Assets, Liabilities, and Equity
all right. High energy, the last segment of the day. Assets, liabilities and equity. Now, we've touched on this already, but we're gonna I'm gonna make some distinctions here, and I'm also going to do some stuff with cash. Now that we've got some cash transactions in QuickBooks, I want to talk about cash and reconciliations a little bit. I touched on the first point at the end of the last segment. Which is that, and I'm gonna turn this slightly, Guys. How much? Bryant? Good. All right. Current versus long term is the first bullet point there. Current versus long term balances. Balance sheet accounts in QuickBooks. And I'm really gonna try toe go put a finer point on those chart. Those accounts we see in the chart of accounts Big One for this section. Big, big, Big Krul's and Deferrals, which relates to the matching principle that we covered earlier in the course posting a cruel and deferral activity to QuickBooks. Okay, next slide, you'll see again the eagles EMC sward of accounting. T...
he assets equals liabilities plus equity. I'm gonna say this again because I think it's an easy way to start solidifying that formula. If you sold all your assets. You own a pizza parlor. You sold all your assets, the tables, the ovens that shares everything. You had a pile of cash and you paid off all your liabilities. The bank loan, the payables, everything you're severe vendors. The pile of money that's left is your equity, which is ownership. All right. Now, you will also hear people describe equity is book value, and it's it's not quite fit if it But for those of you in the audience, if you hear somebody start tossing around the term book value assets equals liabilities. Plus, equity is on the screen Now. In regular business parlance, you may hear this referred to as book value. Also, okay, book value instead of equity. That's not really an accounting convention. That's something that you'll hear in business generally. Okay, so I'm just gonna make that point. Now Let's talk about current versus long term. I touched on it when we were in QuickBooks, and we were looking at a balance sheet last time, and this has to do with how your balance sheet is organized, and we've looked at the balance sheet numerous times. So if you've been watching some of this may start to be sinking in and you'll start to be able to visualize what I'm gonna describe. Here's a balance sheet. We have assets at the top, right underneath assets. We always put current assets. I'm gonna abbreviate current assets, cash or anything you expect to convert to cash within one year. What could that be? Accounts receivable. Does everybody hope to collect their accounts receivable within a year? If I don't collect my account stable within a year, I'm gonna be in big trouble, right? We expect to collect accounts receivable really? Within 90 days or foreign accounting terms. We consider it a bad debt receivables. How about inventory? We've mentioned that Candace has a business where she has inventory. She probably expects to sell her inventory within 90 days within a year, which is why accounts receivable and inventory or both current assets. I'm gonna put a slash, are for accounts receivable inventory because what I'm trying to do is to start painting a picture of what a balance sheets gonna look like. Current long term asset on asset that will not be used up or converted cash within a year. Fixed assets fixed assets tm for term long term fixed assets. So if you're a photographer and you've got a camera or you've got a drop, you know that umbrella drop cloth and I called it can't remember assets that you're going to use in your business for a year or more. We classify those long term assets. Okay, long term assets. That's the asset section below it is liabilities. Current liabilities looking at the screen. But it's not there liability or debt. You expect to pet you convert meaning paying cash convert paying cash within a year, your accounts payable. You're gonna pay within a year. A little tricky. The current portion of your long term debt, meaning the portion of your debt that's due within a year. In spite of being a business person, I don't really like confrontation, and I'm not a negotiator, so we have to replace one of the cars. My wife, business partner, the majority owner of her firm, is a guy my age who loves to negotiate. He's going to go with my wife and negotiate our car six car purchase because I hate doing and she said, Would you mind if I asked, You know my friend to go with this, and I should sure knock it out. Whatever you guys, I don't care. Just tell me what color of that. So I think about a car loan. The amount of your car loan that's due within a year is the current portion of your debt. So current liabilities include the current portion of your long term debt. So if I put current here AP for accounts payable and the current portion of long term debt long term liability, the portion of the car loan that's doing a year or longer Okay, loans lt. Long term loan. I ran out of room. Okay, Loan. Okay, Way back. Go back in the way back machine. What was that