Accounting Flow Intuition: BASE Formula - Video Tutorials & Practice Problems
On a tight schedule?
Get a 10 bullets summary of the topic
1
concept
BASE Formula: Accounts Receivable
Video duration:
8m
Play a video:
Alright. So now that I've introduced you to the concept of debits and credits, I want to show you a simple but important formula that we use in accounting. It's going to help us understand how transactions flow through accounts such as cash, inventory, accounts, payable any account. Let's check it out. Alright, so here we go. We've got the formula at the top of the page here and we call it the base formula. Okay. And that's because of the different the different parts of the formula. Well they have an acronym. Base. Okay. So it's our base formula. And let's go ahead and go through it right now. So in any account we're gonna have some beginning balance. All right. So if we're talking about cash, well we're gonna have a beginning balance in cash, right? Some amount of cash on hand. And then we're gonna have additions to the account when we receive cash. Well our cash balance goes up right? That's pretty intuitive. And then we're gonna subtract from the account. Well when we spend cash right? When we have outflows of cash. Well that's going to subtract from our cash balance and then guess what? We're gonna be left with an ending balance, wow. What a revelation. Right? We start with some amount, we add things to it. We subtract things from it and then we have an ending amount. Great. That's our base formula. It sounds really simple but we're gonna see how important it is and how each account has different additions, different subtractions. So you want to know for each account how these how the transactions are gonna affect the account with the based formula. So let's go ahead and go through two very common accounts accounts receivable and retained earnings. Okay so let's start here with accounts receivable. Remember that accounts receivable when we see this word receivable? Well that means it's an asset. Right? Everything receivable is an asset. And accounts receivable specifically it's amounts that the customers owed to the company. Okay So this is when we sold something to the customer and we said well you can pay us later. Okay we made the sale but we haven't collected the cash yet. So we have this receivable from the customer. Okay so these are assets. Remember these are assets right here. Okay so let's go ahead and see how the base formula affects our accounts receivable. Let me scroll down a little bit. So let's start with the beginning balance. Well what's gonna be the beginning balance in accounts receivable? Well the beginning balance that's money that customers already owe us right they owed us from previous periods and they still owe it to us at the beginning of the period. Well that's the beginning balance in the account and then we're gonna add to the accounts receivable. How are we going to increase our accounts receivable? Well that's when we sell more things with I. O. U. S. Right We sell things to the customer and say hey you can pay us later. Well that's gonna increase our accounts receivable balance. Right? So these sales to customers with I. O. U. S. Well we call those on credit, okay we call them sales on credit or credit sales. That means that we haven't collected the cash yet but we're expecting to collect it soon. Okay so those are gonna be additions to our accounts receivable balance. What about the subtractions? How are we gonna lower our accounts receivable balance? So we lower the accounts receivable balance. Well when we collect cash right when the customers who said I'll pay you later? Well they finally pay us when that time comes around we're gonna lower um we're gonna lower our accounts receivable balance because we receive that cash. Cool so that's the subtractions from the account And then finally we have our ending balance right? Very simple beginning balance plus editions which is more credit sales minus subtractions which is cash collected from the customers leaves us with our ending balance. Alright so let's see how this works. An example. In in an example right here let's use our base formula. A company had a beginning balance in accounts receivable of $1,200 throughout the month. The company sold 3000 in cash and 2000 on credit notice it says 2000 on credit. The final balance and accounts receivable was 1800. What amount of cash was collected from customers throughout the month. Okay so we know we collected 3000 in cash. Right so our answer has to be at least 3000. So cash collected this month. Well there's gonna be 3000 from cash sales. Right? Let's stay on the screen. Let me go back cash sales. Right? But there's also the money we collected through accounts receivable. Right? We allowed customers to pay us later and some of them did pay us. That's gonna be that change in the accounts receivable. Let's check it out. Let's use our base formula. So this is our base formula for accounts receivable. Right? Beginning plus edition minus subtractions equals ending balance. So let's use what we just learned about accounts receivable. And let's fill in our based formula. So it told us that the beginning balance, right? The be beginning balance, it told us was $1200 right here, Right? $1200 was our beginning balance. So let's put that in right there. What about the additions how do we add to accounts receivable? Those were the credit sales. Right. The credit sales and they told us right here there was 2000 in credit sales. So that's going to add to our accounts receivable because we haven't received that money yet. We sold it on credit and we're waiting to get paid. How about our subtractions. What's the subtractions from accounts receivable? That's the cash collected. That's what we're looking for in this problem. Right. What amount of cash was collected from customers. So we're gonna leave that. I'll just leave it as the s right because that's what we're solving for. Make a better s. Okay. Actually I'm gonna put CC for cash collected to be a little more specific. Okay. C. C. Stands for cash collected and that's the cash we collected uh from accounts receivable. Alright. And now let's finish this formula. How about our ending balance? It told us right here the ending balance was $1800. Right? So look at this we've got three out of the four variables in our base formula. And this is how it always gonna work. They're always gonna have to give you three of them, you just have to figure out which three they gave you. Right. They might not give you the beginning balance but they'll give you the subtractions or they might not tell you the additions right? There's always gonna be one that's missing. And then we have to do a little bit of algebra to solve for the last one. So I hope I didn't scare you with that algebra word. But this is really simple algebra. Let's go ahead and do it real quick. 1200 plus 2000. Well that's 3200 minus, that's our variable the cash collected that we're solving for equals 1800. Okay so let's just rearrange this a little bit will add cash collected to both sides to get it by itself. Subtract 1800 from both sides. And what are we left with here we've got 3200 minus 1800 that's 1400. And then on the other side is our cash collected, what we're solving for. So there we go. 1400 is the cash collected on the account. And that should make sense. Right? If we fill in our entire base formula, let me do it over here. We had our 1200 beginning balance plus 2000 in credit sales minus 1400 that we actually got paid by the customers equals our ending balance of 1800. Right? So the math checks out, we're good. So let's go ahead and finish solving the problem most of the time. That would just be the answer. But in this one they were trying to be a little extra tricky by throwing in those cash sales, right? Because at this point you might have forgot that there was cash sales as well and that's how professors left to trick you. Alright so we've had those 3000 in cash sales. That was definitely cash collected during the month. But then there was also the 1400 cash from A. R. Okay so that's just a little extra trick. The main thing I want you to notice here was how to use the base formula. Right? So 33,000 plus the 1400 from A. R. That's a total of 4400 in cash collected and that would be the answer right? 3000 in cash sales. 1400 collected from a are cool. So let's go ahead and pause here, and let's try using our base formula again with the retained earnings account. Cool, Let's do that now.
