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Journal Entries: Business Formation

Brian Krogol
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Alright Let's try. This one clutch paid its tutors for the month in cash for a total of $3,000. So boom. When you see in cash. Well we've got that part down, right? Cash is going to be affected here for $3,000 and was cash increased or decreased in this case? Well Clutch had some money and they paid it to their tutors. Right? So they're gonna have less cash. So we're gonna end up crediting cash. So what I'm gonna do is I'm gonna write the cash part and I'm gonna leave it indented already. I know cash is going to be credited for $3,000. Right? We're going to credit cash for $3,000. That one's the indented one because we know we have 3000 less in cash. Now, what about the other side of the transaction? We know it's gonna be a debit. Right? So what debit is it gonna be? We paid our tutors an amount of money? Is there an asset related to this? A liability, maybe a revenue or what about an expense? This is an expense. Right? We're paying our tutors, the tutors are employees of the company and we're paying them for doing their job for doing what earns us our revenue. Right? So this money that we pay to our tutors is going to be an expense. Okay. So it's going to be an expense but we always want to be a little more clear. We want to be transparent with what kind of expense this really is. So when we talk about paying our employees, we usually say something like wage expense. Okay, wage expense? Maybe salary expense if they're salaried employees something like that. Right? So wage expense is going to be our debit here. Right. Remember that expense accounts go up with a debit? So let's go ahead and put that in and notice notice that I had done my credit part of the entry first because it was easy because I knew that cash was gonna be credited. So I got it out of the way and then I spent my time figuring out the more difficult part the wage expense. Right? So we have the debit to wage expense for $3,000. So there's our full journal entry, right? It balances out our debits equal our credits, wage expense for 3000 cash for 3000. All right. So what's gonna happen here? Let me scroll up and see our final balances from before. So we had ended with 63,000 in assets, 8000 in liabilities and 55,000 in equity. And we were balanced at that point, assets equal liabilities plus equity. And what happened in this transaction for cash went down by 3000. Right, so our assets are gonna decrease by 3000 to a new total of 60,000. What about the wage expense? We just talked about this, right, revenues increase our equity and expenses decrease our equity. Right, So that's what's exactly what's gonna happen here. We don't owe anybody any more money. Right? We don't owe the tutors anymore money. We don't have a liability to them. We just paid them. So what's gonna happen is an equity transaction and we're going to decrease, sorry, I'm trying to get out of the way here. I'm just gonna do that. And we're gonna decrease equity by 3000 right -3000 to a total of 52,000. Okay. And I want to make one more point about this revenue and expenses in equity. If you remember, equity goes up with credits. Right? And when we have a revenue, we're crediting equity to increase equity. And when we have a debit to expenses. Well, that's a debit to equity, which decreases equity. Right? You following me? Equity goes up with credits. So do revenues and debits debits to equity. Bring it down. Which is what the expenses do. Alright. So that's kind of the flow there and notice we still have a balanced equation. Now we have assets of 60,000 liabilities of 8000 and equity of 52,000. All right, so let's go ahead and pause and continue on to the next transaction.