 Hello and welcome to the session in which I called the FAR CPA exam boot camp part one of five in this session will go over a review of accounting information system, which will be very helpful if you're taken the far exam as a foundation for your accounting knowledge, or if you are taken intermediate accounting, it will be helpful for you in reviewing the accounting information system, whether you are an accounting student or a CPA candidate. I strongly suggest you take a look at my website farhatlectures.com. I don't replace your CPA review course. I am a useful addition to your CPA review course. These sessions, part one of five, which I'm going to have five more sessions will build your foundation, your accounting foundation to understand your material better, which in turn you will do better on the exam. My risk, your risk is one month of subscription, your potential return is helping you pass the exam. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. I do have resources for other college courses such as intermediate accounting, advanced accounting, cost accounting, governmental tax, so on and so forth. I do have the AI CPA previously released questions. Also, my CPA review prep courses or supplemental courses are aligned with Becker, Gleam, Wiley, Roger, whatever course you are taking. So it's very easy to follow. Connect with me only then if you haven't done so, please like this recording, share it with other connect with me on Instagram, Facebook, Twitter and Reddit. So in this session, I will do the following. I will show you how to analyze transaction, looking at accounts, analyzing the account and equation, covering the T accounts, debit and credit, how to journalize, how to post to the ledger. And also we will prepare a trial balance. This is part one of five. In the next session, I would look at adjusting entries, how to prepare financial statements, closing entries, converting cash to a cruel. I believe those topics are the foundation for your FAR CPA exam and the foundation for your accounting career. The topics I will be covering today will be covered in a typical intermediate accounting either chapter two or chapter three. Setting the foundation for you to succeed in your accounting career. So the first thing we're going to look at is what is a transaction? A transaction is any financial event that could affect asset, liabilities or stockholders. Now, if you don't know what assets or liabilities are or stockholders, we will cover those in the elements of financial statements. We already have them covered. Just we're going to go over these today briefly just for your basic understanding. An event is something that happens like buying supplies, paying your employees, making a sale, purchasing something on credit. It doesn't have to be in cash. So when you buy supplies, well, you buy supplies, you purchase supplies for your company. Supplies account will go up. You have more supplies. If you pay cash, the cash account will go down. Well, guess what? It's affecting your assets or you could buy supplies. Your supplies account could go up and you can buy them on account. Your accounts payable will go up as well. So it could affect your liabilities. So those are the transaction that could affect your assets and your liabilities. We keep track of all assets and liability accounts and stockholders' equity accounts in something called, guess what? Accounts. What is an account? An account keeps track of changes in your assets, liabilities and stockholders' equity. The best example I can give you is cash. Your cash bank account is an account. When you deposit money in your bank cash account, your cash account goes up. When you withdraw that money from your ATM, your balance goes down. So your cash account is keeping track of your increases and decreases. Now, in accounting, we have many accounts. We have one account for cash. We have one account for supplies. We have one account for inventory. We have one account for accounts payable. We have one account for revenues and you guys get the point. That's the point of accounts, keeping track of changes in your account. Now, the basic accounting equation that's the foundation for everything that we're going to be doing is assets equal to liabilities plus owners' equity. Now, it's very important that you understand the basic components. And in this session, I will show you how this equation remain in balance after each transaction. What are your assets? Your assets are your economic resources that will provide future benefit. And that's all what I'm going to talk about assets today because we do have assets covered in details and elements of financial statements. So for example, if we have $1,000 in assets, liabilities are simply debt obligation. You have obligation of $300 assets equal to liabilities minus stockholders' equity. I'm sorry, assets equal liabilities plus stockholders' equity. It means you have equity of $700. What is equity? Equity is also known as net