Accounting Cycle for a Merchandising Business - Part 2

What is the Accounting Cycle in a Merchandising Business?

Written by Jason Gordon

Updated at April 7th, 2022

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What is the Accounting Cycle in a Merchandising Business?

Back to: Accounting & Taxation

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All right. Here we are with part two of

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chapter four's example

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and so in the part one we did all the

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journal entries and see

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t tables and in this video we're going

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to do the adjusted trial balance and the

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financial statements, so in order to

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really understand where the numbers come

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from

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with this part of the the video series

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for example

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for this example you really need to see

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the first part which is in video one

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um the first part of the example. So

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but hopefully you have all this

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information here's your t tables nothing

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has changed they haven't done anything

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to them I just carried them over from

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the last video.

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So we're going to start off with the

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adjusted trial balance first

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and this is adjusted because we've

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already done the adjustment we only had

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one, so we didn't do an

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uh an unadjusted trial balance because

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there was only one

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so we just kind of lumped them into this

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one, but all I'm going to do is I'm going

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to list all of my accounts

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and their respective balance on their

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their proper side their normal side

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whether it be debit or credit so just to

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kind of give you an idea cash I'm going

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to start with cache 48 860.

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I'm going to put ar you don't have to

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because it's zero but I'm just going to

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go ahead and put that there

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I'm going to do inventory of 8890

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same thing with land you don't have

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to put land there just because it's zero

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but uh you can if you would like uh and

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then we also have

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ap, ap has a balance of zero which would

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normally go on the credit side you don't

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have to put that one there,

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and for the sake of time I'm just going

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to go ahead and just put the rest of

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them on here and you can kind of follow

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along check your work hopefully you've

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done this already.

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And so once I've got it to this point

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then I'm going to go

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to uh the debit column and add up all

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the debit column and when you do that

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you should get a

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sum of 77 500,

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and then I'm going to do the same thing

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for the credit column and hope that it's

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going to be the same

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number and it is, it is 77 500, so we know

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that our trial balance is good we know

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all of our debits and all of our credits

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equal that's spot on with what we need

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to do with the accounting cycle,

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so that leads us to the next step in the

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accounting cycle which is

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the financial statements. And so we know

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we start off

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with the income statement and to this

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we're going to put charlie company

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for whatever you know whatever the year

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is and we're going to be doing a

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multi-step income statement for this one,

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because we have all the pieces that

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would make it favorable to use a

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multi-step income statement we have cogs,

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we have non-operating income

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or not operating activities, and so forth

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so let's let's do that.

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We know in a multi-step income statement

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we're going to start off with not just

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revenues but operating revenues

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so that's the first part and under that

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we're going to start with our sales

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revenue our normal

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day-to-day revenue and so sales revenue

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we have a total of thirty thousand,

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and from that we're going to take away

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the two pieces

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that affected sales revenue directly

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which are going to be returns and

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discounts,

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so let's start with the discounts. So

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I'll say less sales discount

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of we had a sales discount of 100 that

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we gave,

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we also had sales returns that we took

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back from customers

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that were 2 000 total, so those are those

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two t tables

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and if I add that up that's going to

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give me a sum of

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2100 and if I subtract that 2100 from

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the

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30 000 that's going to net my sales to

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14 excuse me 27 900,

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so that's my net sales that's what I

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ended up ending the year in total

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sales revenue after the discounts and

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the returns.

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All right. From that I want to take away

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my cost of goods sold

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remember this is more informat and more

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informative I understand that that's an

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expense but

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this is more informative to our

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investors to say hey this is what we

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truly made

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on our sales, so net sales minus my cogs

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of 14100

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that's going to give me a total

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operating

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revenue of thirteen thousand eight

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hundred,

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all right so that takes care of

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operating revenues. Now let's go into

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operating expenses.

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We only have two operating expenses we

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have delivery expense which is three

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hundred

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and we have selling an admin expense

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which is going to be

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3 000. We add that up that's going to

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give us a

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total operating excuse me it should say

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total operating expense of 3300

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and if I subtract my total operating

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revenue

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minus my total operating expense that's

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going to give me a total operating

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income of 10 500,

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so from an investor standpoint I'm going

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to look at this go okay that's something

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I can expect

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year over year or at least growth on

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that hopefully

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year over year but that's their business

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this is their their main business model.

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Now let's look at the non-operating

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activities the things that are more or

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less one-offs I can't expect them

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they're going to happen year every year

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I can't plan for.

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So we have a few we have the first one

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being gain on the sale of land,

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remember land is not my business so this

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is just kind of a one-off I just made

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some money,

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so I'm going to put that down here it's

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going to be positive number because it

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is a in revenue coming in is like a

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revenue it's a gain,

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I also have interest expense and

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interest expense is considered a

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non-operating activity

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because once the note's gone it's gone,

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so we have interest expense

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of 250 again that's negative because

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it's an expense,

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and so then I'm going to total out my

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non-operating activities. So I'm going to

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take the the sum of

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2500 plus negative

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250 that's going to give me a total

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non-operating income

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of 2250.

