Hello. I'm Professor Brian Bouche. 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, I'm going to start with a series of examples to help review the key concepts from the last video. And then we'll move on to practice doing journal entry, 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 of 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, plus A, to indicate that this debit is increasing the cash account. We're going to credit notes payable for 100. Notes payable is a liability. Liabilities are credit accounts, so we increase a 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 owners equity account. So here were going to repay $20 of the 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, liability is going down by 20 that's notes payable, there's no effect 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, with a credit. So we credit the cash for 20, we'll reduce it. And notice I have minus L and minus A in parentheses to indicate that these two are both, to reducing liabilities and assets. For T accounts, we would have a credit entry in the cash the account, a debit entry in the notes payable account. If we drew a line for the balance in each, our balance in cash is 80 on the debit side, balance notes payable is 80 on credit, aside, our balance sheet equation, would balance where we have eighty of cash, eighty of notes payable, and no stock holders equity. Okay, okay. I know we're not off to an arousing start. But just two more examples and then we'll do some drill 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, 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 ten. In terms of the T-accounts, we would have another credit to cash of ten, we would put a inventory T-account. Account with a debit balance of 10. If we drew lines and added up the balances, we've got 70 in cash, and ten 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 is 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 account balance 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, and increase to common stock of 80 with the increase being a credit, if we drew lines and came up with the totals. We 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 asset equal our liability plus stockholders equity, balance sheet balances, debits equal credits. So lets practice some journal entries. We do the same procedure that we've used in other videos, where I give you a transaction, put up the pause signs so that you can pause if you want to give a shot, 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 of 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. $50,000 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 $5.00 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? So do 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 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 with credit cash for $80,000 to reduce that asset. And then mortgage payable as 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 in debits, 500,000 of credits, and we're in balance. BOC obtains a three year fire insurance policy. 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 pre-paid 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 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. Instead by 35,000 now were 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, let say liability called accounts payable, that's increasing, we make a liability increased though 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 its suppliers. In this transaction, we're paying our suppliers. 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 any time that you pay cash fo 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 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 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 are 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 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. Any time 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 stockholder's 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 stock equity go up. For $500,000, which is 100,000 shares times $5 a par value. Then we credit additional paid in capital to make that stockholder's 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. Anytime 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 customer. Customers. So we credit advances from customers to increase the liability for $600. >> What about the $6000 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 $5,400, 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 good 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 doing down by 8,000. Any time cash goes down, we credit cash to 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 stockholder equity account, stockholders equity accounts have credit balances; so we reduces them with debit. So, we reflect the dividend by debiting retained earnings for 8,000 dollars. 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 start-up company, all the way through it's first transactions, to it's first set of financial statements. And along the way, you're going to get a lot of practice doing journal entires and see a lot more debits and credits. I'll see you then. See you next video.