cartoon where they were? They always win in the way back machine with Sherman. Was that cartoon? I don't remember somebody's remaking and do it like a kids movie, and they go back on the way back machine the way in the way back machine. In an earlier segment, we talked about how to match revenue and expenses, and I say in italics, revenue should be matched with expenses that are used to incur to produce the revenue now. We spent time on QuickBooks today. QuickBooks. You'll see an accounting system does not directly match these up, doesn't it? The in the balance sheet now. The income statement. We've got revenue for the period expenses for the period profit that matches up revenue and expenses. Income statement. The balance sheet. This document is not matching up Revenue and expenses isn't. You've got to go look in the income statement to find that. Okay, let me take that a step further because there's a point that I want to make. I've got an income statement. Now bear in mind before I forget. QuickBooks also calls it QuickBooks. Calls it profit and loss. It's the same thing. Please remember, when you go to the report section of QuickBooks, don't be panic that you don't see the word income statement. Profit loss. I've got some revenue. Remember the photographer that went to New Zealand, then sold the pictures in December? Keep that in mind for a minute. Let's say it's the July income statement, and the photographer has incurred travel expense to take those pictures. Say it's $ but he hasn't sold the pictures yet because it's not December yet generally for this course anyway. We record expenses when we incur them. That is when we write the check generally. So he's going to record that travel expense on the July income statement, even though he has no revenue yet. Okay, now it's December. He sells the pictures from July in December. He's already recorded this expense, so the December income statement shows revenue. But the expense has already been recorded. So the point I'm trying to make is is that when you look at an income statement, it does not indicate when exactly the revenue occur. Because we're just way having expensive July were recorded in July. If we have mileage expense in August, it gets in expensed in August. We expense immediately. Here's why accountants, if you don't know, already are conservative. We have a principle of called the principle of conservatism, which says, When in doubt, do the thing that creates the less profit. When in doubt, when you have to make a judgment, do the the accounting that creates the less profit, which means we recognize expenses immediately, and we put off recognizing revenue. Until we're sure we've delivered the product or service, we expense stuff immediately when we write the check. We may, however, not recognize revenue until later. Okay? Recognizing revenues probably beyond the scope of what you need to know. When you send somebody an invoice, you recognize revenue. Okay? Yes. Um one. How do you handle, like, deposits or in the instance, up like a nonprofit. How do you handle, like, restricted buns funds, You know, that have to be used for a certain purpose. But like that purpose of the happened yet, Okay, I will cover customer deposits in just a minute on your question about restricted funds. Are you the nonprofit? Yes. Okay, let me touch on that just briefly, because that's worth mentioning. Nonprofit accounting is completely different, but it's worth spending just a minute on. In case you guys get clients that are non profits or if you form a nonprofit yourself or if you do charity work for Anambra in the balance sheet of a nonprofit, the assets are called funds. So the cash the assets you own perceivable that nonprofit could have receivables. Here's the big point that Jackie O just mentioned, and then I'm gonna relate it to a client I used to have we have restricted funds. We have unrestricted funds. As Jackie O just said, those restricted funds are donated and contributed to the nonprofit for a specific purpose and have to be used for that purpose. Okay, so when I worked on Trail Net in ST Louis, shout out to trail that love trail hiking, biking trails around ST Louis Great organization. They got donations from entities, state governments, local governments, foundations, endowments and most of them had strings attached. They were restricted funds, which said, You have to spend this on this bike trail or you have to spend this on ride your bike to school, which was a program they had. So, uh, ask your question. Get around about respecting funds. How restrictive funds can be reported as faras like on that balance sheet. Because you're not. You haven't used them yet, so they're not necessarily like revenue per se. I think Jackie O. It's beyond the scope of this class, I think. But I do want to talk about it because you brought it up restricted versus non restrictive funds for just a minute. Because it's important. Unrestricted funds can be used for any purpose. Now nonprofits does anybody know somebody works for a nonprofit? I feel like sometimes I'm working for a non profit, even though I'm not