[MUSIC] In this video we're going to record what happen in year x2 in the campus bookstore, with the bank loan and the interest cost. As you will remember, at the end of year x0, Christina got a bank loan of 20,000 euros. This is why you see a liability called bank loan with a total amount of 20,000 euros. Now, in year x2, we need to recognize the interest cost of this loan. So, we have been using the loan for one year. And that has a cost. We need to pay this cost, this service, that the bank is giving to us. Now, what's the total amount? It's 5%, remember the interest cost was 5% of the principle we are using. So how would you account for this? Well, first thing, at the end of the year we are paying for this interest. Therefore, cash will decrease and therefore, we're going to credit the cash account for 1,000 euros. Remember that the annual interest is going to be this 5% of the 20,000 euros of principal that we are using. So it's going to be 1,000 euros. Second thing, with this amount that we are paying, are we generating an asset or it's an expense? Does it have a future value? Well, not really. This is for a service that we have received in the past. So we are not pre-paying anything here. We are just paying for something that we have already consumed. Therefore, we need to recognize an expense, so the profit and loss account is going to decrease and we debit it by 1,000 euros. After this transaction, shareholders are poorer by 1,000 euros. And they are less liquid as well. So in this case, profitability and liquidity coincide. Remember that the loan we got in year x0, at the end of year x0, was for three years. So the maturity of this loan was three years. So by the end of next year, but the end of year x3, we'll have to repay the full amount of the principal. You may think that there is nothing to account for yet. Because we need to repay this at the end of next year. Okay, so the first thing that we need to do here is to decrease the bank loan. So remember, this is a liability account, therefore to decrease the bank loan, what we need to do is to debit the bank loan account for 20,000 euros. And what we are doing now is reclassifying this amount to a new account, which is the current portion of this bank loan. So let's create here a new account called bank loan current portion. And we increase it by crediting it by the same amount. So at the end of the year when we present the balance sheet, you're going to see that under current liabilities, you are going to have an obligation of 20,000 euros. Next transaction. Christina said that next year she's planning to make new investments to expand the business a little bit more. And this is why now she's getting a new bank loan to be repaid in five years. The total amount of this loan received is 30,000 euros. So how would you account for this? Well, this is an easy transaction, you have seen it before, we have practiced it now a number of times. And so the first thing that happens here, obviously, is that cash goes up. So we debit cash by the total amount of 30,000 euros. This is the amount we'll receive from the bank on December 31st. And second, now we have an obligation to repay this to the bank in the future. And so the bank loan account, the long-term bank loan, remember, it's going to increase. So we credit bank loan by the same amount, 30,000 Euros. So as you see here, liquidity's increasing, but we also have an obligation that increases. Therefore, this is money we need to return, and here we have not made any business, so profits have not changed. It will all depend on what you do with this cash that now you have. If you invested well, probably in the future it's going to generate profits. But what is clear is that this transaction, getting a bank loan, doesn't make you richer. Great, so getting close to the end. We only have a few more transactions. Actually three more transactions and we are done. And then we're going to prepare the balance sheet, the income statement, and a new financial statement, the cash flow statement. [MUSIC]