135 Three, we purchase it for 130 5300. It could be multiple pieces of equipment or one piece of equipment. And what we're going to do with equipment is we're going to put it on the books as an asset, similarly to how we put supplies on the books as an asset. And then we want to expense it as we use it. But unlike supplies, where we could count how much we used, and we could say, Hey, we use this many reams of paper. Therefore, I can see how it went down.

Let's just write down the supplies by the amount that has been used, obviously, a building or like a forklift or something like that. We couldn't just write down because after time has gone by, we know that the forklift went down in value, but we still have one forklift, it's not like we can count the forklift and now we have less than one forklift. So that means that we're going to have to depreciate some other way, some other estimated way. And we'll talk about estimates later at a later time. The simplest type of estimate would just be too divided over the number of years. That's called the straight line method.

But whatever method we use, we want to tell our reader two things, we don't want to just write down the equipment account, because if we did, so then they wouldn't know how much we bought it for. And because it's such an estimate, we want to tell them how much we bought the stuff for and how much we're estimating it to be written down by. Therefore, what we've done here is we've kind of cut the T account in half, so it's like the debit side, and then the credit side. So here's the debit side. And here's the credit side, we're end up therefore with a contra asset account, meaning this account is the credit half of the equipment account. Therefore, it's a credit even though it's green, and that means it's an asset.

It's an asset with a credit balance. Most assets have debit balances, and that's why it's a contra asset account. So before we post this, we can see that we bought it for this amount minus this amount adds up to 37 350 that's the book value. Now we're going to increase the amount that it's going down by increasing the credit, which will decrease the book value. So that's what's happening here. And then the depreciation is what it represents is the devaluation of the property plant equipment, in this case, the equipment, it represents the depreciation, the use of the decline in value, the use of the equipment in the same time period as to help us generate revenue.

So we're going to post that here, and there's just gonna have to give us the number. So although this is probably the most difficult conceptual adjusting entry we've had so far, it's actually the easiest one to post if you just kind of memorize it, because right now we're going to have to give you the number of 1100 and we're going to credit 1100. And then if we post that out, then we can go to depreciation expense down here in cell h 21. equals and point to the debit. That's a debit balance account. That's debit capital. The debits go up, puts us out of balance brings net income down, then we'll go to the accumulated appreciation in H 11.

Say that equals the credit, the credit is going to go up in the credit direction to the contra asset goes up which brings the book value which is this minus this down. So the book value went from here 25 to sorry, here 37 350 down to here these two accounts 36 to 50 which of course is a difference of 1100. Okay, so I'm going to unhighlight these and do the last one here so we're going to unhighlight these Alright, see them says when the accounting department pays insurance, the account is debited is prepaid insurance as of the cutoff date. prepaid insurance is calculated to be 6000. So once again, let's go through our method and see which accounts might be affected. We have one balance sheet account above the blue line related to insurance.

In this case, it's going to be prepaid insurance. So I'm going to make that highlight that to show that that will be affected. One account below the blue line, either revenue or some type of expense, in this case, some type of expense, that expense called insurance expense. We know that expenses all have debit balances, we know that they only go up in the debit direction. So how do we make something go up, we do the same thing to it, which in this case would be another debit. So I'm going to copy this going to make sure that that is a debit right on top because a debit generally go on top.

If the only other account affected is prepaid insurance, then that should be a credit. So I'm going to copy that put that on the bottom and make that prepaid insurance. So once again, we can kind of see which way it's going without really understanding what's going on. So now let's talk about what's going on. So what is prepaid insurance? How did it get there?

When we pay for insurance, by definition, we're getting something for in the future so we can't pay for insurance after an accident happens. If we're paying for car insurance or something like that, because that's not how insurance works, most of the time might work that way now for health insurance, but but for car insurance, you generally have to pay before the accident. So then what that means is when we buy it, we got it, we have an acid, and then we should then expense that asset over the over the coverage of the insurance. So we're going to put it on as an asset, then we're going to expense it as of the coverage of the insurance. So this is the amount that the accounting department has put on there, we have now determined that we have consumed a part of that and the amount that is left is 6000 in this case, so what we're saying is, this is what we have on the books so far, and we now think that we have consumed some of it and the amount that is left is 6000.

Therefore we're going to have to what do we have to bring this down by an order To bring it to 6000, the amount that we have determined, that's going to be a subtraction problem of 12,000 minus the 6000 in this case, so we got to bring this down by 6000, to bring it to what we determined it to be, which is 6000. Now, there's two ways that we could ask this question. Note that, in this format, we're saying as of the cutoff date, prepaid insurance is calculated to be meaning, we're saying what discount this account should be. And in this case, it should be 6000. We could also format this and say that this is the amount of prepaid insurance that has expired that has been used throughout the time period. If we said that then we would just be saying exactly what the expense should be.

So in this case, it happened not to matter because it's 6000 over 6000. Either way, we used 6000. And there will be 6000. Less we used half of it, but if it's not in that proportion, be careful that the question could be asked So either way, we could say do the calculation say this is how much is still prepaid. Or we can say how much this should go down by saying how much has yet has been consumed. So in this case, we're going to say it's 6000.

And credit of 6000. And once we post that, we assume that this will go down to what we calculated it to be, which in this case is 6000. So let's post this I'm going to go down to h 19. n equals and we'll point to the expense, the expense will go up, put us out of balance and bring net income down. So remember, net income is the income revenue here minus all revenue here minus all of the expenses, which is that the 83 980 839 80, this is income, not a loss. Then we'll be up here in H eight, we're going to say this equals and we'll point to the credit, that's a debit. That's a credit that's going to be the opposite, which will make this go down, puts us back in balance here.

And we now see that this is the 6000, which matches what we think is what we calculated it to be.