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Current time:0:00Total duration:4:05

Video transcript

in the last series of examples we go into month two with a hundred dollars in cash and the way we set up the example we spend $200 in months two and what we've been doing so far is you're saying oh that gives us that gives us to a cash balance of negative $100 at the end of month two and that's a little unrealistic I kept it simple here and I 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 is essentially means that someone is lending you money so to make this example a little bit more realistic let's imagine a situation so in month two you only have $100 the person that you're catering for that you're buying these two hundred dollars 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 I have this customer I'm doing the catering inform this month can I pay $100 for to you this month and then maybe pay another hundred dollars to you next month and let's say that they agree to that so in month two on a cash basis instead of spending $200 you're actually spending I'll just write over it you're actually spending $100 and then in month three you'll also spend you'll also spend $100 now this will change your cash accounting numbers this will now be negative 100 and this would now be five hundred dollars but the more important thing is I want to show you how this can be accounted for and accounts payables the fact that you essentially told your vendors even though you gave me $200 worth of stuff I'm only going to give you $100 now and I'm going to give you $100 later that means that you've increased your accounts payable by a hundred dollars you've increased this liability that you owe things to other people so let me add accounts payables over here so I will add it I'll add it a row I'll do it on both of these diagrams so I'll just call it accounts I'll just do a period so I don't have to write the whole thing accounts payable 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 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 through it on all this stuff over here but let's see how that would have affected the income statements and the balance sheet so over here all of a sudden you had another liability accounts payable is a liability you have an accounts payable liability of $100 so this 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 to our vendors and our cash is now at zero so notice it still does not change our equity we essentially added one hundred to cash and then we added $100 liability they cancel out if you take if you take now this part right here all of the assets are four hundred four hundred minus 100 and liabilities still gets you to three hundred in equity but now the reconciliation is to go from $100 in cash to zero cash we're not allowing ourselves to go negative and the reason why we can do that is we actually have a source of cash we have a source of cash so let me erase that and then let's add a line right down let me see if I can add a line right over here so we could say accounts 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're we don't have to use our own cash by increasing the accounts payable it's 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 cash from operations 200 at income minus 400 plus 100 this whole thing is now minus 100 cash from operations so you start with $100 you use 100 our ending cash is now zero and it all works out