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And if I take my total non-operating

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income and add it to my total

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non-operating income

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that's going to give me a net income of

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12750,

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so that's my net income

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for charlie company for this year. Now

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let's move to the next

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financial statement which is going to be

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our statement of retained earnings.

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Our retained earnings to begin with

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remember we start with our beginning

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retained earnings is going to be zero

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why is it zero it's not supposed to be

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there in the bottom again I don't know

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why that's there

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uh retained earnings table should not be

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there but

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uh it is zero because this is the first

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year of this business so everything

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starts at zero we have no beginning

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balances.

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so zero plus uh our net income

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which is going to we just found to be

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twelve thousand seven fifty that's going

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to give me an intermediate number of

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twelve thousand seven fifty.

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our dividends we had no dividends so

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that's going to be zero. so that means

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our ending retained earnings is going to

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be exactly what our net income is

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which is twelve thousand seven fifty. All

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right. So now let's go

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into our balance sheet nothing's

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changing here

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uh we're just going to list out our

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assets liabilities and equity

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assets we have cash of 48 860,

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inventory we have 8890,

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you can put again ar and land if you

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want to

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but there's zero I'm going to leave them

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out on this one, so our total assets is

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going to be

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57 750. Now let's look at our

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liabilities

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I could put ap there but it's a zero

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balance so I'm just going to only put

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notes payable because that's the only

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liability I have a balance in

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so 10 000 which means my total liability

0:07:10.400,0:07:13.520

is going to be 10000,

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and finally equity remember we're

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only really focusing on two

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it's going to be common stock and

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retained earnings, our common stock is

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going to be 35 000

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and our retained earnings we just found

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from our statement of retained earnings

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that's going to be 12 750,

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if I add that that's going to give me a

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total equity of 47 750

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and if I add that 47 750 to the 10 000

0:07:34.639,0:07:36.639

in liabilities

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that's going to give me total

0:07:36.639,0:07:42.240

liabilities and equity of 57750

0:07:39.120,0:07:43.599

and that matches my total asset so I

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know I'm on the right path, remember

0:07:43.599,0:07:46.479

assets it has to equal liability and

0:07:45.440,0:07:48.400

equity so

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we know we're good there. All right. So

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that's the balance sheet the last thing

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that we're going to do

0:07:50.879,0:07:54.879

is our statement of cash flow, and

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remember to do the statement of cash

0:07:54.879,0:07:57.280

flow

0:07:55.520,0:07:59.199

we're really only going to focus in on

0:07:57.280,0:08:01.199

the cash t table

0:07:59.199,0:08:02.319

that's the key to the statement of cash

0:08:01.199,0:08:05.120

flow,

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so let's do that. First we need to go

0:08:05.120,0:08:09.759

through and write our

0:08:06.000,0:08:11.039

fa's, oas, and ias. So 1-1 the 35 000 that

0:08:09.759,0:08:12.879

was for common stock that's going to be

0:08:11.039,0:08:15.759

0:08:12.879,0:08:18.240

210 that 10 000 that was for the sale

0:08:15.759,0:08:22.400

from customers when they paid cash

0:08:18.240,0:08:24.160

that was oa 514 and 6-1

0:08:22.400,0:08:26.160

those were both from customers when they

0:08:24.160,0:08:27.520

paid off their accounts receivable

0:08:26.160,0:08:30.240

so those again are both are going to be

0:08:27.520,0:08:34.560

oa so over there over there.

0:08:30.240,0:08:36.560

831 that was the 7 500 from us

0:08:34.560,0:08:37.919

selling the land that we got for we got

0:08:36.560,0:08:39.279

cash back in return so that's going to

0:08:37.919,0:08:40.479

be ia

0:08:39.279,0:08:42.479

investing dealing with long-term

0:08:40.479,0:08:46.080

productive assets and then the nine

0:08:42.479,0:08:47.360

one that 10 000 was from getting the

0:08:46.080,0:08:49.040

loan from the bank, so

0:08:47.360,0:08:51.360

remember investors and creditors deal

0:08:49.040,0:08:55.360

with fa so that's going to be fa.

