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Hi Chris
I hope you are well.
https://www.youtube.com/watch?v=tYaGBckDVeY&ab_channel=OpenTuition
At around 4.25 on the above video, I’m a bit confused why under cash and cash equivalents is a positive figure if it includes bonds but overdraft is a negative since they surely are both liabilities, no?
Can I also ask why in the same video at around 4.41 why the retained earnings b/f figure is on the credit side? Is it because its equity and an increase is always on the credit side? Equally, why is the PFY figure on the credit side in retained earnings if a debit to the profit and loss is a expense?
I’m assuming the same logic with retained earnings applies to interest payable and tax payable in the sense that the b/f figures appear on the credit side?
With the PPE part at 18.13, is the revaluation on the debit side of PPE a revaluation upwards? If it was revalued downwards, would it be on the credit side of PPE?
Sorry, quite a few questions here! Apologies for that and as always, thanks in advance.
Kind regards
James
Hi James,
the bonds figure you mention is an investment in bonds, hence an asset. It is not where we have issued bonds which would be a liability.
Retained earnings is part of equity (shareholders capital) and is therefore always a credit balance (DEAD CLIC). The profits made by the company are an increase in their capital and so will increase (credit) the retained earnings.
For the revaluation the credit entry is to the revaluation reserve (equity) and the debit is to increase the value of the asset itself. If it was a reduction in value then the asset would be credited.
I think that covers the questions posed but please let me know if I’ve missed anything out or if you don’t quite fully understand the answers.
Thansk
Hi Chris
Thanks for that. Yep, the cash and cash equivalents answer regarding bonds definitely makes sense. Thanks for clarifying that.
Thanks for the explanation for the retained earnings part as well. I’m trying to understand the theory by myself why the transactions are on their respective debit/credit side on the template example in the video and I’m struggling a little bit. Is there anything you can say that will help with this or is this one of the cases of just remembering the template and remembering where things go in advance? Sorry about this.
Thanks also for the revaluation reserve explanation. That definitely makes sense.
Thanks in advance.
Kind regards
Hi James,
It comes back to what was very first introduced when you looked at financial statements. Expenses, assets and drawings are debit balance. Liabilities, income and capital (equity) are credit balances.
Thanks
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