馃攳
Adjusting Entries- loans payable / loans receivable (simplified) (little 2 of 7) - YouTube
Channel: unknown
[3]
>> Hi, this is Bennet Tchaikovsky
[assumed spelling],
[5]
and welcome to Adjusting Entries Part Two.
[8]
This is a simplified presentation
from the earlier one that I did.
[14]
This is focussing on the initial journal
entry, and the adjusting journal entry only.
[20]
Disclaimer and copyright notice: The information
and opinions in this presentation are those
[25]
of the author only and not the author's
employers or affiliated organizations,
[29]
including, but not limited
to Irvine Valley College,
[31]
the South Orange County Community
College District, or Chapman University.
[35]
The presentation is for educational
purposes only
[37]
and does not constitute any legal
or accounting advice whatsoever.
[41]
This presentation is copyright
2008 to 2019 by Bennet Tchaikovsky.
[46]
I encourage you to share this
presentation and share links
[49]
of this presentation on an unmodified basis.
[52]
If you do modify the presentation in
any way, please email me prior to doing
[56]
so at [email protected] to discuss.
[59]
Note the author does not claim any
copyright whatsoever, and any companies
[63]
or organizations mentioned in this
presentation, the other parties,
[67]
rather the other parties are the
owners of their respective copyrights.
[70]
So, here, we're going back to adjusting
entries, or adjusting journal entries,
[77]
and I wanted to simplify this
because my last video was about--
[81]
almost forty minutes going each of these
[85]
because I made the examples a
little bit more challenging.
[88]
So, here we're just going to do
some really basic, quick examples
[92]
and hopefully keep this video under ten minutes.
[95]
So, X company loans Y company
$200,000 on April 1st, 2019.
[104]
The loan will bear interest at six percent.
[107]
Interest in principle will
be on March 31st, 2020.
[112]
So, assume simple interest.
[114]
No compounding interest or interest on interest.
[117]
Record the initial transaction
into T accounts for Y. So,
[122]
I am Y company is loaning me $200,000.
[128]
So, if I am Y company, I am receiving cash.
[133]
So, I'm receiving cash here of $200,000.
[137]
How do I know that if I'm
receiving cash it has to be a debit?
[142]
Assets over here are typically
recorded with debits.
[146]
They're increased with debits
and reduced with credits.
[150]
Since I am receiving cash, I'm going to be
showing that here as a debit for $200,000.
[159]
So, for every debit I need a credit,
[161]
and my credit over here is
going to be to a lone payable.
[167]
So, I'm crediting loans payable.
[171]
Why am I crediting a payable?
[173]
Well, a loan payable is a type of liability
account meaning that I'm borrowing the money.
[178]
I'm going to have to pay it back within the
year, and as it's a liability, over here,
[184]
I show increases to my liabilities with credits.
[188]
So, now we come to the end of the period and at
the end of the period, meaning December 31st,
[193]
do we need to put an adjusting journal entry?
[197]
The answer is yes.
[198]
I have had use of the money from April
1st, 2019 through December 31st, 2019.
[207]
Therefore, I need to show the use of that
money, or in the form of interest expense.
[215]
So, again, the going back here when I
have a cash loan payable, typically,
[221]
the journal entry I'm going to be using
is interest expense/interest payable.
[230]
So, over here, I need to figure
out how much is my interest.
[236]
Well, it tells me that the loan
will bear interest at six percent.
[240]
So, the loan payable is at $200,000.
[246]
Whenever I see an interest rate, it
always denotes an annual rate of interest.
[253]
So, here is going to be six percent.
[256]
So, a full year of interest
is going to be $12,000.
[266]
Now, for Y company, did I borrow
the money for the full year?
[271]
The answer is no.
[273]
I borrowed it from April
1st through December 31st.
[278]
So, what I want you to do is close your eyes
and count on your hands, unless you're driving,
[283]
which is a Birdbox challenge, is we've got
April, May, June, July, August, September,
[290]
October, November, December, or nine months.
[292]
So, since we used that loan from 4.1
through 12.31, this is nine months.
[301]
So, what I need to do is I need
to multiply this value here.
[308]
I need to multiply $12,000 by
nine-twelfths, and I'm going to get $9,000.
[323]
So, I've used this money and what I need to do
here is I'm on for my adjusting journal entry,
[330]
I'm going to be debiting interest expense.
[336]
I have used the funds for nine months,
[338]
so I need to show that by going this
year to a debit interest expense.
[344]
Now, since the problem tells me that the
interest and principle will be due on March 31st
[350]
of next year, and not on December 31st,
what I'm going to do is I'm going to use it
[356]
for an account here called interest payable.
[360]
And my interest payable is a liability account.
[364]
I'm going to show that over
here as a credit for $9,000.
[368]
Does this make sense?
[370]
I show a debit with my expenses and here
I'm showing a credit to interest payable.
[376]
I'm increasing my liability
over here with a credit.
[380]
If you would like a further explanation of
this particular problem or a different one
[387]
that really gets in to a lot more things, I
have another video you can go through and use.
