Hello, I'm Professor Brian Bushee. Welcome to the second part of our debit and credit extravaganza. In the last video, we introduced a lot of terminology and concepts, and in this video we're going to practice applying those. I'm going to start with a series of examples to help review the key concepts from last video and then we'll move on to practice doing journal entries, so that we get used to writing things using this debit and credit language. Let's get started. Okay, let's reinforce everything that we've learned with a series of four examples. In the first example, we're going to increase an asset and then increase either a liability or equity. In this case, we receive $100 cash from a bank loan. The accounts involved are cash and notes payable, both of which increase by $100. On the balance sheet equation, we would see that assets would go up by 100, that's the cash. Liabilities would go up by 100, that's the note payable or obligation to the bank, and equity is unchanged. For the journal entry, first we need cash to go up by 100. Cash is an asset, assets are debit accounts, so we would debit cash to get it to go up by 100. And what I'll do is I'll put in parentheses, +A to indicate that this debit is increased in the cash account. We're going to credit notes payable for 100. Notes payable is a liability. Liabilities are credit accounts, so we increase the credit account with a credit entry. If we looked at this with T-accounts, we would have a cash T-account which would have an entry on the debit side, a notes payable T-account which would have an entry on the credit side. If we did a balance sheet equation, sort of drew a line, added up the balance in each account, our balance sheet would balance. We'd have cash of 100 on the asset side, liabilities of 100 on the liability and equity side with no shareholder's equity. Another example. Now let's look at decreasing an asset and decreasing a liability or owner's equity account. So here we're going to repay $20 of a bank loan. So the accounts involved are cash and notes payable. Both are going down by 20. On the balance sheet equation, we would see assets go down by 20, that's the cash. Liabilities going down by 20, that's the notes payable. And there's no affect on equity. For the journal entry, we're going to debit notes payable for 20. We need a liability to go down. Liabilities have credit balances. We reduce a credit balance with a debit, debit notes payable 20. Then we're going to credit cash for 20. Cash is an asset. Assets are debit balances. We reduce a debit balance accounts with a credit. So we credit to cash for 20, we'll reduce it. And notice I have -L and -A in parentheses to indicate that these two are both reducing liabilities and assets. For T-accounts, we would have a credit entry in the cash T-account, a debit entry in the notes payable T-account. If we drew a line for the balance in each, our balance in cash is 80 on the debit side. Balance in notes payable is 80 on the credit side, our balance sheet equation would balance where we have 80 of cash, 80 of notes payable, and no stockholders' equity. Okay, okay, I know we're not off to a rousing start but just two more examples and then we'll do some journal entry practice. Next example, let's look at increasing one asset and decreasing another asset. The example transaction is that we pay $10 in cash for inventory. The accounts involved here are cash and inventory, and cash is going down by 10, inventory is going up by 10, our Balance Sheet Equation would look like this. All the actions on the left hand side where we have one asset going down and one asset going up by the same amount so they cancel. For the journal entry, we need inventory to go up, inventories and assets. So we debit inventory by 10 to make it go up by 10. We need cash to go down. Cash is a asset. You make a debit balance asset account go down with a credit. So we credit cash for 10. In terms of the T-accounts, we would have another credit to cash of 10. We would put a inventory T-account with a debit balance of 10. If we drew lines and added up the balances, we've got 70 in cash and 10 in inventory on the left hand side, so that's 80 of assets. We have 80 of liabilities in the notes payable. No stockholders' equity, our balance sheets balance, and our debits equal our credits. Final example, we're going to increase a liability or equity and then decrease another liability or equity. So in this case we're going to issue $80 in common stock to pay off the bank loan. So the two accounts are common stock and notes payable. Common stock is a stockholders' equity account going up by 80. The bank loan's a liability going down by 80. In the balance sheet equation, we'd have nothing on the asset side. Liabilities would go down for paying off the bank loan. Equity would go up for issuing the common stock. For the journal entry, we want to debit notes payable for 80 because notes payable's a liability that we want to reduce. liabilities have credit balances, we reduce them with a debit, so debit notes payable. We want common stock to increase. Common stock is an equity account which has a credit balance. We increase a credit balance account with a credit. So we credit common stock to increase stockholders' equity by 80. And then with our T-accounts, we would have a reduction of 80 to notes payable. The reduction being a debit. An increase to common stock of 80 with the increase being a credit. If we drew lines and came up with the totals, we'd have 70 in cash, 10 in inventory, that's 80 on the asset side. We have no notes payable. It goes to 0 because we fully paid it off and a balance in common stock of 80. So our assets equal our liabilities plus stockholders' equity. Balance sheet balances, debits equal credits. So let's practice some journal entries. It'll be the same procedure that we've used in other videos where I'll give you a transaction, put up the pause sign so that you can pause if you want to give it a shot. And then I'll give you the answer and we'll talk through how we got it. Here's the first one. BOC issues 10,000 shares of $5 par value stock for $15 cash per share. In this transaction, we're receiving cash. Cash is going to increase. And we're going to increase common stock accounts. Cash is an asset. We make cash go up with a debit, so we're going to debit cash. The dollar amount is 150,000, which is $15 cash times 10,000 shares. We need the common stock accounts to also go up by 150,000. But we have to split it between the par value and the additional paid in capital. So we're going to credit common stock at par for $50,000, which is $5 par value times 10,000 shares. And then we'll credit additional paid in capital for the rest, which is $100,000. So now we have 150,000 of debits, 150,000 of credits. We're in balance and we've done the journal entry correctly. >> Whoa! You can have more that one credit in a journal entry? Could you also have more than one debit? >> And what is this obsession with par value? >> Yes, you can have more than one credit, you can