- Let's get an overview of the specific items included
in the financial statements.
These are the things that are recorded
in the books through the debit
and credit journal entries.
- We record assets; we all have
an intuitive sense of what assets are.
A formal definition is that assets
are resources owned or controlled
by a company that will provide probable future benefit.
- [White-Haired Man] Let's take the simplest example, cash.
For example, if you look at the balance sheet
of Apple, you see they've got lots of cash,
billions of dollars of cash.
This cash is tracked into and out
of the company through debit
and credit journal entries.
- Now let's do a little mental trip
into a Walmart location.
Close your eyes, drive into the Walmart parking lot,
and get out of your car.
Now you're walking across the parking lot.
You're walking on one of Walmart's assets.
The land is a Walmart asset.
- You walk into the building.
The building is another Walmart asset.
- Now stand in the middle of the store
and look around at all the stuff on the shelfs.
That's called inventory; the stuff
that you can buy from Walmart.
Inventory is an important asset for Walmart.
- [White-Haired Man] Land, building, inventory,
all these assets are acquired and then sold
and these events are recorded
in debit and credit journal entries.
- Now it's true that very few businesses
still use paper books with hand-written journal entries.
- However, the 500-year-old debit
and credit logic still underlies the computer software
and enterprise data systems used by all companies.
- Back to examples; the accounting records
also include the liabilities of a company,
obligations that will require a future sacrifice,
usually by paying cash.
- [White-Haired Man] A good example
of a liability is accounts payable.
For example, when Walmart buys inventory,
the company promises its suppliers,
Proctor & Gamble or Black & Decker,
or whomever, that they'll pay in the future.
That promise is an obligation called accounts payable.
- [Bald Man] The processes of buying on credit
and then later paying these obligations
in cash are reflected in the debit
and credit journal entries.
- [White-Haired Man] Most companies
also have bank loan liabilities.
Both the initial cash inflow
from receiving the loans and the cash outflow
when the loans are repaid, with interest,
are recorded in debit and credit journal entries.
- [Bald Man] Sometimes owners directly invest new cash
into their business; we call this paid-in capital,
which is the amount that owners take out
of their personal savings and pay into the business.
- [White-Haired Man] This amount
is sometimes called capital stock
or capital contributions.
The receipt of this cash from owners is recorded
in journal entries with debits and credits.
- [Bald Man] Collections of cash from customers?
That's also recorded with debits and credits.
- [White-Haired Man] Payments to employees,
payments for rent, and payments for electricity
are also recorded in journal entries
using the same debit and credit system.
- [Bald Man] What about when a corporation
pays dividends to the shareholders?
How's that recorded?
- Yep, dividend payments are also recorded
in journal entries using debits and credits.
- In short, every transaction
that a business undertakes`is analyzed,
converted into the debit and credit language,
and then recorded in the financial records
using journal entries.
- Let's get some experience with the debits
and credits for a broad sample
of business transactions.