[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:03.04,0:00:05.98,Default,,0000,0000,0000,,Hello I'm Professor Bryan Bucce. \NWelcome back.
Dialogue: 0,0:00:05.98,0:00:09.84,Default,,0000,0000,0000,,This is part two of our look at adjusting \Njournal entries.
Dialogue: 0,0:00:09.84,0:00:14.21,Default,,0000,0000,0000,,Hopefully this sequel will be an Empire \NStrikes Back type of sequel, rather than
Dialogue: 0,0:00:14.21,0:00:17.41,Default,,0000,0000,0000,,a Mannequin two type sequel. \NAnyway, let's go to it.
Dialogue: 0,0:00:17.41,0:00:23.02,Default,,0000,0000,0000,,Now we're going to do some practice with \Nadjusting journal entries.
Dialogue: 0,0:00:23.02,0:00:28.63,Default,,0000,0000,0000,,I will have a series of related \Ntransactions, some of them will be
Dialogue: 0,0:00:28.63,0:00:31.82,Default,,0000,0000,0000,,regular journal entries, regular \Ntransactions.
Dialogue: 0,0:00:31.82,0:00:35.29,Default,,0000,0000,0000,,And then we'll be faced with the question \Nof do we need to do an adjusting entry
Dialogue: 0,0:00:35.29,0:00:39.36,Default,,0000,0000,0000,,based on those, and if so, what would the \Nadjusting entry be?
Dialogue: 0,0:00:39.36,0:00:43.69,Default,,0000,0000,0000,,As always the pause icon will appear if \Nyou want to pause the video and try it
Dialogue: 0,0:00:43.69,0:00:47.18,Default,,0000,0000,0000,,yourself, or you can just roll through \Nand listen to the answer and try it later
Dialogue: 0,0:00:47.18,0:00:49.26,Default,,0000,0000,0000,,on the homework's. \NSo, let's get started.
Dialogue: 0,0:00:49.26,0:00:57.14,Default,,0000,0000,0000,,>>September 30th. \NBOC loans $100,000 to an employee at a
Dialogue: 0,0:00:57.14,0:01:06.78,Default,,0000,0000,0000,,12% interest rate. \N>> This is a regular journal entry,
Dialogue: 0,0:01:06.78,0:01:13.39,Default,,0000,0000,0000,,that's occurring during the fiscal year. \NBOC is loaning cash.
Dialogue: 0,0:01:13.39,0:01:16.48,Default,,0000,0000,0000,,Anytime you loan cash, cash is going \Ndown.
Dialogue: 0,0:01:16.48,0:01:23.09,Default,,0000,0000,0000,,We make cash go down with a credit. \NThe debit here is going to be an asset
Dialogue: 0,0:01:23.09,0:01:29.34,Default,,0000,0000,0000,,called notes receivable, because our \Nasset is that our employee owes us
Dialogue: 0,0:01:29.34,0:01:33.37,Default,,0000,0000,0000,,$100,000 cash back. \NThat is an asset because it's going to be
Dialogue: 0,0:01:33.37,0:01:37.98,Default,,0000,0000,0000,,a future cash inflow, we make the asset \Nincrease with a debit.
Dialogue: 0,0:01:37.98,0:01:45.55,Default,,0000,0000,0000,,>> December 31st, it is the end of the \Nfiscal year.
Dialogue: 0,0:01:45.55,0:01:54.09,Default,,0000,0000,0000,,No principal or interest payments have \Nbeen made yet.
Dialogue: 0,0:01:54.09,0:02:00.25,Default,,0000,0000,0000,,>> Now it's December 31st, so the \Nquestion is do we need to make an
Dialogue: 0,0:02:00.25,0:02:04.21,Default,,0000,0000,0000,,adjusting entry? \NWe do in this case because three months
Dialogue: 0,0:02:04.21,0:02:11.00,Default,,0000,0000,0000,,has gone by and we haven't gotten paid \Ninterest, but we our, we have earned
Dialogue: 0,0:02:11.00,0:02:14.74,Default,,0000,0000,0000,,interest revenue. \NBecause we have provided the service of
Dialogue: 0,0:02:14.74,0:02:18.31,Default,,0000,0000,0000,,having the money outstanding to the \Nemployee over three months.
