[MUSIC] In this video clip, we are going to account for a few transactions that we already recorded in the past period in the first year of operations. So you should be already familiar with them, and therefore I'll try to go a little bit faster in my explanations. We're talking here about operating costs of running the business, the campus bookstore. Such as the salary of Christina who at the moment is the only person running the business and the utilities, water, electricity, etc. Total amount of this operating cost that I'm going to call selling, general administrative expenses is 37,000 euros. And they're all paid in cash, so how would you account for this? The most clear thing that happens is that we pay everything in cash, so let's start by recognizing the decrease in the cash account. We credit the cash account for a total amount of 37,000 euros, now the second question here is, are we generating an asset? Or we have to recognize an expense, clearly, this is an expense because you are talking about the salary of Christina. And she's been working for the campus book store for the past year, so this value is already gone, consumed. And second the utilities, water and electricity that also have already been consumed, and therefore there is no future value into them. Hence, we are going to recognize here a decrease in the profit and loss account by debiting this profit and loss account for a total amount of 37,000 euros. So after this transaction, we are poorer by 37,000 euros and also we are less liquid by the same amount. You know, if all the transactions were paid in cash at the moment you purchased things accounting would be much easier. But unfortunately, this is not the case, so we need accrual accounting. In the fourth week I'm going to explain a little bit more what accrual accounting is about. So I'm going to clarify this concept and we're going to see the differences between cash accounting and accrual accounting. Now let's consider another operating cost, here we are talking about the cost of the rent. As you will remember, the campus bookstore is renting the premises where they are operating the business. At the end of the year X1, we prepaid the rent for the year X2, and now that the year X2 has passed we need to recognize the consumption of this prepaid rent. So the value of this asset would decrease, how would you account for this? Well first you're going to recognize the decreasing in the rent, so we are going to credit the prepaid rent. The asset loses value, actually loses the total value it had. Second, we need to recognize that we are poorer as a shareholders in this company. So we recognize an expense, a rent expense for the total amount of 6,600 euros. After this transaction, one of our assets has lost value, and therefore now we are poorer. In terms of liquidity, cash has not changed because we prepaid these, remember in the last period, in the year X1. Now let's take care of the payment of the rent for the following year, so at the end of year X2, on the last day of year X2. The campus bookstore pays the total cost of rent for the year X3, how would you recognize this? This one is easy as well, so cash obviously is going to decrease, so we credit cash. The total amount is 7,200 euros, and then we need to recognize now that we have another asset, so we give cash. And in exchange, we get another asset, which is the right to use the premises for one more year, and we call this prepaid rent. And so we debit the prepaid rent because it's an asset that increases. So one asset decreases, another asset increases, we are less liquid but profitability has not changed. Again, there is a mismatch in time between the payments in this case and the expense. In the next video we're going to see a few transactions related to non-current assets. [MUSIC]