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“And welcome to chapter 3. This is professor farhad in this chapter at the beginning beginning of this chapter. We re going to be learning about important basic terminology they basic. But they are important because if you don t understand those terminology.
You re gonna be in big trouble as a student. But let me go back and to chapter two just for a moment and remind you that it s very important that you understand these accounts okay the elements of the financial statements which is concept statement chapter sick number six and i cover assets liabilities equity is investment by owners distribution by owners and really cover comprehensive and humble but we will see it later on revenues expenses gains and losses. So you need to know what these accounts are those are also i would consider basic information. Okay so we re gonna carry on on this basic information and getting on to chapter three and learn additional basic terminology basically.
Setting the ground for your accounting knowledge. So any accounting information system will have certain terminology basic terminology that we need to be familiar with now we re gonna look at these what s an event what s a transaction. What s an account what our real accounts. What our nominal accounts.
What what is a ledger. What is a journal. What is posting what is a trial balance what are adjusting entries will focus on adjusting entries later on we re gonna focus on generalizing later on what are the financial statements and what are the closing entries. Okay so we need to know the definition of each and the best way to do this is just to go to the textbook.
And what i did i i basically clipped the the basic terminology from the textbook and i m gonna go over this with you. But once again have no doubt if you don t understand these terms. Then you know you need to understand them for your success. So.
What is considered an event well an event happening of a consequence. This is what an event is an event that generally is the source or the cause of changing in an asset liability. Inequity. An event can be internal or external basically.
An event is something happened something happened that effects either an asset effect. A liability not either sometime. It effect an asset and a liability sometime in an asset that an asset sometime in a net a liability an inequity sometime in equity and an asset. So the facts.
Some accounts and it s gonna lead to some changes either an asset will go up an asset will go down liability. Will go up liability. Go down. Equity will go up and equity will go down.
So. One of these accounts will will change now when they say equity. What they mean by equity here is remember as i told you in chapter. Two that the equity account that the equity account.
Let me just that the these accounts all affect equity so when we say assets liabilities and equities. We mean the effect also one of the they could affect also one of these accounts just want to clarify this and the track the event could be internal or external. What is an example of an event you made the sale well you made the sale to an external party. This is an event okay you made the sale to an external party.
Some time you made the sale or you made the purchase from another and from another department. That s an internal transaction that that s an event that s an event a transaction is an external event involving the transfer or exchange between two or more parties. So once when when we say a transaction. What we mean is an external event that means the company thus transacting within out cider and this is a transaction and what do we need to do we need to record the the transaction.
We need to record the transaction. We need to know what is an account and hopefully. We all what is an account let me kind of explain it the simplest way i can most probably you have a checking account. Some sort of a checking account or some sort of a savings account and let me ask you how does the savings or checking account helps you well.
If you think about it..
An account is simply is a record keeping is a record keeping mechanism. What happened when you deposit money in your savings account will need apposite money what happened to your account your account goes up when you withdraw money from your account your account goes down. So an account is basically it s a record keeping of your money okay. But then accounting.
We re gonna have an account for each asset liability revenue expense. We re gonna have many accounts so an account so basically an account is the definition of an account is assisted systematic arrangement that shows the effect of a transaction or other event on the specific element such as asset liability and so on so. What s gonna happen in your accounting information system. You re gonna have all sorts of an account.
You re gonna have an account for cash you re gonna have an account for supplies you re gonna have an account for your loans. You re gonna have an account for your revenues and what s gonna happen you re gonna keep track of each activity in this account when you receive cash your cash goes up when when you pay cash your cash goes down. So companies keep a separate account for each asset liability. Revenue.
Expense and for capital and equity. Okay. Because the format of an account. Offer resembles the letter t.
It s sometime called a t. Account now we re gonna be talking about the t account in the next session. So i m just focusing on the basic terminology. But i m gonna be focusing more you can have one whole lecture about the t account and why they are called the t account.
But basically an account is a record keeping mechanism. That s all what it is what happened when you see more money your account goes up. When you would draw money your account goes down. When you buy supplies you have more supplies when you use the supplies you have less supplies that s all what s an account now.
We re gonna break down the accounts into two type of accounts. We re gonna have and i should have mentioned this in chapter two i did not we re gonna have real accounts and nominal accounts. Real accounts are also called the permanent so real and permanent they mean the same so if we say real or permanent. They mean the same and those accounts are asset liabilities and equity account and we re gonna we re gonna we re gonna look little bit more about the equity account.
