[MUSIC] In this video clip, we're going to account for transactions that we have seen before. So I encourage you to record the transactions on your own. And for this, it would be very helpful if you download the list of transactions that you have available on the website. In any case, after announcing each transaction, I'm going to give you a detailed answer of how to account for it. Let's go for the first one. The total sales of the campus bookstore to individual customers, remember that individual customers go to the store and pay in cash, have been €140,000. The cost of the books sold to these customers have been €98,000. So let's account for these transactions in two steps. First, we're going to account for the sale and second for the cost of goods sold. So how would you account for this sale? Okay, let's see. First, customer's pay in cash, at the moment of purchasing the books in the store. Cash will increase, so we debit the cash account for €140,000. Second, this money already belongs to us and we don't need to return it to anyone. So you don't have any obligation to return this money to anyone. So the net worth of the shareholders increases thanks to this operation. And therefore, we're going to increase the profit and loss account by crediting it. So we credit profit and loss account by the same amount. After this transaction, are we richer or poorer? Obviously, we are richer because the net worth of the shareholders' owner's equity has increased by €140,000. Are we more liquid or less liquid? We are also more liquid, because these sales are cash sales. And therefore we have collected the cash already. Let's account now for the second part of this transaction. The cost of the books that we are selling. How would you account for it? Okay, first, we're giving the books to the customers. So our inventory account will decrease and therefore we need to credit inventory. Credit an asset in order to decrease it. So now we have fewer books. Second, so this is an asset going down in value. So second, we need to recognize that now we are poorer. We had an asset that now we don't have anymore. And we are not going to recover it. So we need to recognize a debit on the profit and loss accounts. And these are the cost of the goods sold. The total effect of this transaction in the net worth of the shareholders is the difference between the revenues and the cost of the goods sold. So shareholders are richer by €42,000. In terms of liquidity after this transaction, cash has increased by €140,000. Let's account now for the credit sales. So these are sales, remember, of textbooks that we make to the school and the school takes 60 days to pay the campus bookstore. So let's account for this in two steps as well. First, we'll record a profit of €70,000. Even though we have not collected the cash yet, we can recognize revenue because we have delivered the product. So now we have the right to collect this money from the customers and this is why we debit accounts receivable. So by debiting accounts receivable, an asset account, we increase it. Note, that after each transaction, the basic accounting equality always holds, total assets are the same as total owner's equity and liabilities. So in this case, you see an increase in an asset of 70,000, an increase in profit and loss, owner's equity of 70,000 as well. After this first part of the transaction, are we richer or poorer? Clearly, we are richer, we have recognized revenue, that's an increase in owner's equity. Now, are we more liquid or less liquid? Well, liquidity has no change, so cash remains the same because we are going to collect these sales in the future. So as you see here, once again, liquidity and profitability are not the same. And this is why we're going to need different financial statements to analyze both things. Let's see now the second part of the transaction, the cost of the books sold. How would you account for it? The first thing is to decrease the amount of inventories we have. Because we have already given these books to the customers. In this case, the textbooks to the school. So we have delivered the product, we don't have it anymore. And our assets have gone down. So we credit inventory by €50,000. Second, we need to recognize that now we are poorer. So we need to recognize the cost of the goods sold. Once again, profitability is changing now we are poorer, however liquidity is not changing. Liquidity changed the day that we paid for the purchases of these books and now we are selling. So, as you see, there is a mismatch in time between liquidity and profitability. As a result of this transaction, the overall effect on the net worth of the shareholders is an increase of €20,000, whereas, the change in cash is 0. Okay, we are making progress, let's go for our next transaction. In year x2, the campus bookstore collects a total amount of €64,000 from the school, from the credit sales. How would you recognize that? Let's see. This is an easy one, okay? So cash goes up, so we need to debit cash. And second, accounts receivable will decrease. Remember that the accounts receivable is that right that we had to collect this money from the customers. Now we are collecting the money, so the value of this right goes down. And it goes down by 64,000, and we do it by crediting the accounts receivable account. So the overall effect of this transaction is that one asset goes up by €64,000, and another asset goes down by the same amount. So everything balances. As you see in this transaction, are we more liquid or less liquid? Clearly more liquid, right? Cash has gone up. Now are we richer or poorer? Well, profitability has no change, why? Because we had the right of recognizing the past, the revenues from these credit sales. One more transaction for this video clip. Payment to suppliers. I think this is easy as well, so you can do it. How would you account for it? If we paid a supplier, there's a cash outflow, so we credit cash. Cash is going to decrease. And second we are honoring one of the obligations we had. So the accounts payable are going to decrease. And we're going to decrease it by crediting accounts payable by the same amount. After this transaction, we are less liquid, but profitability has no change. I know I'm making a lot of emphasis in the difference between liquidity and profitability. But believe me, this is one of the crucial points that you need to learn, that you need to get from this course. And actually, in the last week of the course, you're going to see why that is so important. [MUSIC]
