This workout asks us to apply these transactions to the balance sheet formula. Ignore the impact of inventory being sold So the first one is Superdry sells a T-Shirt (Superdry is a clothes retailer) and it asks, what will be the impact on the balance sheet? Well if Superdry have sold a T-Shirt, let's assume that has been sold for cash. So cash has gone up (that's an asset) What's the other half of the formula? Well that's a sale, a sale sit's on the income statement. So sales up, fantastic! What will be the impact on the bottom of the income statement? Profits go up! And if an income statement's profits go up, then the balance sheet's retained earnings go up as well (so retained earnings up) And my balance sheet formula balances, assets equal liabilities plus equity Next up, British Airways sells a flight on day one The flight takes place on day 30, what will be the effect on the balance sheet on day 1? Well on day 1 British Airways have received a load of cash, so again cash goes up Again we need to ask, what's the other half? Can they book the sale yet? Well no they can't You can only book the sale when you deliver a service or product or in this case when the flight takes off We haven't got to that day yet, so until we get to day 30 we have a liability towards our customers, we owe them something So something in the liabilities column is going to have to go up and that is going to be something called deferred revenue We now fast forward to day 30 and it asks what will be the effect on the balance sheet on day 30? Well the flight takes off, so we can definitely get rid of that deferred revenue, that deferred revenue is going to disappear And because the flight has taken off, we have delivered the service to the customer. We can book that sale in the income statement So income statement sales go up, income statements profit's go up and that feeds through the balance sheet's retained earnings going up, fantastic. So liabilities down Equity up, the balance sheet still balances You might notice what happened overall, well overall cash went up retained earnings went up In between a liability went up and down but they cancel each other out. Overall cash up, retained earnings up Something similar happens with Home Depot, let's have a read through Home Depot sells materials on day 1 with 30 days of credit. What will be the effect on the balance sheet on day 1? Well if we've offered our customers 30 days of credits, that means we've got some accounts receivable. We're owed some cash by our customers. That's an asset for the company, accounts receivable goes up What's the other half? Are we allowed to book that sale? Well yes We've sold an actual product, the customer has taken the product. That sale sale can be booked on the income statement. Income statement sales up, income statement profits up feed through to the balance sheet, retained earnings up Fast forward 30 days, what will be the effect on the balance sheet on day 30? Well on day 30, the customer pays. We don't need that accounts receivable anymore, so accounts receivable goes down and cash goes up, the cash has been received from the customer. Again look at what's happened overall, cash up and retained earnings up We had some accounts receivable go up and down in the mean time but they off-set each, they cancel each other out. Overall, cash up and retained earnings up exactly the same as British Airways, cash up and retained earnings up