supposed to be one. My wife. She'll be here in a while. Sometimes guns, a nonprofit, any purpose. Nonprofits struggle with this issue because they are struggling to get people to contribute money that is unrestricted so they could just operate and pay their bills. Most people, when they donate money, wanted to be restricted for some purpose, right? So nonprofits struggled to get enough unrestricted money. So a lot of times will go to donors and say, at least in my experience, I know you want to name that room after your grandfather and we can do that and that money will be used for that purpose. But can you also donate some unrestricted funds? Because we've got to make payroll next week? Okay, really get point. It's worth mentioning. Why do we go through this match? In principle thing, it's the only way to measure profit on a particular sale. Going back to the photographer. How does he know how much money he made? He matches the December revenue with the expenses that he incurred in July it does not appear directly in his income statement for the income statement for the whole year it would. But if he looks at the July income statement that has the expense, if he looks at just December, it has on Lee the revenue and no expense. He did a look at the whole year to see the match. Okay, eso There's timing differences here. And this is when you guys start pulling reports. This is an issue timing we have mentioned in class people that are in cyclical seasonal businesses like photography in ST Louis with the big variations in weather are our big wedding season is, you know, spring, early summer. So if you're a wedding photographer in ST Louis and you're looking at Revenue May June, July August big revenue here. If you were just pulling your income statement for those months, you'd see big revenue. However, under expenses to prepare for wedding season, you may be incurring big expenses in March and April, big expenses in March and April. So unless you look at a nen come statement for the whole time period, if you only look at the revenue here or if you only look at the months with the expense here, you're not going to see the whole picture is you see what I mean? Look, for the whole period, whole period cash activity for revenue and expenses maker may occur in different periods. And now I'm getting into this really important area. You will remember before we talked about cash accounting versus accrual accounting. The solution to matching up your revenue and expenses is to use accounts. This is new called a cruel and deferral entries. A cruel and deferral entries. Why am I doing this? Those of you in the audience are doing this so you can match your revenue with expenses and find out what your true prophet iss so that if you're in the wedding business and you have all this revenue of one period and you incur all the a lot of the expenses in a different period, you can put the whole thing together and match revenue and expenses. Okay, that's where we're going. My business When I trained NBA's online, almost all my tutoring now is MBA students and people preparing with CP exam between finals the first week of December and the third week of January that business completely dries up and goes away. Even though MBA programs now are running sometimes around the clock, they don't take a A winter break, I can tell you, is like the leaves turning on the trees between December 10th in January, almost 30 it. There's no business. That's why this was a good time of year for me to come out to Creativelive because my tutoring business hasn't kicked up yet. So everybody got seasonal businesses. So now we're gonna talk about how you do it. The prepaid insurance we already did where we pay insurance premiums before the month of coverage. And we said that was an asset. I'm gonna do a different one here in a minute. Pre payment prepaid is an asset because you don't have to pay the premiums later on. Let's do another one prepaid rent. It's an asset account because it's money you don't to pay later. So you you signed a new lease. This is usually when the prepaid rent occurs. You signed a new lease. Part of the lease requires you how many event an apartment where you had to do this right? You gotta pay a month's in advance or maybe a security deposit. Let's talk about paying a month in advance and let's set aside security deposit for a minute. You pay $500. Can you write an apartment in San Francisco for bucks? What's the parking? What's your going rate, Parkins. Thank you. Parking space. We debit, We increase in asset prepaid went five went There's me with Barbara Walters again. Went what? Cash goes down. It's an asset. It goes down by crediting prepaid rent. Asset goes up cash asset goes down prepaid amounts like insurance and, like rent become expenses with the passage of time. Okay, um, this happens. I'm gonna put a date by it on January 1st And we're going to say at the end of January that prepaid renters are rent payment for the month. So the time is going by and now I have to move it even before I look at numbers. Forget numbers for a minute. If the time has gone by, shouldn't I