cell and just basically multiply times negative one or flip the sign. So there we have that. We have the 585 and the credit to 585. Now we just need to know which account will be credited and of course we will not be crediting cash because we purchased it on account and therefore we will be crediting the accounts payable. That's our form of payment. You can think of it as acting similar to a credit card in that we're purchasing something, put it on our account. And so I'm going to copy that in cell E8, put that in B6, right click and paste 123. I'm then going to double click before the A and space that out three times indenting that as we go. Now note that the key term here is going to be that on account. So whenever you see on account, that typically means that it will be either accounts receivable or accounts payable involved in the transaction. Of course here we are dealing with the accounts payable account. Note that some texts might say on credit, but oftentimes a text will avoid that term so that we don't confuse kind of the term of credit with debits and credits when recording debits and credits here. So let's go ahead and post that out then. We have the supplies first. The supplies is going to be right here on the trial balance. We will then record that in cell G7. G7 equals, I'm going to point to that 585, really useful to use formula. So although you could type it in here, highly, highly recommend using the formulas and that will pull over that information, taking it from zero up by 585 to 585, putting us out of balance. Note that these trial balances are represented with debits debits as positive numbers, credits as negative numbers, and therefore the debits minus the credits as in over here will be zero. So if debits equal credits, then debits minus credits will be zero. This format as I've described in some prior videos is going to be really useful to use. So I really think it's worth taking account of and looking into. Otherwise these worksheets will be much more complex and will be more difficult for us to see. A quick view of what is going on here. If we use this format, simplifies the process, makes it a lot easier to fit on one screen, makes it a lot easier to see what is going on, and in practice, very practical to understand. So we're then going to post the accounts payable. So here's the accounts payable. Here it is on the trial balance. Here is where we will post it in cell G8. So we will say equals, point to that 585, and when we hit enter, it's going to go up in the credit direction, put us back in balance down here. So there we have it. Remember that that does not mean that we have negative payable. It means that it's going up in the credit direction as a liability payable being a credit balance account. If we were to then see the effect on the accounting equation, we would see that supplies is going up because we bought more of them, so we will increase supplies. The liabilities are remaining. I mean, sorry, they're going up as well because we are incurring more accounts payable. We owe more money. The bad thing is going up. We also know it's going up because if this side went up and this side happens to be liabilities, which is affected, then it too must be going up. And we know that the equity then is going to not be affected. Next transaction, we'll take a look at B, which says we paid for supplies purchased in the past on account. So in this case, I would ask our question. We're going to go through our normal questions. Is cash affected? And in this case, we're going to say, yes, it is affected and the keywords are paid. Now it's very possible that we could get mixed up with this one because it also says on account. And we might be saying, well, if it's on account, then cash isn't affected. But note that that would be the case when we purchase something on account as we did in A, but in B, we're paying off the account. So therefore it's useful to first think about the cash first and any time it says paid, that typically means we paid with cash. So first let's work with the cash and then we'll see what happens on the other side of the transaction. Cash is an asset. Assets have debit balances. We need to make it go down because we paid something. Therefore we're going to do the opposite thing to it. We will credit cash. So I'm going to copy cash. I'm going to scroll back over here. I'm going to put it on the bottom. So here's B. I'm going to put it on the bottom in cell B9. Right click and paste 1, 2, 3. I'm going to start with the credit. I'm going to double click before the C indent three times. I'm going to start with the credit to the cash even though the debits go on top. We don't need to, because debits go on top, start recording from left to right, top to bottom as we read. So I would suggest putting the journal entry together in whatever way makes the most sense to us. This system usually does because it's easiest for us to know what happens to cash first. So cash is going to be that 585. I'm going to put a negative. I'm in cell D9, 585. Then I'm going to put a debit above it and to the left in cell C8. I'm going to use our formula again and I'm going to say negative of that number. I'm just going to say I want a formula, meaning I want to kind of like an equal sign. Take whatever's in cell D9 and multiply it times negative 1, flipping the sign. So again, you could just type it in there but I'm going to start to practice those formulas as we go. Then we just need to know what that account will be. Now if we paid cash, you might think that we purchased something such as supplies, but we had already recorded the supplies up here in journal entry A. What we are doing now is of course what is owed for that purchase that happened in journal entry A, that being the accounts payable account. So accounts payable has a credit balance here. We need to make it go down by doing the opposite thing to it, which in this case is a debit. So I'm going to copy accounts payable in E8. I'm going to put that in B8, right-click and paste 123. So there's going to be our transaction. Again, we knew that we were going to debit the accounts payable because we credited cash and therefore must debit whatever other account we are using. We also know that we're going to debit by double checking, asking our questions. Well, accounts payable is a liability account. It has a credit balance. If people are paying us, then that account must go down. Why? Because that represents how much money is owed to us and if they then pay it, then it needs to go down. We make something go down by doing the opposite thing to it as its normal balance. The normal balance of a credit opposite then being a debit. So let's post this out. I'm going to post the accounts payable. That's in cell G8. Something is in it. Therefore, I'm going to double-click on it, go to the end of it and say plus and then point to that 585 right there. So it's going to go down to zero here and put us out of balance once we hit enter. So it decreases it back down to zero. Cash