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Journal Entries: Business Formation

Brian Krogol
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Alright, now let's try this one clutch held several reviews throughout the month, charging $5,000 to its customers on account. So on account. Look, we're seeing that again. Alright. So remember that when we saw on account before it was a situation where we didn't pay something right? We had received something but we didn't pay in this situation. It's the opposite. We gave something to the students. We gave them the reviews, right? The reason we're in business is to create these reviews and get the students to come in, but we didn't charge them right away. This might have been an old business model. I'm just kidding. We never really did an on account system, but it just helps with our, our example here. Right? So the idea is we had this review and we had so much faith in the students that they would pay us. We're like, hey, you don't have to pay us right away. Just come to the review and then you can pay us later. Right, Well, so what happens in that situation? We charged $5,000 to the customers, right? But we didn't receive that in cash, right? We told, we told them they can pay us later. So this one's actually gonna be kind of tricky. This is where things get a little hairy in the, in the minds of students when they see this charging 5000, they might think that we received $5,000 in cash. No. What we did is we gave the students $5,000 value of services, right? We provided these services that were worth $5,000. And these reviews are the reason we're in business. So this this $5,000. This is actually revenue, right? This is the reason we're in business is to do these reviews. And we earned this $5,000 by having this review throughout the month. And we we brought in $5,000 worth of revenue. Right? So this notice, it's not cash that we got in this in this situation, we got 5000 in revenue. But what else on this side? They didn't pay us right away. So we didn't get cash. What we got was an Iou from the customer? From the customer. So in this case we're receiving the IOU right? So what we have is accounts receivable in this case, right? We have an asset where we're going to eventually receive some money. Right? Let me write receivable better for you. So you can see it accounts receivable. Right? So this means that at some future date we're gonna receive some money. Right? And that is due to this 5000, from the review. So since the 5000, is revenue, does revenues go up with a debit or a credit? So remember that revenues go up with the credit. Right. And what about accounts receivable? Is that an asset, liability or equity? Well, that's an asset, right, accounts receivable. We have the right to get money in the future. So that is an asset to the company. We we are gonna eventually get some money from our customer, okay. That they already owe us, right? Not eventually, they're gonna take another review in the future. No, this is money they already owe us because we gave them the review. So the accounts receivable is an asset. Alright, So assets go up with debits, right? And we received this accounts receivable. We need to increase the accounts receivable account, Right? So we're going to debit accounts receivable because we want to increase the value of that account. We want accounts receivable to show to reflect this $5,000 that the students owe us right now, what's the other side of the transaction? We have a debit here. We need to credit something, Right? And we said we're going to credit revenue, right? This is the money we brought in uh from from having these reviews. So there's a bunch of different things. We could call it, we could call it sales, we could call it revenue, sales revenue, service, service revenue, fees, earned, all sorts of things, right? There's no correct way to label it. But the most common is gonna be something like sales revenue. Okay. That is what I suggest you always use if you don't have any other uh inkling to go, you know, the teacher didn't qu to use something else. Just use sales revenue for your revenue account. Okay. So we're going to credit that 5000 and remember that revenue accounts increase with credits, right? So that's what's happened here. And if you remember from our previous problem, we had ended with assets of 58,000 Liabilities of 8000. And equity of 50,000 write our equation was balanced. And we had these amounts. So what's gonna happen here? If you think about it? Our accounts receivable? Well, we know that's an asset, right? What about sales revenue? Where do you think that's gonna fall? Is it gonna fall under an asset, a liability or equity? So we had talked about this a little, but I feel like it could be tricky. It's a it's a tricky topic. The revenues and the expenses are all equity, right? Everything that the company does every time we hold the review and make money, every time we pay our tutors, every time we do something that goes into the equity of the company. Alright. So every time we have a revenue that's going to increase our equity and every time we have an expense, it's going to decrease our equity. Okay? So this should make sense. Right? Um because we we receive more money, right? We are we received more assets in this case of $5,000, But we don't owe anybody money for that, there's no liability, right? We don't owe somebody money for earning this, this money is ours because we earned it. So what's gonna happen is our assets go up by 5000, bringing it to a total of 63,000. Right? That 5000 increases the accounts receivable. Eventually our customers are gonna pay us and we're gonna have that 5000 in cash, right? But we already have rights to that money. Our liabilities aren't gonna change, right? There's nobody that we owe anything from this transaction. But our equity is going to increase as well, right? We're going to increase it by that 5000. Bring it to a total of 55,000. Right? So all those revenues increase our equity, all the expenses will decrease our equity. Alright. In general, when we when we prepare this stuff, these revenues and expenses, we're gonna wait to produce an income statement before we affect equity, right? We would total all our rep news for the year. All our expenses get a net income. And that's what would affect our equity. But really on a transaction by transaction basis, this is what's really happening, right? This revenue increased our equity. And if we have an expense, it's going to decrease our equity. Cool. Alright. Let's pause here and move on to the next transaction.