expensive? Sure, because the whole reason I rented the place was toe have a space to run my business to make money. So as time goes by, I need to take it out of prepaid rent. I reduce the asset on January 31st and it becomes rent expense on January 31st. Okay, Would you do the same thing for something like gas? If you know, you fill your tank up twice a month and you know that costs 200 bucks. Do you and your pre pain for gas before you actually drive your car and you use your car for your business? It's, um theoretically, that's correct. It's too difficult to keep track of which goes to a lot of things in accounting where if the dollar amount is small enough, we're just gonna expensive when we pay it. You know, unfortunately, explain what the advantage of is of doing this one month before, as opposed to just putting it straight to the expense. Good point. So the question is, how come you just why did we do this? Why didn't you just expensive and pay cash? I'm assuming that your pre paying rent you're paying rent January 1st for the month of January. So you're paying for something before you've incurred the cost. Which is why I have to do this shift over here. Okay. Now could you? In a small business to keep it simple? Just say I'm just going to expensive. You could You'd be a little bit off technically, but you could now a company of any size were counted as a pre pit. Okay, so what I did was what's on the screen here? I prepaid something. Rent paid cash, just like on the screen here. I recognize an expense. In this case, we're in expense. And I removed. I decrease the asset. The prepaid insurance. In this case, I reduced an asset prepaid. Right. Okay, that one we've seen the next one we have not seen. Okay. Customer deposit. Why is it a liability if a customer, how many of you deal with customer pot deposits? I suggested earlier that in order to find out if a new client is really willing to pay asking for a deposit, I always ask for deposits, not my ego. It's just me making sure that somebody is willing to pay me that deposit is a liability as you see on the screen. Why is it a liability? Because if image my company doesn't provide the product or service that deposit is owed to the customer. I gotta pay him back. I get Sports Illustrated. Uh, I get for my birthday every year, I think. And so if you send in a check for $40 for your Sports Illustrated Sports Illustrated going to record that as a deposit and as they send you magazines every week, they're gonna move that into revenue every week. And that's what we're going to see in a minute. So $50 is my deposit that's on the screen there. And this one, By the way, I believe I saw in QuickBooks as an account when we ran through the chart of accounts. This is a liability account, you know. It looks unusual, right? Unearned revenue could also be called deposits has the world revenue, and I'm confused its liability because you have to pay the money back if you don't deliver the product or service because it's a liability account we know from the assets equal liabilities plus equity. I credit to increase a liability account. $50. I've increased a liability account by crediting I got cash increased cash. When you deliver the product or service, you move the unearned revenue into revenue. So maybe it's photo revenue for image photography. $50. I reduce the liability account $50. I move it into revenue debits, equal credits. I've got debit, debit, 50 Credit credit 50 50 And it balances. What did I just do? I took a customer deposit. I put it in as a liability account in red, and then I circled that when I delivered the product or service, I took it out of revenue. I took it out and I moved into revenue. Now let's talk about revenue recognition just really quickly. You need to have a consistent way of recognizing revenue, and it doesn't. As long as you're consistent, you're probably going to be pretty good. You might recognize revenue when you invoice the client. You might recognize revenue most commonly when you deliver your product or service when you send them the disk with the pictures on it. When you show up with the artwork, whatever it might be. Okay, you might. If there's a risk that they're not going to pay A you might not recognize revenue until you get the Benjamins. You might not recognize revenue until you get the coin because you think there is some risk that they're not gonna pay. Now, that brings up a question. Why would you? Why would you do business with a company where there's a risk they're not gonna pay? It might be a short term thing where you've been doing business with them for five years, and now they're in financial crisis. And your lecture? Yeah. You know, Joe's Joe's a good credit risk. I'm gonna do business with Joe, but I'm not gonna recognize the revenue until he pays me. Okay. Any questions on that one? Let's look at the screen. The first entry we post the customer deposit increased cash increase, a liability account. Next screen, the photos air delivered. We recognize the revenue. We reduce the liability account. And again, it's now goes to a zero balance we posted to revenue