[MUSIC] In this video clip we're going to account for some collections and payments of cash that took place in your x1. First the campus bookstore collecting 38,000 euros from credit sales. Remember that we sold 60,000 Euros on credit to the school. It takes to the school 60 days to pay us. So throughout the year we then receiving these payments from the school for a total amount of 38,000 Euros. How would you account for this cash collection from customers? First cash obviously is going to increase by 38,000 Euros. And second, accounts receivable, the right we had to collect this cash from our customers, is going to decrease by the same amount. As you see still, customers owe us 22,000 Euros. Question for you, after this transaction are we more liquid or less liquid? Obviously more liquid because cash has increased. Now, are we richer or poorer? Well as you see the PNL account or owner's equity has not changed, therefore the net worth of the shareholders remains the same. Now, the net worth of the shareholders changed the day we made those sales. That they recognize the revenues and there was an increase in the net worth of share holders, but remember those were private sales so cash didn't change. Now the cash collection comes later, so there is a mismatch between profitability and liquidity. Next we pay to the suppliers of furniture and equipment. Remember that we had a pending dept from the purchase of furniture and accruement on credit in the past period. So we purchase furniture on accruement for a total of 25,000 euros we already paid 15,000 so we still have to pay 10,000 that we have recognized under all the payables here as an obligation. Now we pay this obligation. How would you account for this? The answer is that the cash would decrease by 10,000 euros, because we are paying this amount, and second, the obligation that we had with the suppliers is now going to decrease. Remember that the supplier of furniture equipment was in this account of other payables. This was a source of financing for us, the supplier was financing the purchase of furniture and equipment, and now we are returning this this source of financing. After the transaction, it is going to be very easy for you to recognize the next transaction. Now, the campus book store pays a total amount of 125,000 euros to the suppliers of books. Remember that the debt we had with the suppliers of books, the obligation we had Were in the accounts payable. So how would you account for this transaction? So cash clearly goes down by 125,000 euros. At the same time, the obligation we had with the suppliers is going to decrease by the same amount. After this transaction. Let me repeat this question. Are we more liquid or less liquid? Clearly we are less liquid, because cash has gone done, we have made a payment. Now, are we richer or poorer? Well, that has not changed. Owner's equity remains the same, therefore the net worth of shareholders has not changed. Remember, the network of the shareholders change at the moment you sell those books or whenever you sell these books. And, you're going to recognize the cost of goods sold in your P and L account because your inventory will go down and your profit and loss will go down. In this video clip, we have recognized cash collections from customers and cash payments to suppliers. In both cases we have seen that cash has changed. Liquidity has changed. But profitability has not been affected. So with these transactions we have to go trade it once more then liquidity and profitability are not the same. These transactions help to illustrate that the changing cash is not the same as profitability. [MUSIC]