assets. Simply put, if you take your assets and you net out your liabilities, what you are left with is net asset, basically free and clear assets of $700. This is what net asset is or for personal finance we call it net worth. So this is the basic accounting equation. Now you're going to learn soon that you have many assets accounts such as cash, account receivable, supplies, property, plant and equipment. You're going to have liabilities account like accounts payable, notes payable. You're going to have many stockholders' equity accounts like revenues, different type of revenues, many expenses, dividend, common stock. Those are equity accounts and we're going to look at all of those in the next 10 to 15 minutes. But what you do is you keep track of changes in these accounts and as you keep track of those changes, your accounting equation would remain in balance. You have to understand that each transaction or each event has a dual effect on the accounting equation. Dual means two. It could have three, four, five effect, many effect, many accounts effect, but at least two. And we have something called, because it's dual effect, two dual, we have what we call the double entry accounting system. It means each transaction effect at least two accounts. It could affect many. Now those two accounts, when we debit them or credit them, the total debits will equal to total credits. So what is debits and what's credit? That's the next thing we need to talk about basically some basic concept. Again, T account or account, those T accounts will keep track of increases and decreases in a specific asset, liabilities, stockholders' equity revenue or expense or gain and losses as well. We'll learn later on, we'll learn about more accounts. Simply put, a T account is called a T account because it looks like a capital T. A capital T will have two sides, will have a debit side, the debit means left, and we have a credit side, the credit means right. That's all what the debit and credit means. Now, basic terminology about T accounts and a T account and a typical T account, let's assume this is cash and don't worry about now just agree with me this is the cash account. For example, here we have the cash, we have the debit side, we debited this account 10,000, we debited this account 18,000. When we add them, we foot, we call it footing, this is footing the accounts. And when we add all the credits, we happen to have only 3,000. Notice we have more debits than credits, it means we have a balance, 18,000 minus 3, because we have more debits than credits, we have a balance of 15,000. We call this balance a debit balance because the balance is on the debit side, we have more debits than credits. Certain accounts we could have the opposite and you're going to learn why in a moment. I'm just showing you what a T account would look like. This is another T account and this is an account payable. For example, here we have 3,000 credit, 3,000 credit, 8,000 credit. If we put them, we have 11,000 credits. If we put all the debits, we have 10,000. 10,000 minus 11,000 minus 10,000, we have more credit. We have a credit balance of 1,000. We call this the normal balance, normal debit balance. And we call this a normal, this is normal debit, and the 1,000 is normal credit balance. Now, we need to learn a little bit more about T accounts because we have many T accounts. So you have to memorize or know this relationship. All assets account, like cash, account receivable, supplies, any asset account, you have to know. You have to memorize. It increases on the debit side. So assets, if you're going to put it this way, asset, they increase on the debit side without telling you if they increase on the debit side will reduce them on the credit side. Okay, so remember debit means left. It means they increase on the left and they reduce on the right. That's all what it means. Expenses, a company could have many expenses. Guess what? They work the same way as assets. They increase on the debit. Well, they are reduced on the credit. However, liabilities, stockholders, equity accounts and revenues, they increase on the credit. Now, stockholders, equity account, we could have under stockholders, equity account, we could have common stock. And common stock increases equity. Therefore, common stock increase on the debit and without telling you it reduces on the debit side. Now, also under stockholders, equity, we have an account called dividend. Dividend, it reduces equity. Therefore, dividend increases on the debit side. Simply put, what I'm going to do, I'm going to put dividend here. I'm going to give you an acronym. So dividend works like assets, expenses and debits. So simply put, here's what you have to remember. This is what you have to remember if you are trying to memorize this. So I'm going to just go like through this. Assets, expenses and debit. DEA, Drug Enforcement Administration or Drug Enforcement Agency. Those accounts, DEA, and this is how I learned it when I was in