Jacksonville CPA | An Accounting Lesson

So good morning and welcome to the podcast. My name is Brandon Mcelroy and I’m the president of Mineva, a Jacksonville based tax and accounting for. So today we’re going over different accounting transactions and analysis and we’re just helping our clients understand the basic finance, basic accounting concepts and what they need to grow their business. So if you’re a Jacksonville CPA is not helping you then give them a call, there are hundreds of Jacksonville Cpa out there and there’s only a few that are giving the clients the information they need to achieve their financial goals. So, uh, let’s, uh, continue going through this accounting lecture to get the information that you need to understand some basic accounting terms.

On October fourth, ABC company paid $600 for a one year insurance policy that will expire next year on September 30th. Now when we pay for more than one month’s worth of rent, or in this case one month, more than one month worth of insurance, then we record an asset, we call it a prepaid expense. And this is another one of these unfortunate terms, a prepaid expense such as prepaid insurance, prepaid rent our assets, and so we’re going to record a $600 deficit. We paid cash. And so here we are. Here’s my accounting equation. Now I’m on the left side of the equation. I’m stepping back here. Cash asset went down. We recorded prepaid insurance, which is an asset that increased. Okay, so total assets stayed the same. One asset went down by 600, one asset went up by 600. Total assets remain the same because we’re going to get one year’s worth of future benefit from this insurance policy. Now, each month as a month expires, we will adjust prepaid insurance because $50, 600 divided by 12 $50 worth of insurance expires each month and that’s another adjusting entry. And so we’ll record $50 of insurance expense and will reduce the asset prepaid insurance by $50 a month by month. Okay. Again, we’ll see adjusting entries in the following lecture

on October Fifth, ABC purchased a three months supply of advertising materials on account. I’m going to highlight these words here on account whenever you see the words on account that tells you that credit is involved. In this case, we purchased supplies on account from Aaron Supply Company for 2,500, so supplies is an asset, so assets increased and this is what’s called the vendor and vendors when we owe that money, when we buy on account, accounts payable increases. Okay, so when we have the money, when we purchase on account, we’re going to record an asset supplies and a liability. Accounts payable. We owe them that money. We’re going to pay that two of them in the future. If we provide service to one of our clients on account, then they owe us money and we would call that an account receivable. One of the things you have to be careful to do in the early stages is to find out what side of the transaction you’re on. We’re not accounting for the other guy. Now let’s just take this transaction for example. So

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We were accounting for our business. We record a purchase, the supplies and an account payable. Erin supply company would record a sale of inventory and they recorded account receivable, but we are not accounting for them. Let them worry about them. We’ll do our accountant on October 20th. ABC paid a $500 dividend to their shareholders. A dividend is a distribution of capital back to the stockholders. Okay. And so it’s a formal transaction. Remember, we’re not allowed to just informally take money out of the company for personal use. Pay for personal bills with the company bank account, but we can transfer money in and we can transfer money out. And this is how we formally take money out for the stockholders. Stockholders are the owners of the business. They want to take out money, they have the right to. So we’re not accounting for the stockholders. Personal affairs were only accounting for the business from the businesses standpoint. Cash decreased by 500. And we know that dividends are a reduction of stockholders’ equity, so assets went down. Equity Wind, okay. Dividends which are reduction to retained earnings, reduces stockholders’ equity, or we have one more transaction here. Employees have worked for two weeks earning $4,000 in salaries which were paid in October 26th. Okay, so we paid cash and we record salary or wages expense. The normal recurring cost of doing business. You have employees, they expect to be paid. Okay?

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expenses. Reduce stockholders’ equity. Now notice on the bottom here we summarize the effect of all of these transactions. Cash current balance is 15,200 supplies. Twenty $500. Prepaid insurance, 600 office equipment, 5,000 total assets equals 23,300. That’s the left side. We know the right side has to equal that amount to. We have liabilities, notes payable, accounts payable, and honor and service, revenue for liabilities total, it looks like 8,700 and then stockholders’ equity which is comprised of common stock and retained earnings. What we have to figure out what’s in retained earnings first, we know that revenues increased retained earnings expenses, decreased retained earnings and dividends, decreased retained earnings. So let’s figure out what, what is in the retained earnings account. At the end of this month, revenue is 10,000, expenses were 4,900 and dividends were 500. So retained earnings would have a total of $10,000 minus $4,900 minus 500. And it looks like that’s what $5,400 deductions.

So that’ll be $4,600 in Stockholm in retained earnings plus common stock. So total stockholders’ equity, 14,600 total liabilities, 8,700. And when you add those two together, the right side, which is liabilities plus stockholders’ equity, we have 23,300. And that’s the same as assets. We are in balance, which we need to be. Okay, so this is a good exercise for you to think about how any transaction affects the accounting equation. Now, again, this is not how we do accounting. This is a conceptual exercise to get you thinking about the accounting equation, which by the way is our balance sheet. Balance Sheet is assets, liabilities, and stockholders’ equity. Okay. Now we’re going to talk about how do we actually do accounting, and this is where the rubber hits the road and you have to memorize these next concepts, a t account going ahead to the board. Okay? Uh, you’ll, you’ll be seeing me shortly. This thing doesn’t move all that fast, but a t account looks like a capital t.

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right? Every account that we have gets its own separate t account and the t accounts are collectively found in the general ledger where we just say the ledger. So for every single account, accounts, receivable, supplies, inventory, land, buildings, machinery, accounts payable, notes payable, you get the general idea. Each one gets it’s own t account. So we put the name of the account.