Dialogue: 0,0:02:18.31,0:02:21.96,Default,,0000,0000,0000,,We have a contract where we're going to \Neventually get paid.
Dialogue: 0,0:02:21.96,0:02:24.23,Default,,0000,0000,0000,,So, it's earned and realize we get to \Nrecord.
Dialogue: 0,0:02:24.23,0:02:28.26,Default,,0000,0000,0000,,Interest revenue. \NRevenue's a credit account so we increase
Dialogue: 0,0:02:28.26,0:02:32.91,Default,,0000,0000,0000,,interest revenue with a credit. \NWe credit interest revenue for 3,000.
Dialogue: 0,0:02:32.91,0:02:37.20,Default,,0000,0000,0000,,The debit side is again going to be a \Nreceivable.
Dialogue: 0,0:02:37.20,0:02:42.72,Default,,0000,0000,0000,,The employee owes us $3,000 of cash based \Non this interest.
Dialogue: 0,0:02:42.72,0:02:46.06,Default,,0000,0000,0000,,So it's sort of like an accounts \Nreceivable, although we only use accounts
Dialogue: 0,0:02:46.06,0:02:48.40,Default,,0000,0000,0000,,receivable when we deliver goods to \Ncustomers.
Dialogue: 0,0:02:48.40,0:02:51.01,Default,,0000,0000,0000,,Here we want to call it interest \Nreceivable.
Dialogue: 0,0:02:51.01,0:02:55.33,Default,,0000,0000,0000,,Debit interest receivable to increase the \Nasset for 3,000.
Dialogue: 0,0:02:55.33,0:03:00.18,Default,,0000,0000,0000,,>>How did you come up with $3,000 as the \Namount of interest revenue?
Dialogue: 0,0:03:00.18,0:03:06.52,Default,,0000,0000,0000,,>>Okay let me show you. \NWe have $100,000 principal, 12% interest
Dialogue: 0,0:03:06.52,0:03:12.33,Default,,0000,0000,0000,,rate, so $100,000 times .12 is $12,000 of \Ninterest per year.
Dialogue: 0,0:03:12.33,0:03:15.76,Default,,0000,0000,0000,,Anytime you see an interest rate you \Nshould assume it's an annual rate, unless
Dialogue: 0,0:03:15.76,0:03:20.60,Default,,0000,0000,0000,,it says otherwise. \NIt hasn't been a year so we take 12,000
Dialogue: 0,0:03:20.60,0:03:26.07,Default,,0000,0000,0000,,of interest per year, times 3/12 because \Nit's been three months, and we end up
Dialogue: 0,0:03:26.07,0:03:30.26,Default,,0000,0000,0000,,with 3,000 of interest, for the three \Nmonths.
Dialogue: 0,0:03:30.26,0:03:36.27,Default,,0000,0000,0000,,>> January 6th, the employee sends a \Ncheck for three months of interest on the
Dialogue: 0,0:03:36.27,0:03:43.32,Default,,0000,0000,0000,,loan. \N[BLANK_AUDIO].
Dialogue: 0,0:03:43.32,0:03:47.56,Default,,0000,0000,0000,,>> So now we are back during the fiscal \Nyear, the next fiscal year, the employee
Dialogue: 0,0:03:47.56,0:03:51.94,Default,,0000,0000,0000,,sends us a check, means we are receiving \Ncash.
Dialogue: 0,0:03:51.94,0:03:56.28,Default,,0000,0000,0000,,Cash is an asset, goes up through a \Ndebit, so we're going to debit Cash for
Dialogue: 0,0:03:56.28,0:04:00.03,Default,,0000,0000,0000,,$3,000. \NAnd then we want to get rid of the
Dialogue: 0,0:04:00.03,0:04:03.86,Default,,0000,0000,0000,,interest receivable asset. \NThe interest has been received, it's no
Dialogue: 0,0:04:03.86,0:04:06.79,Default,,0000,0000,0000,,longer receivable. \NSo we're going to credit interest
Dialogue: 0,0:04:06.79,0:04:11.22,Default,,0000,0000,0000,,receivable to reduce this asset 3,000, \Nwhich just zeros it out because the
Dialogue: 0,0:04:11.22,0:04:14.24,Default,,0000,0000,0000,,employees fully paid us what they owe in \Nterms of interest.