college, the increase on the debit. That's all you have to remember. If you remember DEA, increase on the debit, the Drug Enforcement Administration or the Drug Enforcement Agency, increase on the debit and it's easy to remember D and D. Then you will know the rest. Then if it's not DEA and it's increasing, it must increase on the credit, like liabilities, like revenues, like common stock under stockholders' equity, the increase on the credit. So it's very important to understand how do T accounts keep track of your debits and credits. Now on the CPA exam, they don't really ask you about debits and credits, but you have to understand how they work. Because when you're analyzing a transaction, you have to understand how it works. Now if you are taking intermediate accounting, you definitely have to know it. Actually, I will take that back. On the exam, although they don't ask you about knowing your debits and credits, they assume you know it because you have to prepare the journal entries. Part of your simulation is preparing journal entries and guess what? We're going to learn how to prepare journal entries today. You have to know your debits and your credits. Therefore, you have to know those debits and credits. Now the best way to illustrate journalizing, analyzing transactions is to actually work examples. So what I'm going to do, I'm going to go over an example with 10 to 11 transaction and show you how to analyze, journalize, and post. Starting with the first transaction, Adam as a CPA invested $50,000 to start a consulting firm in exchange of common stock. Simply put, the first thing you have to do, you have to analyze the transaction using the accounting equation. Adam invested money in the business. So the assets because Adam invested cash, cash will go up plus $50,000 cash. On the other hand, what happened is the equity of the business because we invested money in the business, common stock will go up by $50,000. So this is we just analyze the transaction. Simply put, from a debit and credit perspective, debit increases assets, we're going to debit cash $5,000, and credit increases stockholders' equity, and we're going to credit common stock. Simply put, we're going to journalize. When we journalize, we list whatever we are debiting is listed first. Therefore, we list cash first because the account that's being debited in this transaction. We're going to debit cash $50,000, and the credit is to common stock $50,000. Now don't worry about this one or one and three, 11, I'm going to tell you what these are. So this is how we journalize. And sometimes in the real world, you put an explanation on the CPA exam. Sometimes you might have to put an explanation. Simply put, Adam invested money to start the business. That's basically an explanation. After you journalize, you have to post the ledger. Now what is a ledger? Each account will have its own ledger. Basically, the ledger is the actual account. Simply put, the ledger is the account. Sometimes it's called the general ledger, but the ledger is the account. So each account will have its own ledger. We're going to have the ledger for cash. And cash, each account will have an account number. The account number for cash is 101. Once we posted the ledger, and with basically what's posting, basically updating the ledger, updating your cash account. Now you have, you're going to keep track of your cash account. Remember the T account? The general ledger is simply a T account. Keep in track of your increases and decreases. Now in the real world, this general ledger could be very sophisticated, could be, you know, usually it is. It's a part of a software system that's showing you the transaction and the balance. But in this example, it's basically simply a T account. But that's all what the ledger is telling you how much transaction you have and the balance. So right now you have $50,000 in your cash account, and you have $50,000 in your common stock general ledger account. If I ask you how much common stock do you have, you would say, you would draw the balance and you would say my balance is $50,000. This is your balance. If I ask you how much cash do you have, you will add up all the debits or add up all the credits and you have a debit balance of $50,000. This is the balance. And this is the normal balance. It's a debit. This is basically what these accounts are. Now what's going to happen is we're going to keep track of all the cash transaction in the cash general ledger and all the common stock transaction in the common stock general ledger and all the account receivable and the account receivable general ledger. So it's very important to understand this. Now why is this number sitting here 101? After we posted the ledger, we put the number 101 here indicating that we posted. Now what I did, I already had it pre-printed. But the point is, you know, this is basically called the reference. Reference means you already updated the cash ledger. Okay. I showed it to you ahead of time