Video Transcript: Transactions Affecting the Income Statement and/or the Balance Sheet

Hello and welcome back now we're going to discuss the transactions that affect  the income statement and or their balance sheet. To survive, a business must be profitable. This means that the revenues earned by providing goods and  services to customers must exceed the expenses incurred in July 2010, Metro  courier began selling services and incurring expenses. The explanations of  transactions that follow allow you to participate in this process and learn the  necessary accounting procedures at its first transaction in July, Metro perform  delivery services for customers and received $4,800 cash. This transaction  increased in asset, cash by $4,800 and stockholders equity also increased by  $4,800 and the accounting equation was in balance. The $4,800 is a revenue  earned by the business, and as such, increases the stockholders equity,  because stockholders prosper when the business earns profits. Likewise, if the  corporation sustains a loss, the loss would reduce retained earnings. The effects of the $4,800 US Dollars transaction on the financial position of Metro R Metro  would record the increase in stockholders equity brought about by the revenue  transaction as a separate account retained earnings. This does not increase  capital stock, because the capital stock account increases only when the  company issues shares of stock. The expectation is that revenue transactions  will exceed expenses and yield net income. If net income is not distributed to  stockholders, it is in fact, retained due to complexities in handling large numbers of transactions, revenues and expenses affect retained earnings only at the end  of an accounting period, the procedure, the proceeding. Procedure is a shortcut  to use to explain why accounting equation remains in balance. Okay, so again,  your beginning balances, you have your 13,500 and your in your investment of  20,000 for trucks and 2500 for office equipment. And then at the same time you  have your 6000 in note payable or the liability that you owe, and the 30,000 for  your capital stock, and then your earned services, the revenue that you  received, 4000 $100 it was debited to cash, money brought into The business  and record it into a new account, retained earnings. Again, you want to keep  your capital stock, all your stock, separate from your retained earnings, which is  just your earnings, your revenue, minus your expenses. If revenue is more than  your expenses, obviously it's a net income. If your revenue is less than your  expenses, you have a loss. Okay? And again, by looking at the equation assets  equals liabilities plus owner's equity or stockholders equity, you remain in  balance. Metro perform courier delivery services for customers who agree to  pay $900 at a later date, the company granted credit rather than requiring the  customer to pay cash immediately. This is called earning revenue on account.  The transaction consists of exchanging services for the customer's promise to  pay later. This transaction is similar to the preceding transaction, and the stock  owners equity increases because the company has earned revenues. However,  the transaction differs because the company has not received the cash. Instead, the company has received another asset, an accounts receivable, as noted 

earlier, an account receivable is the amount due from a customer for goods or  services already provided, the company has a legal right to collect from the  customer in the future. Accounting recognizes such claims as assets. The  accounting equation included, including the $900 item, is as follows, so as you  can see, you earn services revenue on account. So we've created the new  accounts receivable account, which is an asset $900 which is basically cash that you will receive in the future, and then it's also recorded under retained earning,  because it's money earned, okay? And then again, you increase your assets,  and you also increase your credit, your credit side. Eight days after receiving the bill, Metro paid $1,000 for the office equipment purchased on account. This is  transaction four a this transaction reduced cash by $1,000 and reduced  accounts payable by $1,000 thus the assets and liabilities both are reduced by  1000 and the equation again balances as follows, Metro collected $200 on  account from the customer. In transaction 2b the customer will pay the  remaining $700 later. This transaction affects only the balance sheet and  consists of giving up a claim on a customer in exchange for cash. The  transaction increases cash by 200 and decreases accounts receivable by 200  note that this transaction consistently solely consists solely of a change in the  composition of the assets. When the company performed the services, it  recorded the revenue. Therefore the company does not record the revenue  again when collecting the cash. And you can see that here, okay, so you  collected $200 in cash, and it reduces the accounts receivable balance of what  was of from the nine. So the $900 it reduces it down to seven, okay, and then  there is nothing applied to the credit side because you've already recorded the  $900 revenue under the retained earnings earlier in the previous transaction.  And again, you're still remaining in balance because You increased your cash,  which is an asset, and you decrease an asset in the effect of remaining in  balance. Metro paid employees $2,600 in salaries. This transaction is an  example of cash for Employee Services. Typically, companies pay employees  for the services after they perform their work. Salaries or wages are a cost  companies incur to produce revenues, and companies consider them an  expense. Thus, the accountant treats the transaction as a decrease in an asset,  which is your cash, and a decrease in owner's equity, the retained earnings,  because the company has incurred an expense. Expense transactions reduce  net income since net income becomes part of the retained earnings balance,  expense transactions also reduce the retained earnings, and you can see that  here. So you have cash, you're going to pay your employees $2,600 so you're  decreasing your cash and you are decreasing your owner's equity, because  remember, on the and the extended basic equation, you have your revenues  and expenses that was added, which expounded the equation. And so therefore  expenses and revenue are part of the owner's equity, or stockholders equity, so  revenues you're adding to expenses you're taking away. So that's why your own 

your stockholders equity decreased by the $2,600 in July, Metro paid $4,000  cash for office space. This transaction causes a decrease in cash of $400 and a  decrease in retained earnings of $400 because of the incurrence of rent  expense transaction 5b has a falling effect on the amount and the accounting  equation, again, you are decreasing your cash by $400 and you are decreasing  your retained earnings by $400 because, again, it's an expense part of the  bounded accounting equation. At the end of the month, Metro received $600 bill  for gas and oil consumed during the month. This transaction involves an  increase in accounts payable, which is a liability because Metro has not yet paid the bill, and a decrease in retained earnings because Metro has incurred an  expense. The accounting equation now reads, okay, so now you can see we've  increased our liability side by 600 and we've decreased our stockholder equity  side by 600 no assets were involved, because you're paying for this on account,  okay, therefore keeping the equation in balance. Part A of exhibit four  summarizes the effects of all the preceding transactions on the assets, liabilities  and stockholders equity of Metro courier in July. The beginning balances are the ending balances in part A of exhibit three, the. Which was the ending balances  for June. The summary shows subtotals after each transaction. These subtotals  are optional and may be omitted. Note how the accounting equation remains in  balance after each transaction and at the end of the month.