Dialogue: 0,0:04:17.13,0:04:20.84,Default,,0000,0000,0000,,>> December 31st it is the end of the \Nfiscal year.
Dialogue: 0,0:04:20.84,0:04:27.56,Default,,0000,0000,0000,,During December, employees earned \N$400,000 in salaries, but paychecks do
Dialogue: 0,0:04:27.56,0:04:36.60,Default,,0000,0000,0000,,not get issued until January 2nd. \N>> So it is the end of the fiscal year.
Dialogue: 0,0:04:36.60,0:04:39.56,Default,,0000,0000,0000,,December 31st. \NWe have to ask ourselves whether we need
Dialogue: 0,0:04:39.56,0:04:43.03,Default,,0000,0000,0000,,an adjusting entry. \NWe do in this case because we've had
Dialogue: 0,0:04:43.03,0:04:46.77,Default,,0000,0000,0000,,employees work for us, wiithout getting \Npaid.
Dialogue: 0,0:04:47.86,0:04:51.32,Default,,0000,0000,0000,,Even though they haven't been paid, we \Nstill have to recognize an expense for
Dialogue: 0,0:04:51.32,0:04:54.67,Default,,0000,0000,0000,,the amount of salaries that they earned \Nduring December.
Dialogue: 0,0:04:54.67,0:05:00.64,Default,,0000,0000,0000,,So we debit Salary Expense to increase \Nthe expense for $400,000.
Dialogue: 0,0:05:00.64,0:05:06.87,Default,,0000,0000,0000,,But since it hasn't been paid in cash we \Ncredit a liability, salaries payable to
Dialogue: 0,0:05:06.87,0:05:11.24,Default,,0000,0000,0000,,create or increase this liability for \N$400,000.
Dialogue: 0,0:05:11.24,0:05:15.68,Default,,0000,0000,0000,,Which represents the fact that as of \NDecember 31st we owe our employees
Dialogue: 0,0:05:15.68,0:05:19.09,Default,,0000,0000,0000,,$400,000 cash. \NAt some point in the future, based on
Dialogue: 0,0:05:19.09,0:05:24.23,Default,,0000,0000,0000,,work they've already provided. \N>> What do you mean by earned salaries?
Dialogue: 0,0:05:24.23,0:05:28.87,Default,,0000,0000,0000,,I thought earned was one of the revenue \Nrecognition criteria.
Dialogue: 0,0:05:28.87,0:05:33.56,Default,,0000,0000,0000,,This is an expense. \N>>Yes, earned is one of the revenue
Dialogue: 0,0:05:33.56,0:05:37.69,Default,,0000,0000,0000,,recognition criteria. \NAnd from the perspective of the employee,
Dialogue: 0,0:05:37.69,0:05:41.66,Default,,0000,0000,0000,,the employee did earn revenue. \NThe employee provided service.
Dialogue: 0,0:05:41.66,0:05:46.64,Default,,0000,0000,0000,,They have an agreement to get paid. \NSo they have earned salaries revenue.
Dialogue: 0,0:05:46.64,0:05:53.51,Default,,0000,0000,0000,,The salaries revenue for the employee Is \Na salary expense for us as the employer.
Dialogue: 0,0:05:53.51,0:06:01.95,Default,,0000,0000,0000,,>> January second the paychecks are \Nsent.
Dialogue: 0,0:06:01.95,0:06:05.88,Default,,0000,0000,0000,,>> We've sent the checks which means \Nthat we've paid cash.
Dialogue: 0,0:06:05.88,0:06:12.33,Default,,0000,0000,0000,,Anytime we pay cash, cash goes down, we \Ncredit cash to reduce it 400,000, and
Dialogue: 0,0:06:12.33,0:06:16.56,Default,,0000,0000,0000,,what we are doing is, we are paying off \Nthis obligation or liabilities seller's
Dialogue: 0,0:06:16.56,0:06:19.38,Default,,0000,0000,0000,,payable. \NWe reduce a liability with a debit.
Dialogue: 0,0:06:19.38,0:06:24.72,Default,,0000,0000,0000,,So, we debit salaries payable 400,000, \Nwhich now zeros out that liability.