then will then be recorded up here in cell G5. So in cell G5 equals point to that cash credit. It's going to take this debit balance down by a credit of 585 to 49415 puts us back in balance down here, meaning that the debits up top of 50,000 equal the credits down here. No effect on net income from these first two transactions. Effect on the accounting equation. We're going to say that cash is going to go down. Therefore, assets are going down. The liabilities are going down as well. And there's no effect on the equity section. Next transaction, if we scroll back down, we're on C where it says purchased auto service on account. So therefore we purchased auto service. We're going to say is cash affected and the first question is going to be no cash is not affected because we purchased the auto service on account. I would then ask what we received. We might then say, well, accounts is payables affected, but I would first focus on what we received because it's typically easier to know whether or not to debit or credit the account related to the thing that we are receiving. In this case, auto service. Now you might be thinking auto service should be the auto of an asset, but auto service is going to be something we consumed. Therefore, it's going to be an expense. If we have the trial balance, we see the expense down here. Expenses are going to be always debited. So expenses are going to be always decreasing the net income. They're always going to go up in the debit direction and bring down net income and therefore bring down the total equity as well. So by the nature of the auto expense being an expense, we know that we must then debit it because all expenses have normal debit balances. They only go up. So we're going to do the same thing to it, which in this case is another debit. So I'm going to copy that. I'm going to paste that in the B11. Right click and paste 123. By the way, knowing what the expenses are doing may not be as known to us as what we do to cash or other assets because we typically work with cash the most. But expenses is going to be one of those other accounts because there's a lot of different expenses. We pay for a lot of different things that we'll get used to fairly soon. So you want to get used to the idea that expenses only go up in the debit direction. So then we're going to have that and that's going to be 4, 416. So we're going to put 416 in cell C11. Then I'm going to put a negative 416 in cell D12. I'm going to do that with a formula by putting negative 416 pointing to this 416 there that will take that 416 and flip the sign. Now we just need to know what that account will be that we will then credit. And of course, it's not going to be cash because we did not pay cash. It's going to be accounts payable. So we're going to credit the accounts payable account. I'm going to copy that. I'm going to paste that in B12. Right click and paste 123. Right double click before the A and space bar 3 times and there we have that. So we have a debit to auto expense and a credit to accounts payable. Now we already know that we're going to credit accounts payable due to the fact that we debited the expense. However, it's also useful to think through that. We know that the accounts payable is a liability. Accounts payable has a credit balance. The bad thing is going up meaning we owe more money because we purchased something on account and therefore we are going to do the same thing to it as its normal balance which is going to be a credit. So we're going to post this out. So this is the journal entry. We will then post out here to the worksheet. So we've got the auto expense that's going to be down here in cell G14 in cell G14 I'm going to say equals and then point to this 416 in cell C11 and once we select enter we're going to bring that balance from 0 up by 416 to 416 and we will then be out of balance. Net income will go down. So there we have it. Net income is revenue minus expenses. Credits of revenue, debits of expenses. The credits are greater than the debits by 49, 5, 84. We're then going to credit the accounts payable. So here's accounts payable on the trial balance. Something is in it. Although it is 0, I don't want to delete the 0 so I'm going to double click on it because that will show us what's happening. And then I'm going to go to the end of it and say plus and then point to this amount here. Now I know that we're getting a lot in this account here. So if something goes wrong, if we enter and we have to delete it then just go ahead and say equals and find all the accounts with payable. I'm going to say plus, always plus. And then here's one with a payable plus and then here's one with a payable. Excel then sees this is a credit or a negative, this is a debit or a positive, this is a credit, and it'll do the math for us. We're always going to use the pluses over here and that'll kind of simplify our functions on this side. So there we have it. We're just left with that 416. That puts us back in balance. Let's take a look at the accounting equation. We know that nothing happened to assets. Neither of these accounts are assets. So assets actually remain the same, no impact. And then we know that the liabilities are increasing because they're going up due to the fact that the payable is going up. And we know that equity then must be decreasing. Why? Because if liabilities are increasing and it's on the same side of the equal sign as the equity then the equity must then be decreasing in order to remain in balance. We also know that equity is decreasing because it will do the same thing as what happens to net income. Net income went down because expenses went up. Net income calculated as revenue minus expenses. Therefore, the equity section will too go down as net income goes down. Next transaction, we've got D, Purchased Business Meals On Account 1950. First question, is cash affected? And of course, no because we're working with the accounts payable here. We paid on account and we probably know which way that's going now. But again, I'm going to try to think about what we received first and go through our normal thought process, a standardized set of steps because later on as these journal entries get more complex, if we go through a standard set of steps, building what we know it, it will make things easier as we go. So even if we've memorized these journal entries and we know what the debits and credits are, I would think about the normal process and keep that process in mind. We bought meals and entertainment so that's going to be an expense. It's something we consumed in order to help us generate revenue in the same time period as opposed to purchasing something that we have not yet consumed and hope to consume sometime in the future. This is something that we used up in order to help generate revenue now in accordance with the matching principle then it would be an expense. Expenses all have debit balances and expenses only go up in the debit direction. Therefore we're going to debit the meals and