[MUSIC] The campus bookstore, incurring a few operating costs in year x one. We are referring here to the salary of Christina, who is the only person working in the store. And costs of utilities, water, electricity. We have grouped all of these costs under Selling, General and Administrative Expenses. And so next we are going to account for them. We're also going to talk about another cost that we have in this business, which is the Rent Expense. Remember that we prepaid the rent in the previous period. So now in this period we're going to take care of the Basically the use, the consumption of this prepaid rent. Let us start first with the sale in general administrative costs. The total amount of sale in general and administrative expenses is 30,000 Euros. I know have been paid in cash. So how would you account for these? Obviously first, cash is going to decrease. Now my next question is, okay we are paying some cash and what else we need to recognize here? An asset or an expense? We are talking here about Christina's salary on the one hand and now some of the utilities. So both things had already consumed basically. So Christina has already worked for the company for this past year. And second the utilities have already been consumed, used the water, the electricity. So it looks like all these costs of the campus bookstore do not generate the future value, a future benefit. It has to do with things that Kathleen consumed in the past, therefore you recognize them as expenses. And they are going to decrease the profit and loss account. After this transaction, are we richer or poorer? Poorer, right? Because the net worth of the shareholders has decreased, we have an expense. Second question, are we more liquid or less liquid? Clearly less liquid, because cash has decreased as well. So in this particular transaction, liquidity and profitability are the same. But remember, that this is not always the case. So profitability and liquidity many times are different, because there is a mismatch in time between the expense and the payments, or the revenue and the cash collection. Let's consider now the cost of renting the premises. Remember that at the end of year X-0, in the preparational period, we prepaid the rent for the next year, for the full year X-1. Now, after year X-1, we have already used this prepaid rent. So we had the right to use the premises for one year, and now obviously we have already used those premises. And therefore this prepaid rent is going to decrease in value. It has been consumed. So the first thing we need to recognize is a decrease in the value of prepaid rent by the total amount. So it is clear that as time passes, the value of this asset is consumed. So we need to allocate these prepaid rent month by month and recognize the corresponding decrease in value. By the end of the year H1 we need to recognize the full loss of the value. So, we recognize here the decrease in the prepaid rent of €6,000 which is the total amount that would be in the beginning. And at the same time we're going to recognize that now we are poorer. So we'll recognize the rent expense in our PNL accounts and therefore the net worth of the shareholders has decreased. Why? Because an asset has lost its value. Let me ask you the questions I'm asking you all the time. After this transaction are we richer or poorer? Clearly we are poorer because we have recognized an expense. Now are we more liquid or less liquid? Liquidity has not changed here. Why? Because we prepaid these rents at the end of the previous year. Therefore, as you see here, there is a mismatch between cash and profits and therefore profitability is not the same as liquidity. However, in the last day of the year X1. Christina prepaid the rent for your ex too. The total amount of this rent is going to be 6,600 Euros, 10% more than last year. How would you account for this prepaid rent? The answer to this question is that cash clearly is decreasing by 6,600 Euros. And at the same time now, we have a prepaid rent, so there is an increasing prepaid rent. We have the rights to use this premises for one more year. Now, as time passes, the value of this prepaid rent is going to decrease and we'll keep recognizing an expense month by month. But that's going to happen in year x2. Now, in the next video, we are going to record a few payments and collections of cash. [MUSIC]
