Now in this episode, we will implement some transaction analysis. And from the set of transaction, we'll record them properly, and then we will come up with the income statement and the balance sheet. Well, this is kind of long, and clearly, this is in our handout. So if you miss something here on this page of the flip chart you can go there and check how this goes. But I believe that this kind of important to go together with you through this process. Because sometimes in this accounting course we will go together through a certain procedure and that hopefully will be carved In your minds. So this is transaction, Analysis, And example. So here are transactions, number 1, so this is initial investment. So we start a company from scratch. So on the left side, here we will write the asset account, here we will put liabilities and network account. So cash, let's say it's $200, so I put here +. So we have to find another account and also find some balance that will be 200 and that will be matching that. Well, this is capital stock. This is a liability, also +200. So after this, if we stopped here, if we use the stroboscopic world, and we said, what's the balance sheet after this transaction? It will be 200 cash as an asset, 200 capital stock, that's it, no activity, no income, no nothing only these things. Now the next thing is a loan or a note, so we have some credit, again, cash goes up to by 100, and then here we have note payable of 100. So now after this it would a 3 and 3, great. Actually, it'll be 3, and here 200 and 100, three all together. Now the next thing, now we start, let's see we rent a premise. So this is rent, and the landlord asks us to pay six months in advance. So we have now an asset that is pre-paid rent. That is, let's say +60, and we pay that in cash, so now on the same side, our cash is diminished by 60. See again, well, now we do have negative numbers, so we can say that this is the zero balance, and here it was also sort of zero balance. Now we also purchased some sales equipment, we talk about a trading company. So here we have property plant and equipment of +15, this is an asset. And then we paid in cash, and so our cash has diminished by 15. Well, so far so good. Now here, So we sort of prepared, but we haven't yet engaged in any operation. But now we buy merchandise, I will use abbreviations, it's in a more detailed form, it's all in our handouts. So we put a merchandise purchase, so now we have inventory +40, and then cash. But we purchased that only for 10 in cash, so 30 is on credit accounts payable here, +30. Again, you see the balance, here it's +30, here it's +30 too. And now finally, in number 6, we have the first sale. So we sell some merchandise, and we sell that for cash. And we sell that for $25, so here comes sales revenue, which is 25, but the cost of that from available inventory was just 15. So here and here comes the count cost of goods sold -15. So that's the first part and now I will proceed. So these are six transactions, let's say now comes number 7, that's another sale. But this is sale both in for cash and for credit, I'm sorry, this is only for credit. So now we have accounts receivable +10, inventory -7. And here again, we have sales revenue +10. And then cost of goods sold -7. Now, we have to pay now some salary, and this is salary. And here we have salaries payable of +3, and then we see expenses, which is -3, which is expenses, this is accounted to revenues. Now, the next thing is payments, some payments. So we, first of all, we paid some accounts payable, so we reduced our credit. So this is cash, -20, accounts payable -20. And then also this is cash -3 and then salaries payable -3. So we paid out all the salary that we owed. Now we have more purchases, yeah, these purchases inventory goes up to 150, by 150. Then part of that is in cash and part of it is on credit. So accounts payable +75. Now here is the massive combined sale. By massive I mean not only that it's kind of big, but it's also both on cash and credit. So cash +120, accounts receivable +40 and the cost of that inventory -115. Here we have the revenue, this is 120 + 40, 160. And cost of goods sold -150, so we are almost set, now we have to collect some of the promised amounts. So we have here cash +30 and then accounts receivable -30, so we converted that into cash now. And we have just a few things to proceed. So number 13 is, let's say rent., we have a prepaid rent for 6 months. Now we recognize the cost of 30 for 3 months, so now we have rent expense for three months. So now prepaid rent goes down, it was our asset, so it's -30 here and then the rent expense also -30. And then number 14 is expenses. So whatever they are, so we pay them in cash, so cash is -10 and then here expenses are -10. So now we're all set and we create the income statement, how do we do that? We have all these numbered transactions so we see what goes in. For the income statement, we need the revenue, cost of good sold and expenses, so we go over all these transactions and record the sum. So what I will do, I will put here the results and then in brackets I put the number of transactions used. So revenue, 195, and that is from 6, 7, and 11, where we sell something. Now, cost of goods sold, it will be, I put a negative number, it will be 137, again, from 6,7,11. And we have the result is called, as all of you might have heard, gross margin. Of 58, now, we have to subtract expenses. And that would be 43 that comes from 8, 13 and 14, you can check that and then we arrive at the net income of 15. Well, this is sort of a micro income statement, but this is the income statement that refers to all of these 14 transactions. Now comes at the very end transaction number 15, that is cash dividend, that is declared. Well, you see we made $15. So from $15 we say that this cash dividend is 8. So dividend payable, this is a liability, is + 8 and then the retained earnings, this is -8 also on the liability side. And having said all that, we are all prepared to come up with a balance sheet, which is although a little bit cumbersome. But again, I will produce only the result and in brackets, I will put all these numbers of transactions so that you will follow through that. So our balance sheet is, here we have assets, and here we have liabilities and network. Let's see what we have. So I will produce sort of a table like this. Well, the major thing is cash, because cash is in transactions 1 through 6, 9 through 12, and also 14. So there are very many, and the resulting balance is 282. Now comes prepaid rent, well that transaction is 3 and 13, and the balance is 30. And remember, it was 60, and then 30 we paid off. Then comes accounts receivable, transactions of 7, 11, and 12, and the balance is 20. Then inventory, transactions 5 through 7, 10 and 11, and the balances 53. And then finally, property plant and equipment, that happens in transactions 4 and this is 15. If we added all the top, we will get 400 exactly. Now on the right side in blue, so here, to be consistent, I would put assets in black. So what do we have here? So we have accounts payable, the balance is 85 and transactions are 5, 9 and 10. Then we have dividend payable, which is 8, and this is transaction number 15. We have note payable, which is 100, this is our second transaction when we had some credit. So that is as far as liabilities go, and then from transaction number 1 we have capital stock add 200, and then from transaction 15, we have retained earnings of 7. Here I'll put some explanation, so we had net income of 15 less dividend payable of 8. This is this amount and therefore, so this plus that would be our net income. So that is our retained earnings. And if you added all that together you will have the same 400. So here we produced a balance sheet at the end of this period. And although that is kind of of trivial, but you can see sort of cumbersome too. We used four pages of a flip chart, and again, here I had the privilege to be able to remember some of these numbers and put them here. And you can obviously go through these transactions and check, that's why I put these reference numbers here. Now, my final observation in this example would be number 1, that the accounting equation, It has always been looked at. Remember all these balances in all transactions, they're always the same. That's because of the accounting equation. Now here, the next thing, we ignore non monetary things, sometimes they're important, but not for this kind of discussion. And finally, I will put that in red, that, remember that the book value. Not always is equal to the market value. Well, that is just an important observation, although in this example, it did not play any role. So here I gave you an idea how people in accounting work. This is kind of important because otherwise we have a temptation to say, well these people, they're always overloaded with integrated details and they do not see the big picture and we do. Well great, but it's kind of important to know what exactly these people do. And even if we sometimes have a privilege to avoid going in these details, but we have to have an idea how all that is put up. That does help.