Dialogue: 0,0:06:24.72,0:06:29.87,Default,,0000,0000,0000,,We don't over employees any more cash \Nbased on work they provided so far.
Dialogue: 0,0:06:29.87,0:06:40.06,Default,,0000,0000,0000,,>> November 20th, BOC pays $10,000 for \NDecember's rent.
Dialogue: 0,0:06:40.06,0:06:47.75,Default,,0000,0000,0000,,>> This one, we've paid cash. \NSo, cash is going down.
Dialogue: 0,0:06:47.75,0:06:53.26,Default,,0000,0000,0000,,We reduce cash with a credit so there's a \Ncredit to cash for 10,000.
Dialogue: 0,0:06:53.26,0:06:58.65,Default,,0000,0000,0000,,We create an asset called Prepaid Rent, \Nwe debit the asset to increase it.
Dialogue: 0,0:06:58.65,0:07:04.36,Default,,0000,0000,0000,,This is the example where we paid cash in \Nadvance of getting the benefit of
Dialogue: 0,0:07:04.36,0:07:07.55,Default,,0000,0000,0000,,occupying the space. \NSo it's an asset because we'll either get
Dialogue: 0,0:07:07.55,0:07:10.79,Default,,0000,0000,0000,,to occupy the space or we'll get our \N$10,000 back at this point.
Dialogue: 0,0:07:10.79,0:07:17.17,Default,,0000,0000,0000,,>> December 31st, it is the end of the \Nfiscal year.
Dialogue: 0,0:07:17.17,0:07:21.03,Default,,0000,0000,0000,,Is an adjusting entry needed? \NIf so, what is it?
Dialogue: 0,0:07:26.15,0:07:29.99,Default,,0000,0000,0000,,>> So we do need an adjusting entry at \Nthis point, because what's happened is,
Dialogue: 0,0:07:29.99,0:07:34.49,Default,,0000,0000,0000,,December has gone by. \NWe occupied the space for December.
Dialogue: 0,0:07:34.49,0:07:39.07,Default,,0000,0000,0000,,The prepaid rent is no longer prepaid. \NIt's been used up.
Dialogue: 0,0:07:39.07,0:07:44.15,Default,,0000,0000,0000,,So we're going to debit rent expense. \NIncrease in expense to recognize that
Dialogue: 0,0:07:44.15,0:07:47.73,Default,,0000,0000,0000,,we've incurred the cost of rent for \Noccupying the space in December.
Dialogue: 0,0:07:48.83,0:07:54.34,Default,,0000,0000,0000,,We have to credit prepaid rent, reduce \Nthe asset because it's no longer prepaid.
Dialogue: 0,0:07:54.34,0:07:58.92,Default,,0000,0000,0000,,This has to be zeroed out at the end of \NDecember because we no longer have any
Dialogue: 0,0:07:58.92,0:08:03.71,Default,,0000,0000,0000,,future rent prepaid at this point. \NCredit in the asset by 10,000 Brings its
Dialogue: 0,0:08:03.71,0:08:13.65,Default,,0000,0000,0000,,balance down to zero. \N>> June 30, a customer pays BOC $60,000
Dialogue: 0,0:08:13.65,0:08:22.06,Default,,0000,0000,0000,,for a three-year software license. \N>> In this example we are selling
Dialogue: 0,0:08:22.06,0:08:26.26,Default,,0000,0000,0000,,software as BOC. \NWe've received $60,000 cash from a
Dialogue: 0,0:08:26.26,0:08:29.31,Default,,0000,0000,0000,,customer. \NAnytime we receive cash, cash goes up.
Dialogue: 0,0:08:29.31,0:08:36.62,Default,,0000,0000,0000,,We debit cash for $60,000. \NWe haven't delivered any of the software.
Dialogue: 0,0:08:36.62,0:08:41.51,Default,,0000,0000,0000,,We've, we've got the cash, the license, \Nbut, but we not get to recognize the
Dialogue: 0,0:08:41.51,0:08:46.30,Default,,0000,0000,0000,,revenue until all this three years go by. \NSo this is a liability at this point
Dialogue: 0,0:08:46.30,0:08:49.88,Default,,0000,0000,0000,,called honor and software revenues ,so we \Ncredit the liability to create it,
Dialogue: 0,0:08:49.88,0:08:55.21,Default,,0000,0000,0000,,because we have an obligation to deliver \Nto the access to the software over the
Dialogue: 0,0:08:55.21,0:09:01.59,Default,,0000,0000,0000,,next three years \N>> December 31st.