0:08:51.360,0:08:56.959

On the credit side we have 10 000

0:08:55.360,0:08:58.720

that was for the purchase of inventory

0:08:56.959,0:09:01.920

the first purchase of inventory,

0:08:58.720,0:09:05.200

so that's going to be oa. The 250 was the

0:09:01.920,0:09:08.480

uh cost to get that inventory sent to us

0:09:05.200,0:09:11.200

so again that's going to be oa the 5000

0:09:08.480,0:09:12.880

at 12 15 excuse me 215 that is going to

0:09:11.200,0:09:15.920

be the purchase of the land,

0:09:12.880,0:09:17.200

so that is going to be an ia, then we

0:09:15.920,0:09:19.200

also had 12 740

0:09:17.200,0:09:21.760

that's what we paid for some more

0:09:19.200,0:09:25.040

inventory so that would be oa,

0:09:21.760,0:09:28.800

300 that was for

0:09:25.040,0:09:31.920

uh what was that one for that was for

0:09:28.800,0:09:32.880

oh the the delivery expense when we had

0:09:31.920,0:09:34.320

to sell,

0:09:32.880,0:09:36.160

all right, when we had to send the

0:09:34.320,0:09:37.760

inventory that we sold to our customers

0:09:36.160,0:09:41.440

remember is our responsibility

0:09:37.760,0:09:43.680

so that was uh oa, 3000 was for s

0:09:41.440,0:09:44.720

a expenses that again a normal expense

0:09:43.680,0:09:47.839

so that's oa,

0:09:44.720,0:09:50.160

and then finally 250 that is

0:09:47.839,0:09:51.040

for interest expense and that is going

0:09:50.160,0:09:52.959

to be oa

0:09:51.040,0:09:54.880

as well. All right. So now that we have

0:09:52.959,0:09:56.640

the fa's is always

0:09:54.880,0:09:58.240

we can go through and fill out our

0:09:56.640,0:09:59.519

statement of cash flow, so starting with

0:09:58.240,0:10:00.720

the first one remember we always want to

0:09:59.519,0:10:02.079

start with the best foot forward we want

0:10:00.720,0:10:03.120

to start with positive numbers

0:10:02.079,0:10:05.200

so we're going to start on the debit

0:10:03.120,0:10:08.399

side of the cash.

0:10:05.200,0:10:09.680

So fa that 35 000 we are going to put as

0:10:08.399,0:10:13.040

cash received from

0:10:09.680,0:10:16.160

common stock 35 000. All right.

0:10:13.040,0:10:19.920

The next three so 210 for 10

0:10:16.160,0:10:22.560

000. five 514 for 9 900

0:10:19.920,0:10:24.000

and 6 1 for 8 000, all of those came

0:10:22.560,0:10:26.480

from customers those were all payments

0:10:24.000,0:10:28.079

from customers for our inventory

0:10:26.480,0:10:30.160

so I'm just going to lump those together

0:10:28.079,0:10:30.839

and call it cash received from customers

0:10:30.160,0:10:34.640

0:10:30.839,0:10:35.920

27.9. All right. The next one which is 83

0:10:34.640,0:10:38.560

was ia

0:10:35.920,0:10:40.720

that was for the sale of land so I'll

0:10:38.560,0:10:44.720

say cash received from sale of land

0:10:40.720,0:10:47.920

for 7 500, and then finally fa

0:10:44.720,0:10:49.120

the 91f8 that was for the loan that we

0:10:47.920,0:10:51.200

got from the bank,

0:10:49.120,0:10:52.720

so I'm going to call it cash received

0:10:51.200,0:10:55.360

from notes payable

0:10:52.720,0:10:56.640

under fa for 10 000. All right. That

0:10:55.360,0:10:58.160

takes care of all of our debits now

0:10:56.640,0:11:00.880

let's look at our credits

0:10:58.160,0:11:02.000

uh the first one one two that ten

0:11:00.880,0:11:04.800

thousand was

0:11:02.000,0:11:05.920

for inventory but also so was the one

0:11:04.800,0:11:08.160

three

0:11:05.920,0:11:10.079

for 250 was dealing with inventory as

0:11:08.160,0:11:13.440

well as the 328

0:11:10.079,0:11:14.800

12 740 was for inventory, so all of those

0:11:13.440,0:11:15.920

together were for inventory so I'm just

0:11:14.800,0:11:16.959

going to lump those together

0:11:15.920,0:11:18.720

because they all deal with the same

0:11:16.959,0:11:20.320

thing and I'm going to call that cash

0:11:18.720,0:11:22.640

payment for inventory

0:11:20.320,0:11:24.240

and I'm going to set it negative because

0:11:22.640,0:11:28.000

again this is money coming out

0:11:24.240,0:11:30.399

so negative 22 990.

