Hello, I'm professor Brian Bushee, welcome back. In this video we're going to finally generate some income for Rebecca Park and her Relic Spotter company. We'll go through a number of revenue and expense transactions for Relic Spotter and see how they performed in their first six months of business. Without further adieu let's get started. In a prior video we did the first 14 transactions for this start-up company. Now we will resume the case with transactions related to revenues and expenses. Some of the transactions will be summary entries to record six months worth of activity in one journal entry. As we did last time, we'll record journal entries and post to T accounts for each transaction. After the transaction you should pause the video and try to do the journal entry. Make sure you think about what accounts are involved, did they increase or decrease, do we debit or credit. And then resume the video to see the answer and the explanation. Transaction 15. In a search for new revenue opportunities, Park initiated an unlimited rental arrangement with the Penn Antiquities Club on December 1, 2012. Under this arrangement, the club paid Relic Spotter $1,200 cash upfront for unlimited rentals over the next year. For this transaction, Relic Spotter is receiving $1,200 of cash. Cash is an asset, we increase an asset with a debit, so we're going to debit cash for $1,200. Now we have to look for the credit. So we're getting the cash, and now we're obligated to provide rentals over the next year. That obligation is a liability, and it should be called something like unearned rental revenue. Liabilities are increased through credits, so we're going to credit unearned rental revenue for $1,200. >> When do we get to recognize the revenue? We have the cash. We have committed to allowing the club to rent units whenever they need them. Isn't that enough to call this revenue? >> No. Committing to provide the rentals is not enough to be able to recognize the revenue. We have to earn the revenue by delivering the service. And the service here is providing unlimited rentals over time, which means we're going to have to wait until time passes before we can recognize the revenue and record this on our income statement. Then we post this to T accounts, so we add something on the debit side of cash, so we increase cash on this transaction, and we create a T account for unearned rental revenue, which has a credit balance. Transaction 16. For the six months ended December 31 2012, rental revenues on the metal detectors totaled $124,300. Most of the rentals were paid in cash immediately. However, as an initiative to reward repeat customers, Park allowed a select number of frequent renters to charge their rentals and be billed later. As of December 31, 2012, $4,200 was outstanding under this plan. To do the journal entry for this one we have to recognize that there were three accounts involved. We got rental revenues of $124,300. We have an accounts receivable of $4,200, that's what the customers owe us under the frequent renter plan, and the rest of it we received in cash. So the difference between 124,300 and 4,200 is 120,100 of cash that we received. Any time we receive cash we debit it, so we debit cash for 120,100. We also have these accounts receivable which are an asset. We make assets go up through a debit, so we debit accounts receivable $4,200. Remember, we always use the term accounts receivable for money owed to us by customers, based on providing them goods or services in the past. Now we're looking for the credit part of the journal entry. And what we have left to do is record the rental revenue. Revenue accounts are credit balance accounts, so to increase revenue we credit rental revenue which increases revenue and increases stock holder's equity by 124,300. Another way to look at this is that Relic Spotter recorded 124,300 of revenue. Of which 120,100 was received in cash, and 4,200 has not yet been received in cash, but hopefully will turn into cash soon in the coming months. >> Same question as before. What happens if we don't collect the cash? It doesn't seem kosher for them to book all that revenue with no guarantee they'll get the cash. Same answer as before. For now we're assuming that the company will collect all the cash, but later on we'll see how companies estimate how much cash they will collect, and then make adjustments for this on their income statement, and in the balance of their accounts receivable. So just hang on until later in the course. To post this one, we add another debit to the cash account. So another increase in cash. We create an accounts receivable T account with a debit balance. And we create a T account for rental revenue which has a credit balance. Transaction 17. During the period between July 1st and December 31st, Park purchased $40,000 of sundries inventory, of which 38,000 had been paid in cash and 2,000 was still owed at December 31st. So, for this journal entry, we're paying 38,000 of cash. We credit cash for 38,000 to make the asset go down. We're receiving inventory, inventory is an asset, assets go up with debits. So we debit inventory for 40,000 to recognize the inventory that first, we've received. So we're still missing one part of this and that's the 2,000 that we still owe at December 31. If you remember from a prior video, when we owe money to a supplier based on getting shipments of inventory we call it accounts payable, which is a liability. We make a liability go up with a credit, so credit accounts payable 2,000. >> We're cool with this one. But, thank you for checking. >> We need to post this transaction so we add a credit entry to the cash account. We add