Three core financial statements
Doing the example with Accounts Payable growing Introduction to Accounts Payable
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- In the last series of examples we go into month 2 with $100 of cash
- and the way we set up the example we spend $200 in month 2
- and what we've been doing so far is saying
- "Oh! That gets us to a cash balance of negative $100 at the end of month 2"
- It's a little unrealistic, I kept it simple here and allowed us to have a negative cash balance
- just for simplicity, but usually you will not see a negative cash balance.
- The fact that you have a negative cash balance and you're allowed to operate
- essentially means that someone is lending you money,
- so to make this example a little more realistic,
- let's imagine a situation where in month 2 you only have $100.
- The person you are catering for, that you're buying those $200 of supply for,
- they're not going to pay you until next month, so you tell the people that you need to buy stuff from
- "Look,I only have $100 dollars, I have this customer, I'm doing thec atering for him this month.
- Can I pay $100 for it to you this month, and then maybe pay another $100 to you next month?"
- And let's say that they agree to that. So on month 2, on a cash basis,
- instead of spending $200, you're actually spending $100.
- and then in month 3, you'll also spend $100.
- Now this will change your cash accounting numbers, this will now be -$100, and this would now be $500.
- but the more important thing is how this can be accounted for in Accounts Payable.
- The fact that you essentially told your vendors, "even though you gave me $200 worth of stuff,
- I'm only going to pay you $100 now and I'm going to give you $100 later"
- That means that you've increased your Accounts Payable by $100.
- You've increased this liability that you owe things to other people.
- So let me add Accounts Payable over here.
- I'll just write A period, so I don't have to write the whole thing.
- Accounts Payable
- And going into the period, you didn't have any Accounts Payable,
- and then now that you're essentially borrowing $100 from your vendors,
- you're allowing to push back when you pay them,
- you now have an Accounts Payable of $100.
- and I'm not going to work it through on all of this stuff over here.
- But let's see how that would have affected the income statesments and the balance sheet.
- So over here you had another liability.
- Accounts Payable is a liability
- So you have an Accounts Payable liability of $100
- sorry, at this point we had no Accounts Payable liability
- and then after the end of the month
- we have an Accounts Payable liability of $100.
- We owe $100 to our vendors.
- And our cash is now at $0
- So notice, it still does not change our Equity.
- We essentially added $100 cash, and we added a $100 liability
- They cancel out
- Now if you take this part over here all of the assets are $400,
- $400-$100 in Liabilities still gets you to $300 in Equity.
- But now the reconciliation is to go from $100 in cash to $0 in cash.
- We're not allowing ourselves to go negative.
- And the reason that we can do that is that we actually have a source of cash.
- So let me erase that and then let's add a line right over here
- so we can say Accounts Payable increase
- and now this is a source of cash.
- And it might not be obvious. We're increasing a liability.
- But it's a source of cash because we don't have to use our own cash.
- Increasing the Accounts Payable is allowing us to not use all of our cash
- So we have an Accounts Payable increase of $100.
- So this is a source of cash, so now the cash from operations:
- $200 net income-$400+$100
- This whole thing is now -$100 cash from operations
- so you start with $100, you use $100
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At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
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