0:11:28.000,0:11:31.040

All right the next one would be two fifteen

0:11:30.399,0:11:33.600

that five

0:11:31.040,0:11:35.040

thousand uh that was for ia that was when

0:11:33.600,0:11:36.560

we originally purchased the land

0:11:35.040,0:11:37.360

remember we purchased the land for five

0:11:36.560,0:11:39.120

thousand,

0:11:37.360,0:11:40.720

so we're going to put that in as a cash

0:11:39.120,0:11:43.839

payment for the purchase of land

0:11:40.720,0:11:44.560

of negative five thousand. The next one

0:11:43.839,0:11:46.079

would be five

0:11:44.560,0:11:47.600

five that three hundred that was for the

0:11:46.079,0:11:50.000

delivery expense so

0:11:47.600,0:11:52.160

cash payment for delivery expense of

0:11:50.000,0:11:54.399

negative three hundred,

0:11:52.160,0:11:57.200

we have the seven fifteen entry for the

0:11:54.399,0:11:59.040

three thousand that was for s a expenses

0:11:57.200,0:12:00.639

so we will again call it cash payment

0:11:59.040,0:12:04.000

for s a expenses

0:12:00.639,0:12:07.120

of negative 3 000 again under oa,

0:12:04.000,0:12:10.320

and the last one was the 1231 oa

0:12:07.120,0:12:13.200

of 250 which was the interest expense

0:12:10.320,0:12:14.160

and so we will put that up under oa as

0:12:13.200,0:12:15.920

cash payment for

0:12:14.160,0:12:17.200

interest expense. Now I do want to point

0:12:15.920,0:12:18.160

out something because maybe it's it's

0:12:17.200,0:12:19.279

kind of.

0:12:18.160,0:12:20.480

Hopefully it's not but maybe it's

0:12:19.279,0:12:22.160

throwing you for loop because if you

0:12:20.480,0:12:23.360

remember when we did the multi-step

0:12:22.160,0:12:26.079

income statement

0:12:23.360,0:12:27.600

we put interest expense on that under

0:12:26.079,0:12:29.040

non-operating activity

0:12:27.600,0:12:30.560

but here we're putting it under

0:12:29.040,0:12:31.600

operating activity and that's just

0:12:30.560,0:12:34.560

something that

0:12:31.600,0:12:35.120

that's a rule in accounting but for the

0:12:34.560,0:12:36.880

purpose

0:12:35.120,0:12:39.120

of interest expense and interest

0:12:36.880,0:12:40.560

revenues those go up under non-operating

0:12:39.120,0:12:42.639

activities on this

0:12:40.560,0:12:44.000

income statement, however they go up

0:12:42.639,0:12:45.200

under operating activities for the

0:12:44.000,0:12:48.480

statement of cash flow so

0:12:45.200,0:12:49.839

just be mindful of that. All right. So now

0:12:48.480,0:12:50.320

that we got all of our activities

0:12:49.839,0:12:52.959

together

0:12:50.320,0:12:54.720

we can total those up the net cash flow

0:12:52.959,0:12:56.639

from operating activities is going to be

0:12:54.720,0:12:58.800

one thousand three sixty,

0:12:56.639,0:13:00.160

the net cash flow from ia or investing

0:12:58.800,0:13:01.200

activities is going to be two thousand

0:13:00.160,0:13:02.959

five hundred,

0:13:01.200,0:13:04.399

and the net cash flow from financing

0:13:02.959,0:13:04.720

activities that is going to be forty

0:13:04.399,0:13:07.200

five

0:13:04.720,0:13:08.480

thousand, if we add those three numbers

0:13:07.200,0:13:10.560

up that's going to give me a net

0:13:08.480,0:13:12.399

increase in cash of forty eight thousand

0:13:10.560,0:13:14.000

eight sixty,

0:13:12.399,0:13:15.680

if we add to it our beginning cash

0:13:14.000,0:13:17.120

balance which remember we're a brand new

0:13:15.680,0:13:17.600

business so we have zero in our

0:13:17.120,0:13:19.760

beginning

0:13:17.600,0:13:21.600

balances of everything, so if we add

0:13:19.760,0:13:23.360

forty eight thousand eight sixty to zero

0:13:21.600,0:13:25.360

we will get an ending cash balance of

0:13:23.360,0:13:26.639

forty eight thousand eight sixty which

0:13:25.360,0:13:29.120

also happens to be

0:13:26.639,0:13:30.480

again this is a check figure the ending

0:13:29.120,0:13:33.040

cash balance for our cash t

0:13:30.480,0:13:34.880

table, that's what we want. So that's how

0:13:33.040,0:13:37.120

we do the

0:13:34.880,0:13:38.800

trial balance as well as all of the

0:13:37.120,0:13:39.199

financial statements, and in the next

0:13:38.800,0:13:40.800

video

0:13:39.199,0:13:42.639

the last video for this chapter we will

0:13:40.800,0:13:44.480

be going over the closings

0:13:42.639,0:13:48.079

and the post-closing trial balance, so

0:13:44.480,0:13:48.079

y'all have a good one.

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