Okay so the real account so if i ask you what are the real account. The accounts that appear on the balance sheet. So let s go back to chapter two hey in chapter. Two.
We said and notice here they listed them separately initiative. It should have it should have told me something. But i did not do it assets liabilities and equity. Those are the real what we call them real or permanent means.
The same thing real or permanent account now remember equity. All of these affect equity. So we need to be a little bit more specific about equity later on so. Which one are real and which one are not okay so these are the real account but for now assets and liabilities are real we re gonna look about equities little bit further explain the equity component of it okay now the nominal account or the temporary account our revenues expenses dividend accounts.
Except for dividend. They appear on the income statement. Companies periodically closed the nominal account. So what are the nominal account.
Well let me tell you something a hint if it doesn t go on the ink. If it doesn t go on the balance sheet. It s a temporary account. If it doesn t go on the balance sheet.
So any income statement income statement..
Account income statement accounts such as revenues expenses. Gains losses distribution to owners. Here. We are assuming.
This is called dividend now investment by owner. It s gonna be called common stock. And that s gonna be permanent common stock. Okay that s gonna be considered part of equity.
But we ll see that later on but the but the account that i circled those are called temporary or nominal. Okay and the accounts that i have that i talked about earlier which is assets liabilities and some equity account. Which is common stock those are called real or permanent now one we why do why do we differentiate between those two we differentiate between those two because the temporary account which we will see shortly they are subject to the closing process and i will explain the closing later on so just know for now that the temporary accounts are subject to the closing process they are subject to the closing process that means we closed them okay. Now let s go back and keep working with this so we re done with the real and nominal ledger.
What is a ledger a ledger it s the book containing the account or the computer printout containing the account a general ledger is a collection of all assets liabilities equity revenues and expenses so what is the ledger is a list of all the company accounts how many accounts that you have depending on how large is your company when i went when i was in practice. Some companies they would have 20 or 30 accounts. Some companies would have 150 accounts depending on how complex is their transaction. I had one student that she work at err product.
And she was working in the accounting department and one time. She brought the the ledger. A printout and basically. It was a book literally was look look at a thick book and all what it is it s a list of the accounts and have so many accounts because a company like their product.
They re operating all over the world. They have so many different accounts ok so depending on how big is your company. But when we say the ledger. The ledger is the list of all the accounts of the company s account now the ledger might have something called a subsidiary ledger.
A subsidiary ledger contained the details related to a given a general account for example account receivable okay for example account receivable as an account. So the company might have you know a general ledger account. That s called account receivable. Again.
This is the account now the reason i draw a t account hopefully you are familiar with the spell. It doesn t matter and let s assume in the account receivable. The company have five million dollars. Okay it means customers owe them five million dollars for services.
They provided to the customers. This is called the ledger ledger account the account receivable now remember those five million dollars. They belong to various customers. So they re gonna have account receivable for company a they re gonna have an account receivable for company b.
An account receivable account for company c. And each one of them they will have an account for example this one is a million this one is two million and let s assume we only have three accounts and this one is two million okay so company. I was a million company b owes. Us two million and company company c.
Owes us a three million those accounts that i that i that i draw and blue. Those are called the sub sub accounts. Or subsidiary. Accounts.
The sub ledger account. Because we need to keep track of each customer s how much they are separately. But if we add 1 million plus two million plus four million they will add up to five million. So we re gonna have a a sub accounts.
Which are if we add them up they re led up to the general ledger account okay this is what a sub sub ledger subsidiary ledger account is the journal what does a journal and this is what a journal would look like this is a what s called a general journal..
It s basically. It s it s a document or it s a place where we place the entry for example. If something takes place on you know eight twelve you know eight twelve let s see if we can write this you know on you know delete this on august. The 15th happen on august the 15th we you know we received cash from alone so we debit cash we debit cash i don t know 50000 let s assume we received a loan for 50000 and we credit notes payable wells fargo.
It doesn t matter the name of the bank i ve just it didn t put wells. Fargo but it doesn t matter and that s 50000. Okay. So this is a general a general journal.
And this is where you this is where you book the original entries. This should be notes payable. Let me just fix. It notes payable and we borrowed the money from wells fargo the bankers wells fargo okay okay so this is this is the journal the journal is what this is what you record the transaction.