2
concept
BASE Formula: Retained Earnings
Video duration:
5m
Play a video:
Alright, so let's go ahead and use our base formula with retained earnings. So remember that retained earnings. This account, it's an equity account, right? This is one of our main equity accounts and it's a holding place for all the income, right? All the income. Remember income and earnings. These words are interchangeable income and earnings um that has not been paid to our stockholders as dividends. So remember dividends is not an expense right, dividends don't go through. Our income statement dividends is literally this money that we've earned over time. And then we're giving it to the stockholders who own that money. And stockholders definitely shouldn't have that apostrophe there. Uh So let's go ahead and use our base formula. Okay, so we have our beginning balance in retained earnings. Well this is gonna be all the previous year's net incomes, right? We've been storing all this money over time, We've been earning money over time and we haven't paid it all out. Maybe we paid some of it, but whatever is left, those are still retained from previous years. And then we've got our additions to the account. Right, what are we, how are we gonna increase our retained earnings? Well, that's by earning more money. Right? By having more net income. So this year's net income, which comes from the the income statement, that's the bottom line on our income statement. We have all our revenues, all our expenses and we're left with our net income. Well that's going to go to our retained earnings account. And then what's gonna subtract, Well that's when we pay those dividends, right? When we pay the dividends to the stockholders dividends. That's going to subtract from our retained earnings account account. And then we're finally left with our ending balance boom. Super simple again. Right. We've got our base formula, we have some amount of earnings that we haven't paid out. We earn more money. So it increases the balance we subtract when we pay some of it as dividends and we're left with our ending balance. There's our base formula for retained earnings. So I just want to point out again remember retained earnings. That's an equity account. Okay, So let's go ahead and do an example here. Same as we did above with accounts receivable. Let's do the same thing for retained earnings. So company has a beginning balance and retained earnings of 50 55,000. So that means in previous years they had been earning money, they had net income and they had they had 55,000 that they had not paid as dividends this year. The company had revenues of 40,000 and expenses of 32,000. The company also declared and paid a dividend of 6000. What is the final balance in retained earnings. Okay, so let's go ahead and use our base formula again. Right. We've got B plus additions. Beginning balance plus editions minus subtractions equals our ending balance. Right? So let's let's take what we do know already. They told us the beginning balance and retained earnings. Well 55,000, Let me do it in blue 55,000, that's our beginning balance entertained earnings. And then what else? Company had revenues of 40,000 and expenses of 32,000. Let's let's skip that for now. Right. We we know we want net income. As in our additions, let's go to the ones that they gave us straight up right here. They told us dividends of 6000 right, 6000 and dividends. We know the dividends are subtractions from the account. So we're gonna have a minus 6000 here. And then what is the final balance is what they're asking us for? So we know that's gonna be our variable, right? We're solving for the ending balance. But what about those additions? What is the addition to the account? Net income? Right. So how do we find net income? Well, on our income statement we show our revenues, we take out our expenses and we're left with net income. So in this problem they didn't tell us specifically our net income, but they told us our revenues and our expenses. Right, let me do that in. Green revenues and expenses here. So let's go ahead and find our net income. We had revenues of 40,000 expenses Of 32,000 and well, that leaves us with our net income, right? Revenue minus expenses is net income. So 40,000 -32000 is 8000. So we know that the additions to the account were 8000 right here. Right? So since we have 8000 in net income, well, that goes to our retained earnings, that's earnings that we made this year. And we haven't paid out, but we did pay some of it, right? We paid 6000 in dividends, and that's gonna get us to our ending balance. So 55,000 plus 8,000 -6000. Well, that's gonna be uh 57,000 right here, right? It goes up by 2000. So our ending balance right? There is 57,000. And that's the answer to this question. Right? The little trick that they had here was that you had to solve for net income. Right? They didn't just tell you net income, but it's just our base formula. Nonetheless. Right. Beginning balance plus the additions, which was this year's net income minus subtractions, which was the dividends gets us to our ending balance. Okay, So you're gonna see throughout this course, as we go through new topics, you're gonna see how the base formula is used for all different types of accounts. We're going to show it for inventory. We're going to see it for accounts payable. Every type of account has this based formula to it. All right, so let's go ahead pause here and we'll move on to the next video