a debit to the inventory account so now there would be 42,000 in inventory. And a credit to accounts payable, now the balance would come back up from 0 to To 2,000. Transaction 18. Relic Spotter recorded sales of sundries totaling 35,000 for the 6 months ended December 31, all received in cash. The journal entry here is very straight forward. We're receiving 35,000 of cash, so we debit cash 35,000 to make that asset go up. We've made a sale, we delivered sundries, we got cash, it meets both criteria, we get to record revenue. Revenue is a credit account, so we make revenue go up with a credit to sales for 35,000. >> We are not cool with this one. Where is the inventory? If we sold sundarees, or whatever you call them, then our inventory should go down. >> Excellent question, this journal entry is only dealing with the revenue part of the transaction. Where we record the cash and the sales revenue at the selling price. We'll deal with the inventory part of this transaction in about 15 seconds. Lets post this to T account, so we post a debit to the cash account. And create a sales T account to keep track of revenue from sundry sales. Transaction 19. The original cost of these sundries was $30,000. In this journal entry, we're going to take care of the inventory part of the sundries sales transaction. So if we sold sundries, our inventory went down, inventory is an asset, we make an asset go down with a credit, so we're going to credit inventory for $30,000. Our debit here is going to be something called cost of goods sold, which is an expense. This is what we call the product cost when we make a sale. The original cost of the inventory becomes an expense called cost of goods sold that we match with the revenue that we get from selling the sundries. So we debit this expense, cost goods sold for $30,000 which then will reduce stockholders' equity. >> Do these last two journal entries always have to go together? I mean, anytime you record revenue in an entry, do you have to record COGS in another entry? >> Please also tell me why the revenue and the COGS were different dollar amounts. >> Yes these two journal entries are like the salt and pepper of accounting. They always go together. Any time you sell inventory, you need one entry to record the revenue and the cash we're going to collect at the selling price. And you need a second entry to record the reduction in inventory. And cost of goods sold expense at the original cost. And we hope that the revenue is greater than the cost it gets sold, because it means we've been able to sell our product at a mark up over cost. In other words, we've been able to earn a profit on our product. If it's not the case, we'll then, you don't have to worry about doing these journal entries much longer because you won't be in business. We post this to T accounts by reducing the inventory account through a credit entry in the T account, and we post a debit to a cost of goods sold expense T account. Transaction 20. Finally, Relics. >> Finally. I think the word finally may be favorite word in the accounting language. >> Ha, ha. Let's try that again. Relic Spotter's two employees were paid wages of 32,000 total during the six-month period. And Park drew a salary of $50,000. For the journal entry, we paid 82,000 in cash total. So we credit cash for $82,000 to reduce the cash account. The debit is going to be an expense for the employees working for us. Now, these employees would be period costs, so we're recognizing an expense as they work for us. We're going to debit salaries and wages expense for 82,000 to recognize this period cost, which then in turn will reduce stockholder's equity as expenses always do. Then we post this to T accounts, so yet another credit to the cash account. And we create a salaries and wages expense T account with a debit balance. Now it's the end of Relic Spotter's fiscal period, so we're going to close the books to any more transactions with the outsiders. The next step on the accounting cycle will be to do an unadjusted trial balance, which makes sure that everything that we've done so far during the fiscal period has been okay, there have been no math mistakes or transposition errors. So, I'm going to bring up Excel and show you how to do this. I've been showing you the T accounts one by one. But here's what they would look like all on the same page. You'll notice that there are some T accounts which have nothing in them yet. These are things that we're going to work on in a later video when we talk about adjusting entries. But for all the other T accounts, what you want to do is draw a line and come up with a balance for each account. So we have 78,800 in cash, 4,200 in accounts receivable, 103,000 in land and so forth. Then you carry over all the account titles to another page and create a column for debits and a column for credits. You put in the balance of each account and then just add up the columns. And you can see that we have 536,500 of debits. We have the same amount for credits. So we know that we've done everything correct so far because our debits equal our credits. And now we're ready to go on to the next step in the accounting cycle, which will be adjusting entries. Wow, there's nothing more thrilling than watching somebody work through Excel on video. Sorry about that, but that seemed to be the most expeditious way to show this part of the accounting cycle. Plus, if you're going to learn some accounting, you've got to do some Excel now and then, right? So in the next video, we're going to talk about adjusting entries which will get us one step closer to putting together financial statements. I'll see you then. >> See you next video!