Dialogue: 0,0:09:01.59,0:09:05.70,Default,,0000,0000,0000,,It is the end of the fiscal year. \NIs an adjusting entry needed?
Dialogue: 0,0:09:05.70,0:09:13.93,Default,,0000,0000,0000,,If so what is it? \N>> We do need an adjusting entry
Dialogue: 0,0:09:13.93,0:09:17.42,Default,,0000,0000,0000,,because part of that three years has gone \Nby.
Dialogue: 0,0:09:17.42,0:09:22.53,Default,,0000,0000,0000,,And as time goes by, we get to recognize \Nrevenue for the amount of time that's
Dialogue: 0,0:09:22.53,0:09:26.03,Default,,0000,0000,0000,,gone by. \NBecause we've earned that part of the
Dialogue: 0,0:09:26.03,0:09:30.43,Default,,0000,0000,0000,,service of providing software. \NSo six months have gone by.
Dialogue: 0,0:09:30.43,0:09:35.28,Default,,0000,0000,0000,,We get to recognize software revenue for \Nsix months, so we credit software revenue
Dialogue: 0,0:09:35.28,0:09:38.54,Default,,0000,0000,0000,,to increase the revenue account for \N10,000.
Dialogue: 0,0:09:38.54,0:09:43.83,Default,,0000,0000,0000,,We reduce the liability because 10,000 of \Nthis has been earned.
Dialogue: 0,0:09:43.83,0:09:47.81,Default,,0000,0000,0000,,It's no longer unearned. \NSo we debit unearned software revenue to
Dialogue: 0,0:09:47.81,0:09:51.85,Default,,0000,0000,0000,,reduce the liability. \NThe balance as of December 31st in this
Dialogue: 0,0:09:51.85,0:09:56.30,Default,,0000,0000,0000,,liability account is $50,000, which is \Nthe amount of revenue we are going to
Dialogue: 0,0:09:56.30,0:10:02.15,Default,,0000,0000,0000,,earn over the remaining 2 1/2 years of \Nthe software license.
Dialogue: 0,0:10:02.15,0:10:06.53,Default,,0000,0000,0000,,>> I know why the answer is $10,000, \Nbut maybe you should explain it for the
Dialogue: 0,0:10:06.53,0:10:10.60,Default,,0000,0000,0000,,other viewers. \N>> I'm happy to explain it for the
Dialogue: 0,0:10:10.60,0:10:15.64,Default,,0000,0000,0000,,other viewers. \NSo we're going to earn $60,000 over three
Dialogue: 0,0:10:15.64,0:10:17.79,Default,,0000,0000,0000,,years. \NAssuming it's earned on a straight line
Dialogue: 0,0:10:17.79,0:10:22.21,Default,,0000,0000,0000,,basis, that would be 20,000 per year. \NIt hasn't been a year.
Dialogue: 0,0:10:22.21,0:10:28.98,Default,,0000,0000,0000,,It's only been six months, or half a \Nyear, so half of 20,000 would be 10,000.
Dialogue: 0,0:10:28.98,0:10:35.25,Default,,0000,0000,0000,,So we get to recognize $10,000 of revenue \Nfor these six months.
Dialogue: 0,0:10:35.25,0:10:40.94,Default,,0000,0000,0000,,>> June 30th, BOC purchases a building \Nfor $500,000.
Dialogue: 0,0:10:40.94,0:10:45.72,Default,,0000,0000,0000,,The expected life of the building is 20 \Nyears and its expected salvage value is
Dialogue: 0,0:10:45.72,0:10:54.93,Default,,0000,0000,0000,,$100,000. \N>>So, on June 30th all we have to account
Dialogue: 0,0:10:54.93,0:10:59.75,Default,,0000,0000,0000,,for is purchasing the building. \NWe don't do any depreciation yet cause we
Dialogue: 0,0:10:59.75,0:11:03.44,Default,,0000,0000,0000,,just bought the building. \NSo, we paid cash 500,000.
