Business Formation Accounting
Let's talk about how we can tie what's going on with the partnership into what's going on from an accounting standpoint. Okay, what's going on in the partnership with what's going on in accounting standpoint? And this is a good point to tie in that discussion that we had about debits and credits. And this is the reason that I have a white board up here today because I discovered when I was in the shower where I get all my good ideas, it was it would be easier with Flipboard somebody, Creativelive told me. Now there are awkward notes where you can write your notes in the shower. Amazing. Cause I don't know about you. I'm not really awake until I'm in the shower. There's about I have the budget for about 10 minutes of just generally stumbling around, just like try and put my can get my context and you have to go through that time period that we get in the shower on things kind of boot up. So I thought this would be easier. So what I'm gonna try to do is to take those debit and credit con...
cepts in the T account concept and then use it to explain what's going on in accounting standpoint with these 300 without losing everybody and having you run screaming out of the room. All right. This is why we needed the flip. Sure, David. To the left, credits and right. This is a T account. It was hard to show on a slide. It is a T account for cash. Okay. Name of the account of the top cash. Debit left credit. Right. Cash is an asset account. Okay, this is Joe's capital account. Capital accounts Air used for sole proprietors. Capital accounts are used for partnerships. Debenham left credit on the right. I'm gonna put d and C. You will notice the debit is still on the left and credit is still on the right. Jos Capital account is an equity account. Equity. Let's say that Joe puts money into the business. $ we debit cash to increase it. $5000. Here's where I tend to lose people. We credit capital $5000. We increase equity accounts by crediting That's actually an increase. Do one more time debited left cracks and right. In both cases, I increase in asset account by debuting I increase in equity account by crediting Now let me tie it to the equation that we had yesterday. And this is where I think I lost people. We had a formula in an earlier segment called Assets Equals Liabilities Plus Equity, and I said that these amounts have to balance right. We increased in asset account $5000. That's on the left. We increase in equity account $5000 on the right, The equation balances and debits and credits or in balance, this is the point that I couldn't get across yesterday on my slides. And I came to this realization in the shower at my very nice hip hotel. That's cash in his pocket. Let's do that example, OK, because there's a couple steps to answer your question. So Transaction number one and again I'm not. I don't want to get to Matthey Accounting he, but I think it's a very good point. Thank you. When would this account be debited? When Joe takes money out of the business. Okay, Joe takes $1000 out of the business. A debit reduces an equity account. Joe takes money out of the business. A credit reduces an equity you can reduce is a cash account. So we have credited cash. 1000 cash went down. I'm sorry. Credit. Let me do two things. The cash account went down $1000 so assets went down. That's what I was starting to do over here. And I didn't explain it. The capital count went down. $2000 equity went down. Is it still in balance? Yes. Yes. The formal is still in balance. Okay, The other thing. That's nice about T accounts, and it's tough to see it on QuickBooks. It's happening on QuickBooks, but it's tough to see if these were the only transactions for the period. Cash would have an ending balance of $4000 5 minus one Equity would have an ending balance of $4000 5 minus one. You'll notice that the cash balances a debit and that the capital balances a credit. I know this is Greek to most of the audience. I'm on Lee trying to take this as far as I can to get it to the point where you can use it. What I'd like to do is is to take this and I'd like to put it into QuickBooks. Yes, this applies to sell proprietorship and partnership, but not corporation. It's different for corporation. Correct. Let me do in fact, employees breath it up. Let me do how this would look for Corporations Corporation. Slightly different. Same type of transactions, slightly different. Damn it. Still on the left credit still on the right. And you're always using positive numbers. Never negative numbers for this class. Yes. Okay for this class, Yes. And yeah, I'll just leave it that stick with positive number. We want to raise money to run our business again, but this time it's a corporation. Debits on the left cried still in the right. This time we use an equity account that is not capital. It's called common stock. Now we're going to see on a later slide that it's there's a couple of steps to this, but just to keep it simple for now, if Joe buys $5000 worth of common stock in the corporation I debit to increase cash $ I credit to increase common stock. $5000. I got a hold this to get the There we go. Assets equal liabilities plus equity cash went up $1000 went up $5000. That's an asset. Common stock and equity account went up. $5000. That is an asset. Debits, equal credits. Still magic. The magic of