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Accrued Expenses Broken Down | Adjusting Entries - YouTube
Channel: Accounting Stuff
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in this video you'll find out what
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accrued expenses mean and I'll show you
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how they work with an example hey there
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welcome back to accounting star I'm
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James and in this video we're going to
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cover accrued expenses in accounting
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this is part of a playlist that I've put
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together covering adjusting entries in
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accounting which you can find linked up
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here and down below in the description
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so far we've covered the big picture of
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adjusting entries prepaid expenses and
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deferred revenue and very soon I'll be
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releasing the final installment where
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we'll cover the crude revenue so hit
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subscribe and click on the bell so you
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don't miss out on that one and painting
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more accounting content that's coming
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soon but in this video we're going to
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take on accrued expenses with an example
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so let's dive in in true accounting
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stuff style fashion we'll begin with the
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definition an accrued expense is a past
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expense that hasn't been recorded or
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paid for yet let's pause for a moment
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think about what this means an accrued
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expense is a past expense that hasn't
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been recorded or paid for yet so this
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expense will be recorded or paid out in
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the future
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but right now in the present we're still
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waiting for that to happen got it this
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will all become clearer with the example
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that we'll get into shortly but first
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let's think about how a typical business
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transaction works imagine that we're the
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buyer and we want to buy something from
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someone the seller they send us the
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goods or provide us with a service and
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in addition to that they hand us an
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invoice in return we pay them in cash
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voila transaction complete with the
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crude expenses the seller provides us
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with the goods or services sometime in
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the past but we don't receive the
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invoice from them all made the payment
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to them until later in the future why
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why does all of this matter because as
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financial accountants we like to use the
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accrual basis of accounting and in a
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call accounting expenses are recorded as
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they are incurred not when cash
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changes hands I like to think of
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payments as accounting triggers when we
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pay money out of our bank account to a
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supplier we code the payment to the
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relevant account in the general ledger
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receiving an invoice is also an
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accounting trigger when using accounting
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software like QuickBooks Online you are
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required to enter the details from the
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invoice into your accounts payable
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ledger once you've received it I'll
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explain how this works later in the
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example okay why does all of this matter
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my point is that we have to accounting
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triggers the invoice and the payment if
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both of these are going to happen later
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in the future then right now in the
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present we've got a problem
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we have no accounting triggers to record
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the goods or services when we received
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them in the past that's when the
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substance of the transaction took place
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that's when the expense was incurred and
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accrual accounting is telling us that we
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need to record the transaction here but
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how do we go about accruing an expense
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in the past I'll show you right now
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let's imagine that we own a business and
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there are some basic overhead costs
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associated with running our office
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things like electricity heating and
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water we call these utility expenses and
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for now let's focus on water in our
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office we are built for our water usage
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on a quarterly basis four times a year
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and on each occasion the bill covers our
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water consumption for the previous three
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months
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today is November first the first day of
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a new billing cycle that means that
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three months from now on the 31st of
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January will receive a water bill
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covering 3 months November December and
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January 3 accounting periods and to keep
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things simple let's assume that water
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normally costs us about $50 per month
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let's jump forward now to November 30th
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one month has passed and it's the end of
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an accounting period do we have any
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adjusting entries to post yes we do
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we've been using water for a whole month
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we haven't received a bill or paid for
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any of that consumption yet so we need
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to accrue an expense into our general
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ledger and how do we do that we post a
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journal entry we need to recognize a
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utilities expense in our income
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statement water normally costs us $50
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per month so we need to increase our
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utility expenses by $50 expenses are the
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first e in dealer normal debit accounts
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so debits increase them and credits
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decrease them all utility expenses need
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to go up so we debit our utilities
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expense account by $50 but where does
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the other side of this transaction go we
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are double entry accounting so there is
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another side to this adjusting journal
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entry we've already hit expenses in our
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income statement so we need to
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temporarily hold the other side of this
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journal entry somewhere in our balance
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sheet in our accrued expenses account
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but our accrued expenses an asset or a
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liability let's work it out assets bring
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us future economic benefit whereas
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liabilities involve a future economic
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sacrifice we've already received
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economic benefit from this transaction
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because we've been using water for the
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past month but we haven't paid for it
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yet at the present moment we are
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committed to making a future economic
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sacrifice so we have to recognize an
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accrued expense as a liability in the
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balance sheet accrued expenses are
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always recorded as liabilities in the
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balance sheet and liabilities are the L
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in dealer normal credit accounts so
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credits increase accrued expenses and
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debits decrease them so we need to
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credit our accrued expenses to increase
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them by $50 in the balance sheet great
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let's see how this adjusting journal
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entry affects our general ledger using T
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accounts we have two T accounts the
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utilities expense account in the income