because this is not really a bookkeeping course. Just wanted to show you that it's already been posted. Let's take a look at the second transaction. The company purchased $9,000 worth of computer equipment paying cash. Well, let's analyze this transaction using the basic account and equation. We're going to have less cash because we paid cash. We're going to have more equipment. So what's going to happen is we reduce our assets a little bit by 9,000, a little bit by 9,000. But we increased another asset called computer equipment. So assets went down, assets went up. Guess what? The account and equation would remain in balance. Let's do this through a debit and credit perspective. Well, debit increases asset. We're going to debit computer equipment 9,000 and credit decreases asset. We're going to credit cash. Therefore, we're going to journalize. Now we're going to list the computer equipment first because that's account that's being debited. 9,000 cash is account number 101, credit cash 9,000. After we journalize, we post. We need to update our cash account. Now, since we credit cash, we're going to credit cash 9,000. Now if I ask you how much cash do we have, you will draw a line here and you would say my balance is 41,000. Notice the benefit of the ledger. It's keeping track of your cash account. Now your computer equipment 50,000. If I ask you what is the balance, you would say 50,000. Now let's keep going. Third transaction. Adam borrowed $40,000 from a bank by signing a note. So Adam borrowed from a bank by signing a note, $40,000. Let's look at it from a accountant equation analysis. Well, we borrowed money. We're going to have more cash, but also we signed a note. We have more liabilities. This liability is called a notes payable because we signed a note of 40,000. Let's take a look at it from a debit credit perspective. Assets went up. We debit cash. We debit cash 40,000 liabilities went up. We debit. We credit notes payable. Let's go ahead and journalize it. We list cash first. Cash is up 40,000. Then liabilities are up 40,000. Now we need to post the cash and post the notes payable. Now we posted the cash. Now if I ask you how much cash do we have, it's 90,000 minus 9. The cash is 81,000 and we have notes payable of 40,000. Now remember, notes payable would require us to pay interest expense and don't worry. We'll worry about interest expense in the next session when we do adjusting entries. We have to adjust for our expenses. We'll take a look at that later. We're just planting the seed now. Let's take a look at the following transaction. We purchased $3,000 of supplies on credit from Staples. Let's analyze it. We have more supplies. Supplies are assets, but we purchased it on credit. That means we have to pay it down the road. Therefore, we owe the money. Now we have an account payable. Assets went up. Liabilities went up. Increasing both sides of the equation will keep the equation remain in balance. Let's take a look at it from a debit and credit analysis. We debit, increase assets. We debit supplies and we increase liabilities. We credit accounts payable. Let's journalize. Supplies are listed first and notice when we credit, we indent a little. Supplies account number 126, accounts payable 201 and this should be 3,000. That's a mistake. Now we need to post to the ledger. We're going to increase supplies by 3,000. Increase our accounts payable by 3,000. Again, supplies is one of these accounts we're going to have to adjust in the next session. Now we have 3,000 worth of supplies. This is when we bought them October 4th. By the end of the month, we're going to use some of that supply, so it's going to need to be adjusted. So I'm just planting the seed for the next session. Adam performed 10,000 worth of consulting services on account to Robot Inc. Simply put, Adam did some work worth of consulting. Let's take a look at the account and equation. How would that affect the account and equation? We have $10,000 more in account receivable. We did the work. It was on account. Robot's going to pay us down the road. However, since we did the work, we can recognize the revenue. So revenue increases stockholders' equity. Asset goes up by 10,000. Stockholders' equity go up by 10,000. Everything remain in balance. From a debit and credit perspective, we increase the asset by debiting account receivable. We increase the stockholders' equity by crediting revenue. So journalize it. We debit account receivable, credit consulting revenue. From a post post everything to the ledger, now we have 10,000 of account receivable. That's the balance. And now we are starting to generate revenues, but none of it is in cash yet. None of it is in cash yet. All of it is on account. I hope we'll receive some money by the end of the month. The following transaction. Let's take a look at the following entry. Adam paid $5,000 to an assistant during the consulting engagement. Simply put, Adam used some help basically, and they had to pay $5,000. Cash