account. Okay, because in the corporation, the money, steps or market Or is that a c trying to use on the right way to stop the course? Let's go back to 2nd 1 Welcome creative ways. Go away. No, I'm sorry. Credit. Okay, let's go back in the time machine. Devin left credit on the right. All right, Now we want to pay an owner a dividend. A dividend is going to reduce equity. We're gonna pay him a $100 dividend. We're going to debit equity. This is an equity account. Also E for equity, $100. And we're going to reduce cash by crediting $100. Equity goes down, cash goes down. Does the formula still balance equity with essence with down $ equity went down? No, $100. Yes, Shareholder. Do you have a definitive countering shareholder? It's a good question in a corporation, it's not in the accounting records, but there is a bank that has an account for each shareholder, but it doesn't make it to the accounting records. Now, unless you've got a really small business and there's three shareholders otherwise no. Okay. Is that okay? Assets and both sides of equal sign balance. $49. If this was the end of the period and we had a total up our cash, we have a cash balance of $49. If I netted out my equity and I took the common stock less the $100 dividend, I'd have $49 equity because these two accounts go together. Okay, It's a lot. We're going down Accounting road kind of heavy, but it takes everyone it takes accounting majors multiple times again. My struggle in this course is to try to give you just enough that you need without giving you all your accounting merit badge because you guys don't want an accounting mira pageant. Okay, maybe you do one accounting urban. Let's say I want to do a transaction in QuickBooks. Okay. Picking up where we left off yesterday in my head, all the way. I like it. It's up to your own preference in a transaction like this, where it's not really a sale when it's not an expense. I would go to create journal entry checking is my cash account. I'm gonna debited to increase it. $ go back to my previous example, because my example here is a sole proprietorship. I need a credit to make it balance. Right, Because at the bottom, we need to see debit sequel credits. I'd like an account. That's an equity account that indicates the owners investment I scroll down. Remember that the chart of accounts are in order. Assets liabilities. Okay, here's equity down here somewhere. Equity right here. I'm gonna hit an account called Owner's Equity because there's only one owner, Sarah, and we're gonna credit her account by $5000. I really don't need him. And I'm just gonna call that investment in businesses. I said I would hope that you use a memo entry every time I'm even gonna put the date. I'm gonna call it 1 20 to keep it simple. All right, I'm going to copy that explanation down to the second part of the Internet. Why am I doing it? Because when you pull up reports in here, you do not always see both sides of the entry. If you pull up just cash, you're going to see that explanation. If you didn't put the explanation on both checking and owners Equity, if you pull up cash, you're not going to see the owner's equity side of the transaction. See what I mean you needed on both parts of the entry? Okay, we use that name field for if you want to put in the name of a vendor or a customer when you're making a journal entry now, so shouldn't you put Sarah over there? There's only one owner, which is why I just don't. OK, you could, though, and you could make an ideal. That's a good point. You could make it account up Sarah's Equity Joe's Equity Paul's Equity separate account for me because, as I mentioned yesterday in probably the most brilliant part of this presentation, I'm sure you remember it. Oh, yeah, I talked about the fact that dealing with this capital the next thing I'm gonna cover is challenging. It's challenging, and you guys need to know this and again. We're taking one more step down accounting road, and I'm trying not to go too far okay. Sarah's our owner of image photography and Josh just suggested. Well, shouldn't we have a separate account for the owner? And ideally, you should I just put on his equity cause we have one owner. Okay, Deb, it's still on the left. Credits still on the right. On my deathbed death debits will still be on the left craft. Still be on the right. OK, I suggested my Children that when I get older, they could just take me up to Alaska and just put me on an ice floe and just push it. That's how bacon take care of me. And my old age debited left Crestone, right? It's an equity account. We increase the account by crediting. So I'm gonna put a little a row of we increase at capital accounts by crediting we reduce them by deboning What we just saw on this journal entry waas. I'll show you how we get to it. Watch this. If I go to home page and I go to what I think is a clock and I look at recent transactions and I'm gonna click on this journal entry just made there's the journal entry. Let me do show you how I got there again. Clock Recent transactions journal entry. There's the transaction. So how did we increase equity? We credited $ because we put money in the business. Now let's say that Sarah are owner takes money out of the business Now for a sole proprietorship. A partnership with a capital account. You can call it salary for your own purposes. It's