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statement and accrued expenses in the
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balance sheet remember when using T
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accounts
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debits always go on the left and credits
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always go on the right we debit the
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left-hand side of the utilities expense
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account by $50 and we credit the
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right-hand side of accrued expenses in
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the balance sheet by $50 so we have
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accrued the utilities expense of $50 in
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our income statement for November now
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let's jump forward to the end of
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December another month has flown by do
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we have any more adjusting entries to
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post yes we do we've consumed another
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months worth of water and we still
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haven't received a bill or pay for any
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of it yet we need to accrue some more
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utility expenses the journal entry looks
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like this it's exactly the same as the
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one we posted last month why because we
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estimated the water costs us roughly $50
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per month so we need to recognize
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another $50 of utility expenses in
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December and on the flip side we need to
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increase our accrued expenses in the
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balance sheet by another $50 and how
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does this impact our books like this our
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utility expenses now come to $100 50 of
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which was expensed in November and
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another 50 in December in our balance
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sheet we are now carrying accrued
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expenses of $100 this liability keeps
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getting bigger because we've now gone
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two months without an accounting trigger
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to settle this once and for all
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we haven't received a bill or a payment
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in November or December so we are making
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our best estimate of what the bill might
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be at this stage okay now we'll jump
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forward to the end of January the final
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month of our quarterly billing cycle the
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water company has sent us an invoice
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covering the past three months and it
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comes to 153 dollars so it's not bang on
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the one hundred and fifty dollars that
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we expected but that's okay we used our
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best estimate and we actually came in
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pretty close like I mentioned before I
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like to think of invoices as accounting
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triggers here's what I meant by that
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when we entered this
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invoice into QuickBooks Online or
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whatever accounting software you're
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using we need to categorize the
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transaction and when we do this it
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automatically triggers a journal entry
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that gets posted behind the scenes in
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our general ledger if you run a business
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and receive lots of invoices then this
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automatic posting can become a huge time
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saver and it's one of the many benefits
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of using accounting software I'll pop a
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link down in the description to a free
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trial of QuickBooks Online so you can
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test it for yourself it's an affiliate
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link so by signing up you'll have the
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opportunity to support me making more
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accounting tutorials just like this one
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the automatic journal entry looks like
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this it debits our utilities expense
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account by one hundred and fifty three
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dollars to increase our expenses the
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other side of this journal entry is
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going to credit our accounts payable
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account by one hundred and fifty three
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dollars in the balance sheet I just want
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to point out to this moment that we
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haven't actually paid our water bill yet
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we have only received the bill and now
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we have 30 days in order to make the
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payment we owe money to the water
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supplier so we have a liability in our
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balance sheet how does this affect our
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general ledger we need to credit a new t
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account accounts payable on the balance
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sheet by one hundred and fifty three
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dollars that's the final balance of what
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we owe to the supplier and we debit
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utilities expense account in the income
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statement by one hundred and fifty three
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dollars but hang on our utility expenses
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are now two hundred and fifty three
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dollars that's quite high our final bill
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was only one hundred and fifty three
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dollars how does any of this make sense
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we accrued fifty dollars of utility
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expenses in November and another fifty
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dollars in December when we add the one
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hundred and fifty three dollars that was
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automatically journals in January we get
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two hundred and fifty three dollars both
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our expenses in the income statement and
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our liabilities in the balance sheet are
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overstated by one hundred dollars that's
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because we have one more adjusting
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journal entry to post we need to release
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our
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food expenses from the balance sheet so
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let's do that the journal entry looks
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like this we need to reduce our accrued
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expenses in the balance sheet accrued
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expenses are liabilities so we reduce
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them by debiting the account by $100 our
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utilities expense account an income
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statement is also overstated this is a
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normal debit account so to decrease it
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we credit the utilities expense account
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by $100 we post this journal entry into
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the January accounting period debiting
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the left-hand side of accrued expenses
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in the balance sheet by $100 and
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crediting the right-hand side of the
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utilities expense account in the income
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statement by $100 when we close off the
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quarter we have incurred utility
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expenses of one hundred and fifty three
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dollars in our income statement $50
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which we accrued in November another 50
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in December and then in January we took
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up a further fifty three dollars there
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are no more accrued expenses in our
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balance sheet because we released our
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$100 accrual in January and we now owe
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one hundred and fifty three dollars to
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our water supplier which we recognize as
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a liability in accounts payable we've
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recorded all of our expenses in the
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correct periods as we incurred them so
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our books are in line with the accrual
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basis of accounting in the next video
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we'll round off this adjusting entries
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miniseries with a video on accrued
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revenue click on this circle to
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subscribe so you don't miss out on that
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and the whole playlist can be found over
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here as always if you've got any
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questions let me know down below in the
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comments or message me directly on
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instagram at accounting stuff see ya
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