entertainment expense copying that account, putting that in cell B14 right clicking and pasting 1, 2, 3. The amount will then be 1,950. I'm not going to put any commas or anything I'm just going to type the entire 1,950 there. I'm going to credit the same amount, negative of 1,950 and I'm going to use formulas you could just put a negative of that number. Then we just need to know what this account will be. It's not cash. We're not going to decrease cash we did not pay cash. We put it on account. Therefore the account will be accounts payable. I'm going to copy accounts payable in cell E8 by right clicking and copy. Put that in cell B15 by right clicking and pasting 1, 2, 3. I'm going to double click before the A and space three times for the indentation and then post this out. So here's meals and entertainment on the journal entry. Here it is on the trial balance. We will record it in cell G13 by saying equals pointing to that 1,950 bringing the balance from zero up by 1,950 to 1,950 putting us out of balance by 1,950 and bringing net income down by 1,950. Net income calculated as revenue minus expenses and there we have that. Now we'll record the second half accounts payable. Here's accounts payable on the trial balance. We're going to record it in cell G8 something is in it. Therefore we're going to double click on it go to the end of this and again I know it's a long transaction but you can see where all these accounts are going so it's D6 plus C8 plus D12. If you record these journal entries in the exact same cells as we have here as I recommend then we could just type that in there and then say plus and we want to add to it this 1,950 once we hit enter we will be back in balance here and this goes up to 2,366 as a result of these two transactions auto service meals and entertainment which have not yet been paid and need to be paid sometime in the near future. Okay so then we're going to say is cash effect or what's the effect on the accounting equation nothing to assets no effect on the assets as of this time we see that liabilities went up because the payable went up so liabilities are going to increase and we know that the equity must go up for a couple different reasons one is that liabilities increased and nothing happened to assets therefore this must then go down in order for this side of the equal sign to go up and down we also know that the expense went up bringing net income down and total equity always goes in the same direction as net income net income decreasing results in a decrease to the total equity E then last transaction says paid for auto service which was purchased on account in the past first question is cash affected and in this case it is and the keyword is paid here note that it also has on account so you might say well that must be something other than cash which it is but we're going to have in this case both cash and the other thing other than cash which is accounts payable when we purchase something remember on account that means we got something and we pay for something other than cash we put it on account but then we need to pay off the account which means we're going to have that accounts payable on account accounts payable and cash so anytime we see paid we're just going to basically say that must be cash so cash has a debit balance we need to make it go down therefore we're going to do the opposite thing to it which in this case is a credit so I'm going to copy cash going to put that on the bottom so here's E I'm going to put it on the bottom in cell B18 right click paste 1 2 3 I'm going to double click before that C space 3 times and enter I'm going to put it in the credit column we're going to put it in the credit column D 18 it's going to be a negative 416 and enter we're going to debit something by 416 I'm going to use a formula in order to do this negative this number that negative just means I'm going to take that number and flip the sign or you can think of it as take that number and multiply times negative 1 resulting in a positive 416 then we just need this account here and we paid cash for the auto service happening in the past so we didn't have the auto service done today we already recorded it up here as an expense now we're paying off what is owed the account representing something owed is accounts payable so there's accounts payable it has a credit we're going to reduce it so we're going to do the opposite thing to it's debiting it so I'm going to copy that paste that here so in B17 accounts payable now again we know we're going to debit that because we credited cash and if we think through it again we can say accounts payable has a liability represented by the brackets we know that it is going down because we got paid so therefore it has to be decreasing the amount that people owe us this is a credit balance in order to make something go down we do the opposite thing to it which in this case would be a debit so we can kind of double check the debit here going through that process there cash is going to be decreased that means the assets will decrease on our accounting equation assets are going to decrease and we see that accounts payable is going to decrease as well so accounts payable is going to decrease I know I didn't post this yet so decrease and then nothing's going to happen to the equity okay so now let's post this so we're going to post this out so accounts payable here's the accounts payable something is in it in cell G8 therefore we're going to double click on it go to the end of it say plus and then point to this 416 once we hit enter that should bring the balance down so there it is we're at 1,950 is the balance now that ties out to what has not yet been paid for the meals and entertainment then we're going to post the cash so cash is up here here's the cash on the trial balance we are in cell G5 double click go to the end of it plus scroll back down we want this cash and enter and again I know we're going back and forth so if I double click on it you want equals D9 plus D18 that will bring the cash to 48,999 and that'll put us back in balance here our net income is currently at 47,634 we saw the impact on the accounting equation last couple questions we can think about our expenses recorded when cash is paid not necessarily not under the matching or expense recognition principle our expenses recognize assets have been used or liabilities incurred in order to generate revenue our expenses recognize when should assets have been used and that's going to be the definition so that's the definition of basically the matching or expense recognition principle meaning we're going to recognize the expenses kind of like when revenue is earned when expenses are incurred now we could represent that by saying expenses are incurred when we consumed an asset like cash or something like that or incurred a liability like accounts payable in order to help to generate revenue that's one way we can basically define the consumption of the expense under the matching or expense recognition principle