A window washer does a day of work at PL Co, paid in cash The question asks us, what is the effect on PL Co's balance sheet? Well if the window washer has done the day of work today and we've paid that window washer in cash today Then the effect is going to be cash going down for us and at the same time, retained earning's going down So why is that? Well we have incurred an expense, some kind of salary expense That means my income statement's expense has gone up My income statement's profit has gone down That feeds through to the balance sheet's retained earnings which also goes down and that's since it's under the equity column of our formula Assets equal liabilities plus equity Let's check that formula still balances, I've got my assets going down (that's the cash going down) and liabilities and equity, that's gone down (retained earnings gone down), fantastic! Next up, let's look at Kelloggs. Kelloggs sells to Walmart on 30 days credit The question is, what is the effect on Walmart's balance sheet on day 1? Well Walmart has had to purchase something, so if they've got to purchase something that means their inventory has gone up Inventory has been received However, have they paid anything for it? No they haven't, they owe money. They have a liability towards Kelloggs So Walmart will have an accounts payable that goes up as well Does that balance sheet formula balance? Yes your assets have gone up, your liabilities and equity have gone up via accounts payable Let's now fast forward, it says what is the effect on Walmart's balance sheet on day 30? So day 30 is the day that Walmart has to pay it's bill, so we're going to see the cash bill go down And the accounts payable is no longer needed, we don't have a liability anymore Let's look at what happened overall. Well we bought some inventory so inventory went up and we paid for it, cash went down We did have an accounts payable go up and down in the meantime but those two just cancel each other out Overall inventory went up, cash went down Let's move on to Apple Apple pays its shop rental at the start of the quarter The question's asks us, what is the effect on Apple's Balance sheet on day 0? Well number one, they have paid it. So that means their cash is going to be impacted, it will have gone down But because it's day 0, we haven't had any enjoyment from that expense. Yes, we've paid some cash but we haven't actually enjoyed it It hasn't helped our sales yet. So it can't go on the income statement if it hasn't actually helped our sales yet Instead we have prepaid one of our expenses That's an asset on the balance sheet and an asset means you're going to get future economic benefits In this case, over the next 90 days Does the balance sheet balance? Yes, one of your assets went down (cash), another of your assets went up (prepaid expense) Let's fast forward to day 90, what is the effect on Apple's balance sheet on day 90? Well we have had some enjoyment from that events from now. The shops been opened, we've been able to make some sales I can now have an expense go on my incomes statement So I'm going to see that my retained earnings goes down Why? Well an expense went up on the income statement profit went down on the income statement which feeds through to retained earnings down What's the other half of the transaction? Well it's the prepaid expense, that did exist It doens't exist any more, the prepaid expense has gone down Overall, what has happened on Apple's balance sheet? Well overall cash went down and retained earnings went down You rented a shop You paid for it, cash went down and that expense went on your income statement Yes you had a prepaid expense go up and down but the two cancel each other out The overall effect is cash down, retained earnings down