Video Transcript: Demonstration Problem Explained

Hello and welcome back now. We're going to run through a demonstration  problem. We're going to explain the process on June 1 2010, Green Hills Riding  Stable Incorporated was organized. The following transactions occurred during  June. June, one shares of capital stock were issued for $10,000 cash. June for  a horse stable and riding equipment was rented and paid for for the month at a  cost of 1200 on June, 8 horse fee for the month was purchased on credit for 800 June, 15 boarding fees of 3000 for June were charged to those owning horses  boarded at this stable, see, the fees are due on July 10. On the 20th,  miscellaneous expenses of $600 were paid on the 29th land was purchased  from a savings and loan association by borrowing $40,000 on a note from that  association. The loan is due to be repaid in five years. Interest payments are  due at the end of each month, beginning July 31 on June 30, salaries of 700  were paid for the month. And on the 30th, we also received fees for writing,  writing and lessons, and they were built to the customers in the amount of  $2,800 now we're going to prepare a summary of the proceeding transactions  using column headed cash, accounts receivable, land, accounts payable, notes, payable capital stock and retained earnings. We're going to determine the  balances after each transactions to show that the basic accounting equation is  still in balance. So again, on June 1, we receive $10,000 cash for capital stock,  which is credited to $10,000 in capital stock. And you can see from that that the  equation remains in balance. On the fourth we're going to demonstrate the rent  expense to pay $1,200 and the asset was cash, and we have a credit to  retained earnings because of the expense. And then again, the feed expense of  eight we bought that on credit, so we owe $800 and we record that to account  payable, and it's also an expense, so therefore it's deducted from the retained  earnings, the boarding fees we are charging our customers for that. So therefore we're going to charge $3,000 to accounts receivable, which in essence is future  cash. So that's an asset, and we're going to debit their revenue account for  $3,000 on the 20th miscellaneous expenses of 6000 which comes from cash.  And we're also going to deduct $6,000 from retained earnings because of the  expense purchase land by borrowing. Okay, so we, we borrowed $40,000 and  so we have land worth 40,000 so that's an asset, that's a new account land, and then we obtain that on credit. So we opened up a new liability account called  notes payable, and the 40 is debit credited to that. On the 30th we pay our  salary expenses, which was paid by cash, which is a negative of 700 and a 700  negative from retained earnings, because, again, it's an expense, and then the  riding and lesson fees billed. We billed for $2,800 so therefore, because we're  billing it to our customers, it's account receivable, future, cash and expected. So  there's a debit to your asset and then a credit to the retained earnings under  revenue. Okay, so with all in all back and forth, you can see the debits and the  credits all balance at the end of the month. If they don't balance, and you need  to go back and find out, based on your worksheet, the transactions that 

recorded. And later on, we're going to demonstrate the journal and how you  actually record them in the journal. And that is a helpful tool to find errors if there are any. Okay, so from the worksheet, then you're going to compile from the  headings that you have your assets, your liabilities and your stockholder equity  or owner's equity, whichever the case may be, your revenues and your  expenses. You're going to compile an income statement to which you see here,  and you're also going to compile a statement of retained earnings. Okay, so your income statement is just simply your revenues and your expenses. What did you take in? What did you spend? Okay, and from there, you're either going to have  a net income or you're going to have a net loss. Here, in this example, we have  a $2,500 net income, because in the first column, Okay to properly document  and head. The heading for what you're going to do is Green Hills Riding Stable.  That's the name of the company. The next heading, the next line, will determine  whether it's an income statement, a balance sheet. You're going to name what  type of statement this is so income statement. And then the third line of the  heading is for the month ending, whichever month it is now the balance sheet is  for a specific period. So therefore it's going to be from the month of January, the  month of June, the month of July, okay, but this is for the period ending, because at the very end of the month, you're going to decide whether you have an  income or a loss, okay? And from there, you're also going to create a statement  of retained earnings. Okay? Since we started operations in July, June, we have  nothing, okay, so that's why you have a zero balance for June one. Okay? So as you can see from your income statement, the net income the 2500 is carried  down to your Retained Earnings Statement. You added net income for June of  $2,500 there were no dividends paid out. So your retained earnings is the 2500  and that's your ending balance for June 30. Okay, now here's your balance  sheet, and all you're doing taking from the worksheet your classes of accounts  that you have. You have your assets, you have your liabilities, but you have your stockholder equity. And remember, assets always equal liabilities and  stockholder equity. Okay, so you've got your accounts receivable, your cash,  your land, those your total assets, and then your liabilities, which was your  accounts payable, your notes payable, those are your total liability that's owed  out and then the equity. What kind of equity do you have in whatever your  personal, your business, it's all retained down here under the retained earnings.  Okay, the equity account. So your capital stock, again, your stock is separated  from your earnings. Okay, so you see your capital stock of 10,000 and your  retained earnings of 2500 again, brought over from the income statement and  brought over from the worksheet. Okay? And then, as you can see, $53,300 for  your assets and a grand total for total liabilities and stockholders equity of  53,300 and again, both sides in balance.