have more than one debit. The only requirement is that your debits equal your credits within the journal entry. And yes, accounting professors are obsessed with par value. It's one of those difficult things that you can only come to a trained professional like me to understand, so you're going to see it a lot. BOC acquires a building costing $500,000. It pays $80,000 cash and assumes a long-term mortgage for the balance of the purchase price. The accounts involved in this transaction are buildings which are going up, cash which is going down, and mortgage payable, which is going up, it's a liability that's increasing as we take out the mortgage. So starting with buildings, they're going up. Buildings are an asset, so we debit buildings by 500,000 to increase the asset. We want cash to go down. Cash is an asset, cash has a debit balance. So to make it go down, we need to credit it. We credit cash for $80,000 to reduce that asset. And then mortgage payable's a liability, has a credit balance. We want to increase it, so we're going to credit mortgage payable to increase the liability. We're not given the amount but we know it has to be 420,000 because we know our debits have to equal our credits. Once we credit mortgage payable for 420,000, we have 500,000 of debits, 500,000 of credits, and we're in balance. BOC obtains a 3-year fire insurance policy and pays the $3,000 premium in advance. In this transaction, we're getting fire insurance coverage for three years. That's an asset that we're going to call prepaid insurance and it's going up. We're paying cash, so cash is going down. So starting with a pre-paid insurance, it's an asset. We make an asset go up through a debit, so we debit pre-paid insurance for 3,000. Cash is an asset also, but it's going down. So to make cash go down, we credit cash to reduce the asset by 3,000. BOC acquires on account office supplies costing $20,000 and merchandise inventory costing $35,000. In this transaction, we're acquiring office supplies and inventory. Both of those are assets. So we're going to make them go up with debits. So we debit office supplies to increase that asset by $20,000. We debit inventory to increase that asset by 35,000. Now we're not paying any cash. Instead we owe our supplier $55,000 because we got the stuff on account. When we owe money to our supplier, it's a liability called accounts payable, that's increasing. We make a liability increase through a credit, so we credit accounts payable for 55,000. So we have 55,000 of debits, 55,000 of credits, and we're in balance. Next, BOC pays $22,000 to it's suppliers. In this transaction, we're paying our suppliers which reduces how much we owe them, which is going to reduce accounts payable. And since we're paying cash it's going to reduce cash as well. Accounts payable is a liability. It has a credit balance. If we want to reduce it, we need a debit so we debit accounts payable 22,000. Cash, of course, has a debit balance. If we want to reduce it, we credit cash for 22,000. And this, by the way, is the journal entry you're going to do anytime that you pay cash to reduce a liability. Debit the liability to reduce it, credit cash to reduce it. BOC exchanges a building valued on the books at $200,000 for a piece of undeveloped land. In this transaction we're trading one asset for another asset. We're getting land, land is going to go up. So to make land go up, we debit land 200,000. We're getting rid of a building. Building is going down, building is an asset. We make an asset go down with a credit, so we credit building 200,000. >> How do you know that the land is worth $200,000? >> Given the information we have, we have to assume the land is worth $200,000 so our debits equal our credits. And the assumption makes sense because if we're giving up a $200,000 building and just getting land, the two values should be equal. Now later on in the course, we'll look at situations where they're not equal and we end up having a gain or a loss in the transaction. But that's for another day. BOC retires $1 million of debt by issuing 100,000 shares of $5 par value stock. In this transaction, we're reducing a liability. Anytime we reduce a liability, we need to debit the liability to make it go down. So we debit notes payable for $1 million to reduce it by a million. Now we need to increase stockholders' equity by a million, but we have to split it into the common stock and the additional paid in capital. So common stock at par goes up by the par value. So we credit common stock to make the stockholders' equity go up for $500,000, which is 100,000 shares times $5 par value. Then we credit additional paid in capital to make that stockholders' equity account increase. And we know the amount has to be $500,000 because we know our debits have to equal our credits. >> [FOREIGN] >> Sorry, I'm going to make you do par value a lot. Get over it. BOC receives an order for $6,000 of merchandise to be shipped next month. The customer pays $600 at the time of placing the order. In this transaction, we're receiving $600 cash. Any time we receive cash, we debit cash to increase the asset. So we debit cash 600. We're also getting an obligation here because now we either owe the customer $600 back or we have to deliver the merchandise. So we're going to create a liability called advances from customers. So we credit advances from customers to increase the liability for $600. >> What about the $6,000 of merchandise we ordered? Don't we have to account for that? >> No, we only account for the $600 because that's the only part where there's been a transaction or exchange because we received $600 cash. For the other $54,000, that's all future stuff. That's all promises. We don't have a liability yet because there's no obligation that's based on benefits or services that we've received. Not until we exchange cash, goods, or services equal to 5,400 in the future will we have to record that part of the transaction? Finally, BOC declares and pays $8,000 of cash dividends. Let's start with cash in this transaction. So cash is going down by 8,000. Anytime cash goes down, we credit cash, reduce the asset. So we credit cash for 8,000. So now we know we're looking for a debit. The other part of the transaction is dividends. We're paying dividends. Now remember, dividends are a reduction in retained earnings. Retained earnings are a stockholders' equity account. Stockholders' equity accounts have credit balances so we reduce them with a debit. So we reflect the dividend by debiting retained earnings for $8,000. That was a lot of good practice at taking transactions and trying to represent them as journal entries using debits and credits. You're going to get a lot more practice. Starting next video, we're going to do an extended case that follows a startup company all the way through its first transactions to its first set of financial statements. And along the way, you're going to get a lot of practice doing journal entries and see a lot more debits and credits. I'll see you then. >> See you next video.