just taking capital out of your account. It could be profit. It could be some of the money you originally put in. Now, we talked yesterday about a loan somebody brought up alone. Should I call it alone? To my business or not? And I suggest that you never call it alone. You just put the capital in. Don't call it alone. It gets its ash. Your account, It gets complicated. Sarah makes a withdrawal of $500. We reduce the capital account by deboning. Now we're gonna do it in QuickBooks ex out of this transaction X, create journal entry. Now, what I'm gonna do is record the fact that owners equity is going down and we're gonna pay cash to Syria. The owner Click on my accounts. Scroll down. There's asset there's liability. There's owner's equity. In this case. I'm going to reduce it by debuting 500 bucks. By the way, everybody in the audience and live audience is sitting at the edge of the receipt on the couch. I know you can't see it at home. This is how I entertain myself. All right. Gotta do some checking. We credit it 500 bucks because we're paying her right. I'm gonna call it owner withdrawal. I'm gonna breathe eight withdrawal with W Draw of capital. I was very impressed when I went into the green Room and one of the people who was working on the other broadcast is going on. Remembered my name. That was really kind of cool. She has a good memory, all right. Just like we've got here. We're debuting to reduce her equities, which is the same thing as capital equity in Capitals kind of equity account. We are crediting cash on the screen. So if I had a tee up count up here for cash, which I probably should were crediting that account and we're reducing cash and we're reducing capital, that's transit. Could you do the same thing by writing an invoice to Sarah and having it on the invoice. Access these accounts. I would not do it on an invoice because in invoices to consider to be a sale, I would keep that separate. That's a good question. Okay, so what? We just did waas We had Sarah put capital into the business. Might be cash. Might be film equipment, photography equipment, I should say. And then we had or take money out. Now, let's look on QuickBooks and see what happened. We know that capital is an equity account. That's a balance in the balance sheet from our formula. Cash is in the balance sheet. It's an asset account. Remember, Assets equal liabilities plus equity, cash, asset, capital equity there in the balance sheet. So let's go look at the balance sheet. I got a couple ways I could get there. I'm gonna go to reports. I don't know why I'm leaning over the table so far. Reports balance sheet. We found out yesterday that you can click on numbers in this report. Okay. Another thing about accounting is I say this all the time. Set the numbers aside for a minute and think about what's going on in the accounts. All right, we got also bogged down on the numbers. What about the accounts? Here's what I mean. I know from this transaction that checking went down by $500 when I when we paid her the cash. So I know in the checking there must be a reduction of credit for 500. And I also know that in the equity sections somewheres, I got a stroll down. I'm going to see equity change for that $500 payment. Also, let me make sure I've got all the days in here. I'm gonna go out to February. Okay. Run the report. Let's click on check it. Checking shows all my transactions. Look at the bottom here. Somebody said you're not using negative numbers in this report. You're going to see negatives and positives the in and outs for cash. But look what's going on. The bottom. We had an investment in the business of 5000. We had a withdrawal of cash of 5 500 So my cash adjusted. Now, I'm a little wondering about the capital account. The owner's equity, cause that doesn't look right to me, but we'll pull it up. Oh, no, it's right. So because I had a prior transaction, I forgot So Owners Equity section There's the investment in the business. Increase positive number. Increased equity pay out $500 Reduced equities. Let me do that one more time and try to tie the two together if I want to see this activity that I posted in journal entries in QuickBooks. In here they are both balance sheet accounts. Cash is an asset owners equities equity. I pull up reports and I go to balance sheet if I click on cash. While law investment in business increased cash. 5000 that we saw that on the board. Pay the owner reduced cash 500 Saw that on the flip chart. Go out of the report. Back to summer report. Go down to Equity Owner's equity. $5000 invested in the business increased there on the screen. 