is going to go down by $5,000. However, expenses will go up. Hold on, why do you have minus if expenses went up? Well, expenses always go up. The minus is to indicate expenses are reducing equity. That's how expenses work. They always go up, but they reduce equity. So equity goes down, cash goes down. Everything remain in balance. From a debit credit analysis, we're going to credit cash, and we're going to debit expenses. Cash is going down, gets a credit, it's an asset. Expenses always go up, they get a debit expenses. From a journalizing perspective, we're going to list expenses first, salaries expense, because it's the account that's being debited, and we're going to credit cash $5,000. Now we're going to post to the ledger, cash is going down. Now we could also compute the balance for cash, which is $90,000 on the debit, minus $14,000. Whatever that answer is, $90,000 minus $14,000 is, if my math is right, is $76,000. And now we have expenses. We have salaries expense of $5,000. Next transaction, October the 15th, automation paid Adam $4,000 for consulting services for the next two months. So what happened is, we have a company called Automation. They needed some consulting services, but they paid Adam up front. That's good. I'm going to take the cash. So from an accounting equation perspective, Adam will take the cash. However, we didn't do the work yet. Adam did not do any work yet. Therefore, Adam is going to recognize the $4,000 under a liability called unearned revenue. Simply put, Adam received the money, but Adam did not do any work. What does that mean? It means Adam will have an obligation, a liability to perform the work. Therefore, unearned revenue is increased. So from a debit credit analysis, we're going to credit cash. I'm sorry, we're going to debit cash because cash is going up and we're going to credit liabilities. Liabilities are going up as well. Therefore, we're going to debit cash, credit unearned revenues. Now we're going to update the cash account and we're going to update unearned revenues. So we have more cash, but we have more unearned revenue. That's another account. We're going to have to adjust later on in the next session when we look at the adjustments. But this is what we're doing now, planting the seed. Also, October the 15th, Adam paid $12,000 of prepaid rent for the next 12 months. Adam prepaid the rent. It's $1,000 after negotiation. Halfway through the month, the owner said, pay me $12,000. I'll give you the rent for 12 months. So cash is going to go down, of course, but prepaid rent. Since we paid the rent, we cannot expense it yet because we haven't used it. Prepaid rent goes up. We have to spread it out over the next 12 months. Guess what happened? From a debit credit analysis, debit increases asset. We're going to debit prepaid because prepaid is an asset. Why is prepaid is an asset? Because it has a future benefit. We can benefit from this prepaid for the next 12 months. It's an asset. Obviously, cash goes down. We're going to credit cash. From a journalizing perspective, we're going to debit prepaid because it's being debited. It's been increased and we're going to credit cash. Cash is going down. Again, we keep track of our cash account. Make sure you keep track of the cash account because at the end of the day, we're going to have a balance for that cash account. So add up all the debits, add up all the credits and the difference will be the balance. And we're going to have prepaid account, prepaid rent, which will have to again adjust at the end of the period. Let's take a look at more transaction. Adam paid 2000 of utilities for the month of October. We paid our utilities for the month of October. Well, cash goes down. It's an expense. It's a utilities expense. Stockholders' equity will go down as well. From a debit credit analysis, we're going to reduce. We're going to credit asset, the cash, and we're going to debit expenses. Expenses always go up. Therefore, we're going to debit expenses, goes first, utility expenses, and we're going to credit cash, which is for 2000. Again, we're going to update our cash ledger. Notice now cash 2000 going down and utility expense is 2000. Let's take a look at this transaction. We paid staples, $1,000 for the amount owed on account. Remember, and not long ago, we purchased 3,000 worth of office supplies from staples. Now we're paying them $1,000. So our cash account will go down. True. But what happened is our liabilities, our account spable will go down because we owe them 3,000 minus 1,000. Now we owe them only 2,000 and we're going to see this in the ledger. For a debit credit analysis, we're going to credit the asset cash. We're going to credit the asset cash and we're going to debit account spable. They are both going down. Cash is going down with the credit. Liabilities going down with the debit. We journalize. We list account spable first. Debit account spable, credit cash, then we post to the ledger. Once again, cash is going down in