Dialogue: 0,0:11:03.44,0:11:09.45,Default,,0000,0000,0000,,Anytime we pay cash, we credit cash to \Nreduce the cash account.
Dialogue: 0,0:11:09.45,0:11:13.98,Default,,0000,0000,0000,,We debit Building to create the asset \Naccount to represent that we have this
Dialogue: 0,0:11:13.98,0:11:18.85,Default,,0000,0000,0000,,new asset called, that's a Building, so \Nwe debit Building $500,000 and credit
Dialogue: 0,0:11:18.85,0:11:22.32,Default,,0000,0000,0000,,Cash 500,000. \N[BLANK_AUDIO]
Dialogue: 0,0:11:22.32,0:11:27.00,Default,,0000,0000,0000,,>> December 31st. \NIt is the end of the fiscal year.
Dialogue: 0,0:11:27.00,0:11:30.78,Default,,0000,0000,0000,,Is an adjusting entry needed? \NIf so, what is it?
Dialogue: 0,0:11:36.18,0:11:40.61,Default,,0000,0000,0000,,>> We definitely need an adjusting \Nentry to record the depriciation.
Dialogue: 0,0:11:40.61,0:11:44.73,Default,,0000,0000,0000,,So the format of the journal entry for \Ndepreciation expense always looks like
Dialogue: 0,0:11:44.73,0:11:48.20,Default,,0000,0000,0000,,this. \NYou debit depreciation expense to create
Dialogue: 0,0:11:48.20,0:11:52.74,Default,,0000,0000,0000,,the expense for the period. \NAnd then you credit the contra-asset
Dialogue: 0,0:11:52.74,0:11:56.16,Default,,0000,0000,0000,,accumulated depreciation. \NRemember, that's where we're going to
Dialogue: 0,0:11:56.16,0:12:01.20,Default,,0000,0000,0000,,keep track of all the reductions in the \Noriginal cost of the building over time.
Dialogue: 0,0:12:01.20,0:12:05.37,Default,,0000,0000,0000,,We're going to keep it, track of it not \Nin the building account, but in the
Dialogue: 0,0:12:05.37,0:12:08.91,Default,,0000,0000,0000,,separate contra-asset account, which has \Na credit balance.
Dialogue: 0,0:12:08.91,0:12:13.39,Default,,0000,0000,0000,,So a credit to accumulated depreciation \Nincreases this account.
Dialogue: 0,0:12:13.39,0:12:17.26,Default,,0000,0000,0000,,So this the format you're always going to \Nsee for depreciation expense journal
Dialogue: 0,0:12:17.26,0:12:20.17,Default,,0000,0000,0000,,entries. \NNow I do have on this slide, so you don't
Dialogue: 0,0:12:20.17,0:12:22.74,Default,,0000,0000,0000,,have to ask, the calculation for how we \Ngot this.
Dialogue: 0,0:12:22.74,0:12:28.44,Default,,0000,0000,0000,,The original cost of the building was \N500,000, the salvage value's expected to
Dialogue: 0,0:12:28.44,0:12:34.69,Default,,0000,0000,0000,,be 100,000, so we're going to depreciate \N400,000 of value over time.
Dialogue: 0,0:12:34.69,0:12:39.25,Default,,0000,0000,0000,,The time is going to be 20 years. \NSo based on a straight line basis, we
Dialogue: 0,0:12:39.25,0:12:43.36,Default,,0000,0000,0000,,have 400,000 divided by 20 is 20,000 per \Nyear.
Dialogue: 0,0:12:43.36,0:12:47.47,Default,,0000,0000,0000,,So that's the annual expense. \NBut notice here only six months have gone
Dialogue: 0,0:12:47.47,0:12:51.41,Default,,0000,0000,0000,,by. \NSo we take that 20,000 divided by 2 to
Dialogue: 0,0:12:51.41,0:12:55.26,Default,,0000,0000,0000,,get a $10,000 six month depreciation \Nexpense.
Dialogue: 0,0:12:55.26,0:13:00.85,Default,,0000,0000,0000,,>> What if your salvage value or useful \Nlife estimates are wrong?