5000 paid her out. Withdraw Negative number reduced it 500. So what I've tried to do is to take the debit credit T accounts stuff, put it in a journal entry and show you where it is on QuickBooks. That is a lot. A lot to throw it. You guys in the period of time. What questions do you have? Maybe you have. I know that's drinking out of a fire host to an extent. Like through transactions, possibly on the left hand, columnar under the right here. No, Keep going. You're going Get going to go in here banking. That's like a banking transaction. Let's click on it. We're going to the credit card, debit, the download stuff the moment you have downloaded transactions in this section. So this section is really for downloading activity. But actually, it's kind of nice that you went to this because you can accept transactions or un accept them, depending on whether they're accurate or not. But to answer your question, I would prefer to go home, create and remember, this is an expanded warned Oh, I would rather be create right here. Show more journal entry for this stuff. Now again, as I mentioned yesterday home, if you're going to do invoicing, you might want to go to transaction sale to do a new sale invoice. You may want to go there instead. As I said, I'm old school and I'm all about going to the Create journal entry because back in the day. That's what we did. We didn't have all this tech. We didn't have go to sales, created envoys. We didn't we didn't have it. It's old school. Other questions. We had one come in on the Internet. Jo Jo had asked. If we use that create button for sales invoices, etcetera, then the journal entries are automatically created and both sides of the equation or bouts forests. And they're basically asking, Is that correct? That's exactly so. Let's talk about that for just a second. If I go to sales, create new invoice that gets posted to sales and accounts receivable automatically, I'm gonna do some of this later in the class. I just didn't want to go that far yet. If I go to expenses, create a new expense. If I create inexpensive here, it's gonna get posted an account payable automatically. Yes, the answer is yes. What else You know, you could do accounting all day long like this for a living. Isn't it amazing? How much fun would that be? What are you doing today? Accounting. What about tomorrow Accounting? They want to know what if the two partners have not invested any money just their time. And the business is making profits. One partners drawing salary. But the other ones not. Does that affect their ownership split Going forward. I'm gonna ask you to read that one more time. Yeah, no problem. Could you run it by me? Yes. So they're asking about what if two partners have not invested any money but just their time. But the business is making profits. So one partner is drawing salary, but the other one does not. Does that affect their ownership? Split Moving forward. Who? That's a lot. The springs have a critical point which I haven't covered, which is in accounting world in accounting world. In a business, you have to have a number in here for equity. Eventually, however, on this is tricky for this class, it's I'm going to see. I'm going to say that it's possible to start off and start doing business and having come and pay expenses and have income with no equity created at the beginning. In other words, there's no contribution of capital and stuff. All right, here's how that might work. How am I gonna do this real quick? You have $100 in revenue. You have. We credit to increase revenue. You have $50 in expenses. We debit to increase expenses. Okay, that means you have a profit. 50 bucks. And we said There's two things you could do with the 50 bucks. You could pay it out to the owners. It would be a dividend to a corporation. It would be return to Capitol to a sole proprietor partnership. You can keep it in the business, though, right? If the part, if they have a two partners, have profit, they have a profit. They can keep that in the business. And if they keep it in the business, its equity. They created equity by creating profit. Okay, so that's how Capital gets created. Okay, now let's say a partner is drawing out. So we have plus 50 for equity, and then we have a partner pay himself 10 bucks, and now there's only $40 in equity. Okay, that salary in a partnership that just would reduce the capital account for that partner. So that's subtraction of equity that just reduces Bob's equity. Bob's Capital. Let me do that again. So our partnership, nothing's deposited for equity sell some stuff, has some expenses $50 profit. That's equity. Keep it in the business. We paid $10 out to bob Equity for the whole partnership goes down. Bob's capital is reduced for that equity. Joe's Capitals unchanged. They both had 50 total. We pays 10 Bobs salary. Total equity goes down. Bob's capital conquers down. And that's the way a lot of businesses start. That's fine, particularly in fields where your expertise driven and you're not manufacturing anything. Okay? Uh huh. So, Bob in in Bill in the beginning have the discussion about who gets what? Yes. So the same thing with the person on the Internet, they need to agree in the beginning. How they each get paid. Absolutely Yes. Okay, so, you know, if I had a something I'd like you to take away from this and do is is just a Renee mentioned is please have that who gets what discussion. If you're gonna be in partnership with other people or start a corporation. The other thing I would like you to do is to consider being keeping very close track of what's going on on the money you put in your business and take out okay. I mentioned earlier in this segment. The importance for a corporation of separating business from personal transactions, which is gonna be something we go into our next second. All right? Yeah. It is about time. We have one more question for them to keep track of what they have. You should have. Ah, separate. Step it. Equity account. Each person you bet, separate capital account. So Bob has his Joe has is and they add up to the total equity.