this right here. We have an additional reduction in cash. Account spable also going down. We had 3,000. Now we only have 2,000 as a balance because 3,000 minus 1,000 equal to 2,000. Again, if you want to run your cash balance, add all the debits, add all the credits and the difference should be a debit because we have more cash than we don't. Of course we do. You cannot have a negative cash balance. Adam Inc. paid 3,000 in dividend. Well, the company paid 3,000 to the shareholders. Obviously there's only one shareholder, Adam. Cash is going to go down. Stockholders' equity will go down as well. Why? Because when you pay dividend, the equity of the company goes down because the cash is leaving the company. However, the dividend account always go up. The negative is to reflect the reduction in equity. Now, from a debit credit perspective, we're going to credit cash because it's going down and we're going to debit dividend, it's going up. But it's reducing equity. It is going up, but it's reducing equity. That's why the negative. To journalize it, we're going to debit dividend, an account called dividend, and we're going to credit cash. Once again, we're going to post to the ledger and update our cash account. So this 3,000, again, a reduction in cash. Dividend is 3,000. That's the balance for dividend. The next thing we're going to do is robot Inc. We paid us 6,000. If you remember, we did 10,000 worth of work with the robot and he said they're going to pay us. Well, they paid us 6,000. That's good. Cash will go up by 6,000 and account receivable will go down. Usually students, what they do, they make the mistake of increasing revenue. Now they paid us for services already performed. They paid us for services already recorded as revenue. We cannot record the revenue again. So one asset goes up. The other one goes down. So we're going to debit cash, credit receivable. They're both assets, one going up. The other one goes going down. This is going up and this is going down. They're both assets. Again, from a T-account perspective, what we do is we add up all the debits and add up all the credits. And now also for account receivable, we add up all the debits, add up all the credits. Automation, robot Inc. still owes us $4,000. We still have an account receivable of $4,000. Now if we add up all the cash balance, we should have in total net balance of 38. So they all add up to 100,000. And if you add up all the credits, they add up to 32,000. 32 minus 100 will give us a balance of 68. The account receivable balance is 4,000 and you could go back, hopefully, kept track of all the balances, dividend 3,000, so on and so forth. What you do next after you are done with journalizing, you prepare something called the trial balance. And this trial balance, I'm going to call it specifically unadjusted. So what I'm going to do now, I'm going to list all my accounts with all the ending balances. Cash is 68,000. I just showed you that cash is 68, that's the balance, that's a debit. Account receivable is 4, supplies is 3, prepaid is 12, equipment is 9. So what you do in a trial balance, assets are listed first. Then you have the liabilities. Then you have the liabilities including unearned revenue. Then you have the equity, then you have the revenues, then you have the expenses. All with their normal balances, assets will have a debit balance, the liabilities will have a credit, common stock is a credit, dividend is a debit, revenue is a credit and expenses are a debit. You add them up and the trial balance and the trial balance, there is a reason why it's called the balance, total debits equal total credits. All what we did now is we went through a series of transactions, showed you how do we end up with a balance, with a trial balance. In the next session, I'm going to show you that this is unadjusted and in the next session we're going to adjust the account receivable. This is, we need to update this, we're going to update supplies, we're going to update prepaid, we're going to update the equipment, we're going to incur expenses for the notes payable, we're going to update unearned revenue, we're going to update service revenue, we're going to update salaries and wages and maybe add one or two more expenses. So in the next session, I'm going to say this is the trial balance that we prepared in the prior session. Now I'm going to add additional information to show you how to prepare the four types of adjusting entries. At the end of this recording, once again, I would like to remind you whether you are an accounting student or a CPA candidate. These series of the next five lessons, four lessons are basically the bootcamp, the basics of the basics of accounting, whether you are an accounting student taken intermediate accounting or you are studying for the CPA FAR exam. Keep your course, I don't replace it. I am a useful supplement to your CPA review course. Good luck. Study hard. The CPA is worth it. Invest in yourself. Don't shortchange yourself.