[392]
I'm going to pause real quick and we'll
do the other side of the transaction.
[397]
So, now we're going to do this
same question that we just went
[399]
over from the perspective of X company.
[402]
So, in this situation, I'm
giving Y company $200,000.
[407]
So, in this case right here for X company,
[410]
the transaction's going to
be a little bit different.
[413]
For X company, my cash is
decreasing by $200,000.
[419]
Why? I am giving it to Y company
who will pay me back in a year.
[425]
Since my cash is going down,
and cash is an asset,
[429]
I'm going to show that decrease
over here with a credit.
[433]
Debit, credit, expense revenue, assets
equals liabilities plus owner's equity.
[438]
On this side over here, though, I have an
asset in the form of a loan receivable.
[444]
Why? This client has to pay me back in a year,
or Y company has to pay me back within one year.
[452]
So, I'm debiting loan receivable.
[454]
Is a loan an asset?
[455]
Yes, it is.
[456]
They have to pay me back.
[458]
It's giving me future economic benefit,
[459]
and the fact that I will be
getting the loan plus the interest.
[462]
So, this is going to be on 4.1 and we get to
the end of the year, and when we get to the end
[470]
of the year, we're asking ourselves the
questions: do our revenues reflect everything
[478]
that we've earned during the period?
[480]
Do our assets reflect the
future economic benefit?
[484]
And I have loaned this money
to Y company for a period
[489]
of time-- from April 1st to December 31st.
[493]
So, even though they're not paying me the
interest on December 31st, I still need to show
[502]
that revenue, or what I have
earned over that period of time.
[507]
So, here, my loan receivable
amount is going to be $200,000.
[517]
The interest rate is going to be six percent.
[521]
We can write this here.
[525]
So, the full annual interest
is going to be $12,000.
[533]
Now, when I'm looking here at showing what
I've earned during the period in the form
[541]
of interest revenue because, again,
I've loaned this money to Y company
[547]
and even though they haven't paid me
interest, I still need to show this on my books
[552]
because this is the period
of time where I've earned it.
[555]
So, here, I've got to show my interest revenue.
[559]
I'm going to show that revenue here with a
credit, and how many months has it gone by?
[565]
Well, I want you to close your eyes again.
[566]
This is the accounting Birdbox challenge.
[569]
So, we've got here-- don't drive!
[571]
We've got here, April, May, June, July,
August, September, October, November, December.
[577]
So, nine months.
[578]
So, we have basically from
April 1st through December 31st
[586]
which is going to be here, nine-twelfths.
[589]
So, I'm going to multiply the $12,000
by nine-twelfths and I'm going
[597]
to get an interest revenue of $9,000.
[602]
So, showing interest revenue
is part of my adjusting entry.
[608]
Now, is Y company paying me cash?
[610]
The answer is no.
[612]
The interest in the principle will be repaid
to me or for X company on March 31st, 2020.
[619]
So, over here, I need to
show interest receivable,
[628]
and over here when I'm showing interest
receivable, over here is going to be $9,000.
[639]
So, let's kind of think about over here
what happens when we're going through
[643]
and doing adjusting journal entries.
[645]
When I'm doing adjusting journal entries,
I'm asking myself really four questions:
[649]
Do expenses reflect what I
have used during the period?
[654]
And here, for Y company, when Y company borrowed
the money, it really hasn't and that's why
[661]
on December 31st, 2019, we had to go through
[666]
and show this interest expense
or the use of that money.
[670]
The other part is do my liabilities
reflect my future obligation?
[675]
And in this case, it doesn't because I do have--
[677]
I have borrowed this money over
a period of time, and therefore,
[681]
I'm going to have a credit to interest payable.
[684]
Note: When you are going through and
doing this transaction, you do not debit
[689]
or credit the loan payable or receivable
for the amount of the interest.
[693]
Leave the amount of the loan payable by itself.
[696]
So, over here, we've got interest
expense and interest payable.
[700]
When I've gone through and done
this, now I can say to myself
[704]
that I've satisfied my adjusting
entry requirements.
[708]
Over here, for the basically, for X company
who's loaning the money to Y company, over here,
[715]
I can say, alright, I've got-- my assets are
now showing me my future economic benefit
[720]
because I'm also owed this interest, and also
over here I'm showing my revenues or the amount
[726]
that I've earned during the particular period.
[729]
And so, those are my adjusting journal entries.
[732]
Hopefully I've done this in under ten minutes.
[734]
If you want to see the longer explanation, as
well as what happens when the loan gets paid off
[741]
or gets repaid, please take a look at my other--
the second video, but it's the full version.
[748]
Thank you so much.
[749]
Have a great day.
[750]
I'll see you on the next video.
[751]
Please do not forget to like and
subscribe, and if you have any questions,
[757]
please feel free to send me an
email and if it's a good one,
[763]
we might try to get it up there on a video.
[764]
So, have a great one and I'll
see you on the next video.
Most Recent Videos:
You can go back to the homepage right here: Homepage