Dialogue: 0,0:13:00.85,0:13:05.69,Default,,0000,0000,0000,,How can you possibly know what a building \Nwill be worth in 20 years, or even that
Dialogue: 0,0:13:05.69,0:13:10.33,Default,,0000,0000,0000,,you will use it for 20 years? \N>> Both the salvage value and the
Dialogue: 0,0:13:10.33,0:13:15.94,Default,,0000,0000,0000,,useful are manager's best estimate of how \Nlong they plan to use it How much it'll
Dialogue: 0,0:13:15.94,0:13:19.14,Default,,0000,0000,0000,,worth when they're done using it, when \Nthey buy, the asset.
Dialogue: 0,0:13:19.14,0:13:23.72,Default,,0000,0000,0000,,Like all estimates, it'll probably be \Nwrong.
Dialogue: 0,0:13:23.72,0:13:29.53,Default,,0000,0000,0000,,If at any point in time, managers decide \Nthey're going to use the asset longer or
Dialogue: 0,0:13:29.53,0:13:33.01,Default,,0000,0000,0000,,shorter than they thought, or the salvage \Nvalue will be higher or less than they
Dialogue: 0,0:13:33.01,0:13:35.69,Default,,0000,0000,0000,,thought. \NThey can change the assumptions, and
Dialogue: 0,0:13:35.69,0:13:38.69,Default,,0000,0000,0000,,recalculate the depreciation expense \Ngoing forward.
Dialogue: 0,0:13:38.69,0:13:43.09,Default,,0000,0000,0000,,And then if we get the end of the life, \Nand we sell the asset for more or less
Dialogue: 0,0:13:43.09,0:13:46.56,Default,,0000,0000,0000,,than its salvage value, we'll just book a \Ngain or a loss at that point.
Dialogue: 0,0:13:46.56,0:13:56.14,Default,,0000,0000,0000,,>> December 31st, BOC still has an \Noutstanding order $300,000 of products
Dialogue: 0,0:13:56.14,0:13:59.40,Default,,0000,0000,0000,,that will be delivered and billed in \NJanuary.
Dialogue: 0,0:14:03.69,0:14:07.68,Default,,0000,0000,0000,,>> So the question here is, do we need \Nan adjusting entry to reflect that we
Dialogue: 0,0:14:07.68,0:14:12.70,Default,,0000,0000,0000,,still have this outstanding order that \Nhas not yet been delivered or billed?
Dialogue: 0,0:14:13.93,0:14:17.16,Default,,0000,0000,0000,,Well, the answer is no. \NWe do not need an adjusting entry,
Dialogue: 0,0:14:17.16,0:14:23.40,Default,,0000,0000,0000,,because there has not been any kind of \Nrevenue that's been earned at this point.
Dialogue: 0,0:14:23.40,0:14:28.65,Default,,0000,0000,0000,,We haven't delivered the goods so we \Ncan't recognize revenue, we haven't
Dialogue: 0,0:14:28.65,0:14:31.41,Default,,0000,0000,0000,,earned it. \NWe haven't billed cash, we haven't
Dialogue: 0,0:14:31.41,0:14:35.24,Default,,0000,0000,0000,,collected cash. \NSo there's no realization yet, there's
Dialogue: 0,0:14:35.24,0:14:39.13,Default,,0000,0000,0000,,not existing account that needs to be \Nadjusted.
Dialogue: 0,0:14:39.13,0:14:43.76,Default,,0000,0000,0000,,Basically, this entire transaction will \Nhappen some time in the future There's
Dialogue: 0,0:14:43.76,0:14:49.35,Default,,0000,0000,0000,,nothing we need to adjust at this point. \N>> Okay.
Dialogue: 0,0:14:49.35,0:14:53.94,Default,,0000,0000,0000,,So we can't record the revenue yet. \NBut is there any way we can let people
Dialogue: 0,0:14:53.94,0:14:57.17,Default,,0000,0000,0000,,know this order? \N>> Yes.
Dialogue: 0,0:14:57.17,0:15:02.95,Default,,0000,0000,0000,,Companies can always voluntarily disclose \Ninformation that they're not allowed to
Dialogue: 0,0:15:02.95,0:15:07.74,Default,,0000,0000,0000,,recognize in the financial statements. \NSo a common disclosure in financial
Dialogue: 0,0:15:07.74,0:15:11.96,Default,,0000,0000,0000,,statements is called the quarter backlog. \NWhich talks about these orders and lets
Dialogue: 0,0:15:11.96,0:15:15.36,Default,,0000,0000,0000,,investors know about them, even though \Nthey haven't gotten to the point where we
Dialogue: 0,0:15:15.36,0:15:23.20,Default,,0000,0000,0000,,could recognize revenue for them yet. \NSo to provide a quick overview of
Dialogue: 0,0:15:23.20,0:15:26.52,Default,,0000,0000,0000,,adjusting entries before we wrap up the \Nvideo.
