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Current time:0:00Total duration:3:40

Video transcript

let's see if we can use our example to understand the three types of income statements and hopefully understanding those income statements will also help us understand this example so I'm going to start off we're going to focus on month two and what I've done is that just rewritten some of this accrual income statement down here so it really looks like a statement so this right here is the income statement for one for month two on an accrual basis in that month we said we had four hundred dollars of revenue two hundred dollars of expense four hundred minus two hundred gives us two hundred dollars of income an income statement tells us what happened over a period of time what was the activity how much revenue how much expenses and other things this is just a super simplified one without taxes without interest without other types of expenses over here I also have drawn the balance sheet at the end of month one and the balance sheet at the end of month two or you could also view this balance sheet here as the balance sheet the beginning of month two and the main thing to realize this income statement tells you what happens over time period while balance sheets are snapshots or their pictures at a given moment snapshots so this tells us essentially what did I have the assets are are the things that can give me future benefits so what do I have and the liabilities are things that I have to give future benefit to or things that I owe so this is what I have this is what I owe and then the equity is what I really have to my name if I net out the liabilities to from the assets so at the beginning of the of month two which is the end of month one I had $100 of cash no accounts receivables I didn't owe anyone anything I didn't know the money I didn't know them services so 100 minus zero means I had $100 that's kind of what the owners of the companies can say they have a value at the beginning of the month you fast forward now at the end of month two I now owe the bank $100 so I just put this as negative $100 here normally wouldn't be accounted that way and on an actual company's balance sheet but this is simplified I had now but I have an accounts receivable of $400 so my total assets now are three hundred dollars of assets and remember accounts receivables are an asset because someone owes me something someone owes me cash in the future I still have no liabilities so you take all of your assets - all of your liabilities and now I have $300 in equity so you can see the snapshot at the beginning of the month 100 in equity snapshot at the end of the month 300 in equity and so to go from one point to the other to go from 100 to 300 I must have grown in equity by 200 I must have gotten $200 worth of value from someplace and that's what the income statement describes it describes it right over here the change in equity sometimes the change in returned earnings or our or just change in equity that is going to be the $200 in net income that the company got over that time period now there's one thing that you're probably confused by right now is like well you know how do we reconcile everything with the cash we know that over this period we got $200 in income on an accrual basis but when you look at the cash we went from $100 positive cash to negative $100 in cash it looks like we lost $200 so how can we reconcile the fact that we got $200 in income how can we reconcile that with the fact that we lost $200 in cash and that reconciliation is going to be done on the cash flow statement and I'll do that in the next video