Accounting: Basic Procedures (1962)

[Music] our daily lives are made up of many Financial transactions but even the simplest transaction usually affects the financial records of some business records must be kept so that the people who operate a business will know its Financial condition it is the job of bookkeepers and accountants to record and interpret these business records and to prepare reports that are easy to understand to help you understand what is meant by accounting we're going to apply it to a very simple business operation Jim Wilson a high school senior operates a lawnmower rental service from his father's garage two summers ago Jim purchased a power mower for $100 he rented the mower mainly to boys who mowed lawns for homeowners last year Jim purchased a second Mo for which his father lent him $100 Jim has been repaying his father with interest Jim's father has suggested since Jim is going away to college in the fall that he sell his business someone who was interested in buying it is one of Jim's customers Fred Davis a sophomore at Jim School Jim knows that Fred is a business student and so will probably ask how much did Jim make last year what equipment does he own and how much money does he owe so that Jim can answer these questions Jim's father is going to help him make out what accountants call a balance sheet in the balance sheet for his Mower Service Jim will list what he owns his assets and he will list what he owes his liabilities now what do Jim's assets include they include his desk chair and office supplies two used mowers gasoline oil spare parts a repair kit $8 owed to him by Mrs Jones and $9 owed to him by Mrs Green after listing his assets Jim totals them $263 represents his total assets now what about his liabilities his liabilities include the $33 he still owes his father a $1250 repair bill which he has not yet paid and for newspaper advertising a bill for $6 which he has not yet paid Jim totals them $51.50 represents Jim's total liabilities knowing his assets $263 Jim subtracts his liabilities $51.50 the difference $21.50 is his net worth Jim adds the net worth to the liabilities as you can see from this balance sheet assets equals liabilities plus net worth now Jim and his father are working out a second kind of Business Report which accountants call an income statement or a profit and loss statement this shows Jim's income and expenses for the past year Jim has listed his only source of income more rentals and he has listed and totaled all his expenses he has subtracted his total expenses from his income to find his net income or net profit and here are the balance sheet and income statement that Jim has Rewritten for Fred Davis to see on the basis of Jim's reports Fred has agreed to purchase Jim's business for its net worth Fred would like to work with Jim for a week to set up a bookkeeping system this will give Jim an opportunity to learn more about bookkeeping and accounting Fred Davis is making a record of the assets liabilities and net worth of his new business in a book called a journal this is the first step taken whenever formal records of a business are begun and is called making the opening entry the opening entry in the journal is made from the information on the balance sheet assets on the left side of the balance sheet are listed first in the journal and their amounts are recorded in the leftand amount column the debit column liabilities on the right side of the balance sheet are listed next in the journal and their amounts are recorded in the right hand column the credit column now Fred writes a brief explanation of these entries in the journal he records that these entries came from the balance sheet of August 31st during the operation of any business transactions occur that change the value of the assets and the liabilities Fred explains that accountants summarize these changes in a book called a ledger each account in the opening entry will be placed on a separate page of this Ledger transferring a journal entry to a ledger account is called posting Furniture is a debit account in the journal its amount is recorded on the left or debit side of the furniture account in the lger Fred writes in the date as it is shown in the journal and the explanation balance Fred goes on to make up one account in his Ledger for each debit that was listed in his journal each time the amounts are recorded on the left or debit side but for his credit accounts such as the newspaper advertising Bill the amount is recorded on the right or credit side of the account Fred is making out one more account in his Ledger for cash since cash will also be involved in his transactions Fred will post his journal entries to ledger accounts once a month while the basic records of his business will be kept in a ledger Fred is explaining that the daily transactions of his business will be recorded in this special cash Journal this cash Journal has a cash debit column and a cash credit column it also has a general debit column and a general credit column every journal entry has both a debit part and a credit part and the debit amount always equals the credit amount when cash comes in for lawnmower income such as this $8 the amount is recorded in the cash debit column because cash is an asset for the credit part of the entry Fred credits lawnmower income in the General Credit column when cash is used to buy gasoline the amount is recorded in the general debit column for the credit part of the entry Fred records the amount in the cash credit column because cash is decreased when Fred pays the bill to the frontier Enterprise for advertising he is decreasing a liability so the amount is recorded in the general debit column cash is also decreased so cash is credited in the cash credit column the accounting procedures we've seen used for this small business are applied in much the same way in large business business where balance sheets and income statements prepared from journals and ledgers show a business's Financial condition at the end of the week Fred is ready to move the mower rental operation to his own home even in this simple operation Jim has begun to see the importance of bookkeeping and accounting a fundamental part of all successful business today