Dialogue: 0,0:15:26.52,0:15:30.78,Default,,0000,0000,0000,,Think about a timeline where you have \Ncash transactions that could either
Dialogue: 0,0:15:30.78,0:15:36.87,Default,,0000,0000,0000,,happen before or after you recognize \Nthat, recognize that revenue or expense
Dialogue: 0,0:15:36.87,0:15:40.97,Default,,0000,0000,0000,,in the financial statements. \NIn the example of the deferred revenue
Dialogue: 0,0:15:40.97,0:15:45.81,Default,,0000,0000,0000,,and the deferred expense, what happened \Nwas the cash transaction happened before.
Dialogue: 0,0:15:45.81,0:15:50.64,Default,,0000,0000,0000,,We recognize the revenue or expense. \NSo either we receive cash and create a
Dialogue: 0,0:15:50.64,0:15:54.05,Default,,0000,0000,0000,,liability. \NThen when we earn the revenue, we credit
Dialogue: 0,0:15:54.05,0:15:58.84,Default,,0000,0000,0000,,revenue and reduce the liability. \NOr we pay cash to recognize a prepaid
Dialogue: 0,0:15:58.84,0:16:02.83,Default,,0000,0000,0000,,asset. \NThen as time goes by and we use up
Dialogue: 0,0:16:02.83,0:16:07.50,Default,,0000,0000,0000,,whatever we prepaid, we debit the expense \Nand reduce that prepaid asset.
Dialogue: 0,0:16:07.50,0:16:13.92,Default,,0000,0000,0000,,For the accruals, what happens is the \Nrevenue or expense comes before the cash
Dialogue: 0,0:16:13.92,0:16:17.31,Default,,0000,0000,0000,,transaction. \NSo for an accrued expense we recognize an
Dialogue: 0,0:16:17.31,0:16:23.21,Default,,0000,0000,0000,,expense before we pay the cash. \NSo that we create a payable liability,
Dialogue: 0,0:16:23.21,0:16:25.95,Default,,0000,0000,0000,,like a wage is payable or a tax is \Npayable.
Dialogue: 0,0:16:25.95,0:16:29.46,Default,,0000,0000,0000,,Then later on, we pay the cash and reduce \Nthe liability.
Dialogue: 0,0:16:29.46,0:16:35.37,Default,,0000,0000,0000,,Where sometimes we recognize revenue, \Nbecause we provided some kind of service
Dialogue: 0,0:16:35.37,0:16:39.66,Default,,0000,0000,0000,,but haven't been paid cash yet. \NWe created asset to represent the
Dialogue: 0,0:16:39.66,0:16:43.61,Default,,0000,0000,0000,,receivable. \NLater on we collect the cash and get rid
Dialogue: 0,0:16:43.61,0:16:47.74,Default,,0000,0000,0000,,of the receivable. \NSo all of the adjusting entries are
Dialogue: 0,0:16:47.74,0:16:51.13,Default,,0000,0000,0000,,going to fit in to one of these four \Ncategories.
Dialogue: 0,0:16:51.13,0:16:54.73,Default,,0000,0000,0000,,Now that we've done examples of all the \Npossible types of adjusting journal
Dialogue: 0,0:16:54.73,0:16:59.03,Default,,0000,0000,0000,,entries, I can't think of anything better \Nthan to do more practice with them.
Dialogue: 0,0:16:59.03,0:17:02.96,Default,,0000,0000,0000,,And that's what we'll do next video. \NIn the Relics [UNKNOWN] case.
Dialogue: 0,0:17:02.96,0:17:05.62,Default,,0000,0000,0000,,I'll see you then. \N>> See you next video.
Dialogue: 0,0:17:05.62,0:17:05.62,Default,,0000,0000,0000,,[BLANK_AUDIO]