FA3 - Understanding Assets, Liabilities and Equity

the problem from this video can be downloaded at a counting workbook calm if you go to the website click the PDF link and you can download a copy of this and all of my problems for yourself now if you check the website and you click on videos you'll see there are more videos than those I've listed publicly on YouTube you can see that there's every problem covered in the workbook has either a public video or a members-only video if you'd like access to the members only video just click the join button beneath the video player

on YouTube alright let's jump into the problem let's take a look at problem 1 - a from our accounting workbook this problem has us identifying accounts so in our very first video we explained what is an asset or liability shareholders equity account revenue expense dividend what are they what categories are they what does it mean to be an asset these types of things this video has us flexing those muscles so we're gonna go down our list for each account we're gonna say isn't an asset is it a liability is it Charles's equity revenue expense or

dividend and further if it's an asset or liability and many of these will be is it current or long-term now we haven't discussed this yet current versus long-term a current asset is one that is expected to be liquidated or we're expected to use it up within one year one year or less so an example of a current asset is inventory right Walmart expects to sell through any piece of inventory in less than a year so Walmart's inventories are current assets cash we're constantly moving it's very much considered a current asset now if I go back

to the Walmart example I see that they have my Walmart they have like refrigerators where they sell stuff out of the refrigerator like that refrigeration equipment that keeps stuff cold that is an asset of all Mart but it is a long-term right those refrigerating units where you might buy milk from that is you know it's gonna last them years that's a long term asset and so we can do the same for liabilities I have a phone bill that's a current liability I gotta pay them in 30 days I mortgage that's a long-term liability it's gonna

take me 30 years right so one year is our distinguishing line between current and long-term okay I've rambled long enough let's get started we just worked our way down the list identifying it and as asset liability shares equity revenue expense our dividend and is it current or a long term so number one long term investments this is something we can owner control that would be good - owner control this is an asset it even says in the name a long term well there's our Dave give away it ain't current now we can have current investments

right I can buy and sell stocks and shares that I'm planning the hold for a week a month a couple months it can be current in this case though it's identified as long term so it's gonna be we're buying for the long run here accounts receivable absolutely an asset it's when somebody owes me money and you know it's part of normal business and so if somebody owes me money a customer I've done work for it I've given them a bill they haven't paid the bill yet that's a typical account receivable situation they're gonna pay me

in usually 30 days certainly 99% of customers are gonna pay in less than a year this is a current asset consulting revenue well it's got the word revenue in it it is company doing hoarded Esther and money it's a revenue rent revenue same thing it's a revenue not noted as current or long term it's assumed it would have been earned in the last few months maybe the last month or 12 months depending on the time period we're looking at computer that's an asset and yes computers go out of date quickly but still one would expect

a computer to last more than a year so I would call that long-term liability oh sorry I should say mortgage payable is a liability if it's got the word payable that's a dead giveaway for a liability it's got the word receivable you should be thinking asset mortgage payable is a liability and it is a long-term liability my mortgage is gonna last 30 years salaries payable those are liabilities it's having to pay your employee salaries unpaid salaries they're not gonna put up with you for not paying them for a year they won't be air flows they'll

be suing you and so therefore this is a current fly not a long-term one cash is considered the most current of current assets supplies is indeed an expense retained earnings we said or supplies expense is inexpensive we'll talk about that in a minute retained earnings we said was one of our two shareholders equity accounts it's the company choosing to keep profits within the company and there's it's the account that tracks at temporary investments asset the word temporary indicates to me that it is current or a short-term accounts payable liability think of your phone bill when

you think of accounts payable and when I think my phone bill I think 30 days so current income tax expense that's an expense car is an asset and it is a long-term asset right it'll last see more than hear salaries expense is an expense utilities expense is an expense land is an asset and it's a very long-term asset it'll be here long after we're dead well maybe after you're dead my head's gonna be frozen in a vat somewhere so I'm gonna live on for a long time we'll leave that for another discussion for another day

inventory asset and it is current building asset a long-term interest expense is indeed an expense bank loan payable liability it's not clear here whether it's current or long-term in most intro accounting classes assume a bank loan is long-term unless it tells you otherwise so let's assume long-term unless it says something else common shares that is shareholders equity we don't need to know whether it's current or long-term supplies well if I think of office supplies like I got some post-it notes right here if I think about post-it notes these are assets there things we can own

or control that would be good tone or control and they are current so we've answered the question but sometimes when I do this in a classroom students will call this out they'll say supplies expense or expense but supplies are an asset what's going on here like what isn't this like kind of the same thing like what's going on and so I just want to explain this if you don't feel like you need an explanation fine skip to the next video but just a brief explanation I'm like this is supplies but what is supplies expense then

so if my University let's say they bought a thousand dollars worth of these sticky notes right and they put them in a sticky note cabinet and so they have supplies right they have a thousand dollars worth of sticky notes that is an asset they own and control $1,000 worth of sticky notes months go by and of course us professors are like vultures circling around supply cabinet waiting for new order to come in and grab supplies for ourselves we look at the supply cabinet a month later and in that supply cabinet that used to have $1,000

of sticky notes the vultures have circled and now there are only $100 of sticky notes left over well we have $100 worth of assets right if we're the the company here we have $100 worth of assets we have $100 worth of sticky notes that is my supplies asset that is this one what about supplies expense well supplies expense is the amount of supplies I've used up in a given period of time and so from the perspective of the company they've used $900 they have $1,000 now they only have a hundred their supplies expense for that

period is 900 it's the amount of supplies they've used up over a given period of time so it sounds similar supplies the asset and supplies the expense but it is different supplies the asset how much physical stuff do I have supplies the expense how many dollars worth of supplies have been used up okay I hope that was fairly clear this is again is chapter 1 module 1 we really explore this concept in chapters 2 & 3 of the course but it's good to have sort of that the we've primed the pump now right when we

get to it in module 2 or module 3 you're gonna be ready for it okay stay tuned for our next video bye for now