So the journal is the book of the original entry where the company initially record the transaction and selected other events. Okay now. This is the this is the journal now various amounts are transferred from the book did from the book of the original entry to the ledger. So eventually what s gonna happen we increased cash in this transaction.
What happened is we increased cash and we increased our loan what s gonna happen is we eventually we will update we will update the cash account the cash ledger account and we will update and we will update the notes payable account the notes payable ledger account we will update those accounts now why am i saying this i m saying this because this is the process of updating the account. The process of the updating each account separately it s called posting because we re gonna learn this term. So when we post it means we update each account separately and we re gonna be working some posting in this chapter. So this is basically basic terminology everything that i am talking about we will be working this in this chapter.
And you will need and you will need to learn it and you will need to learn it so so the entries. The original entries is called the journalizing so when i took out the loan when i debited cash and credited the this entry here we highlighted in yellow. This is what journalizing is this is journalizing. This is what journalizing is generalizing is when you record something in the journal.
That s what s journalizing is okay so posting posting is the process of transferring the essential facts and figures from the book to the ledger. Okay. So this is what this is what posting is updating each account separately again you will see this later on we re gonna work this later on this is what posting is posting is updating each ledger separately and hopefully you know this if this is your intermediate accounting course you should know this. But again this is a review.
We re gonna work in a few examples to refresh your memory trial balance. What is a trial balance trial balance is the list of all open accounts in the ledger and their balances. So the trial balance will have a list of all the accounts with. Their.
Balance for example we have. 100000 in. Cash 100000. In cash we.
Have 50000 and count. Receivable 50000. And. Counter see but we have.
30000 in in. Supplies we have 50000. In revenue. So on and so forth okay.
The trial balance taken immediately after the adjustments is called adjusting trial balance. And we would look at this later on in this chapter. A trial balance taken after the closing has been posted. It s called the post closing or after closing trial balance now we re gonna look at the trial balance later on so for this trial balance.
I m gonna write later we re gonna look at this later it just think entries we can look at this later as well as just the entries are made at the end of each accounting period and the purpose of the adjusting entries..
If you re asked. What s the purpose is to bring all the accounts up to date on accrual basis. So the company can prepare financial statements. So adjusting entries is to prepare the to keep the to bring all the accounts up today so everything this correct everything is up to date so we can prepare the financial statements.
Otherwise if the accounts are incorrect. Obviously the financial statements will be incorrect. That s an obvious one so that s why we prepared the adjusting entries financial statements. We can look at this later as well statements that reflect the collection tabulation and final summarization of the accounting data.
We re going to learn about four financial statements. We re gonna learn about the balance sheet. Which shows the financial condition of the enterprise at the end of the period and we ll look at this little bit later on we re gonna show we re going to look at the income statement measures the result of the operation during the period. And we re going to briefly look at the statement of cash flow.
That reports the cash. Provided and used by operating investing and financing activities and we would look at the statements of retained earnings. So basically this is a list for the financial statements. We re gonna look at each one of them separately later on one more one more concept or basic terminology.
We need to be familiar with is something called the closing entries. The closing entries is the formal process by which an enterprise to reduce all nominal accounts. Which one are the nominal accounts. We talked about the nominal accounts.
Not long ago. Remember losses. Gains. Revenues expenses distribution to owner anything that doesn t go on the balance sheet.
What s gonna happen we re gonna close it and we re gonna see this later on we can have one whole session about closing. They will close all the accounts to zero. We re gonna bring them down to zero and d and determine and transfer net income or net loss because we re gonna either have a net income or net loss to equity also known as closing the ledger or closing the books or merely closing. So the process of closing.
All the nominal accounts. The to equity is called closing the larger closing. The books or merely closing. So those are basic terminology.
You would need to be familiar with and this is right from your textbook. This is this is right from your textbook basic terminology the next topic we re going to be covering. I m gonna keep it totally separate is the systems of the system of debits and credits okay. So the next topic.
I will cover is something called the double entry accounting rules. Which it has to do with the concept of debits and credits okay this is i m gonna have one whole session. I can finish it now. But i prefer to have one more session for the debits and credit because it is important everything that we do is important.
But if you don t know how debits and credits work. Then you are done you re finished. There s no there s no need to process to go any any for any any any forward and accounting. If you have any questions by all means email me see me in class or ” .
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