- [Instructor] You're 18 again, and you want to
work outdoors and set your own schedule.
So, let's start our own landscaping business.
Okay, your first task in starting
this business is to acquire cash,
either through owner's investment or by borrowing.
Now, remember, you're 18 again.
You got a full head of hair and a million ideas.
You're ready to make some money.
You have $1,000 in savings,
and your parents have offered to match your funds.
You decide to issue 200 shares of stock.
You make this journal entry.
This transaction increases Cash as a result
of capital stock being issued to investors or stockholders.
The Cash account is debited
because an asset, cash, increased.
And the Capital Stock account is credited.
Remember, Owner's Equity accounts
are increased with credits.
The economic impact of this situation
may be summarized as follows in the accounting equation.
Note from the journal entry
that our debits equaled our credits.
And note from the spreadsheet that our assets
equal our liabilities plus our owner's equity.
This will always happen if we've done things correctly.
Okay, next, suppose that, on top of the money
from yourself and your parents,
you went to a bank and somehow
convinced the loan officer to lend you some money.
What were they thinkin'?
You're 18, but hey, you did it.
The journal entry for such a transaction
would be as follows.
Here, the Cash account is debited,
and the Notes payable account is credited.
Cash is debited because cash is an asset,
and assets increase with debits.
Notes payable, a liability, is credited
because we now owe more money,
and increases in liabilities are recorded with credits.
A note is a contract specifying amount
that one party will repay to another,
usually with interest along the way.
This particular account could also be called loans payable.
The accounting equation captures the economic impact
of borrowing the money as follows.
We now have assets totaling $4,000,
funded with liabilities in the amount of 2,000,
and investments by owners also to the tune of $2,000.
Again, our accounting equation balances
because our debits equaled our credits in our journal entry.
Now that you have the funds necessary
to start your business,
you can use that money to acquire other assets
needed to operate the business.
You need assets like supplies, inventory, and equipment,
like a lawnmower and a truck for hauling.
These assets may be purchased with cash or on credit.
Credit purchases require payment after a period of time,
for example, 30 days.
Normally, interest expense is incurred
when assets are bought on time payment plan
that extends beyond two or three months.
We will show how to account for interest
in an upcoming section,
where we discuss the payment of obligations.
Now, we will demonstrate transactions
involving the acquisition of non-cash assets.
The first thing you need is a lawnmower
and some form of transportation.
You can't afford a new car,
but you do find a 1998 lime green
pickup truck for sale for $800.
And you buy it, paying cash.
With this transaction, you're trading one asset for another.
The account Truck, an asset, will increase.
And we know that assets increase with debits.
We also know that our Cash, an asset, has decreased.
And assets decrease with credits.
The impact of this journal entry
on our accounting equation looks like this.
Note at all times that our assets
equal our liabilities plus our owner's equity.
The accounting equation always balances
because the debits always equal the credits.