00:01
Okay, so if we want to see how these transactions impact the accounting equation, let's write the accounting equation on top.
00:08
So assets equal liabilities plus equity.
00:21
So the first one is the business begins with cash for $150 ,000.
00:31
That means it increases owner's equity by $150 ,000 as well.
00:36
So that's the first one.
00:48
The second one, says that furniture is purchased for cash, using cash, for $20 ,000.
01:05
So $20 ,000, we're going to reduce cash.
01:12
So we're going to decrease that asset, but furniture is also an asset.
01:21
So we will reduce and increase assets to keep this equation balanced.
01:30
So then we purchased goods on credit for 25 ,000.
01:35
So that to me is inventory for your product.
01:40
So goods or inventory is an asset.
01:44
And it was done on credit.
01:46
So we're going to increase this side of the equation as well.
01:52
And it's an account payable.
01:54
So we'll pay them later.
01:55
So to keep the equation balanced, we increase both sides of the equal sign here.
02:00
We increased accounts payable and we increased inventory to make assets and liabilities balance.
02:12
The next thing is that we sold goods costing $10 ,000 for cash for $14 ,000.
02:25
So to me it's easiest to think about this as a journal entry.
02:30
So if we sold goods costing $10 ,000, so our cost of goods sold was $10 ,000.
02:37
That means our inventory was decreased by 10 ,000.
02:42
But then we have a second journal entry here that tells us how much cash we received and what our revenue was.
02:49
And this is often different.
02:53
This piece is smaller than this piece because hopefully your product is selling for higher than the cost of the product in the first place...