Let's talk now about now how to record revenue and expense transactions. Let's work with a couple of examples. Let's record sales of $1,000, all received in cash. And then we'll come back and record expenses of $90, all paid in cash. Let's start with the sales entry. Remember there are four things that you need to know to be able to record a journal entry. And I bet by this point you know what they are. They're the accounts affected, the type of account, whether the account goes up or down, and the dollar amount. Let's use our balance sheet equation to help us with that. And the transaction where we're recording sales of $1,000 all in cash, let's think about what accounts are affected. Well let's start with the easy part. The company receives cash when it makes these sales. So we know that cash which is an asset account, goes up by $1,000 But what about the other part of this entry, sales? I don't see anything here that says revenues or sales. But recall, that when we look at the income statement, we learn that revenues are increases in owner's equity as a result of making sales to customers. Increases in owner's equity. So what account is it, in owner's equity, that revenues increases? We've talked about two sources of owner's equity. The first one is equity that's contributed to the company by owners or investors. That's contributed capital, capital stock. But the second source of equity is retained earnings. That's the equity or the earnings that the firm generates over it's life, that it decides to retain in the firm rather than pay out in dividends. It's this retained earnings account that is increased when we generate revenues. So our retained earnings account increases by $1,000, when we make sales. Now importantly here in our course, we are going to use balance sheet accounts to record all of our journal entries. Ultimately, every transaction affects the balance sheet. Even those transactions on the income statement, eventually affects the balance sheet. Because recall, income statement transactions, revenues and expenses, results in net earnings or net income that the company can decide to distribute as dividends or to retain in it's retained earnings account. So those earnings that are retained in it's retained earnings account cause a retained earnings account to increase, owner's equity increases, and so ultimately affect the balance sheet. Let's record. The journal entry here for sales of $1,000. We know that cash increases by 1000, cashes and asset, it's increasing. So that's a left hand side entry or a debit. Cash, asset increase 1000. The other side of the entry would be an increase to the retained earnings account. Retained earnings is an owner's equity account, it's increasing. So it is a right hand side entry or a credit. So I put my account name. Retained earnings, an indication that it's an owner's equity account. And for revenue and expense transactions that we're making to retained earnings, I'm going to suggest that we put a notation in the journal entry itself, that gives us an indication of why we're making that entry to the retained earnings account. So retained earnings is increased by $1000. Let's post these to the individual T-accounts. We have cash that's being affected. And we have retained earnings. I'm going to abbreviate that, RE. We have retained earnings as being affected. If we post these to the individual T-accounts, we would take our left side entry to cash, post to the left side of the cash T-account. Take the right side entry to retained earnings, post to the right side of the T-account. And just as I suggested, that we make a notation within the journal entry about why we are recording an entry to the retained earnings T-account. I'm going to suggest that we do the same in the retained earnings T-account. We'll see later in the course that this will come in handy as we begin to prepare our financial statements. Let's check to make sure that our equation stays in balance after we've recorded this entry. Cash up by 1,000. So our assets is up by 1,000. Retained earnings increased by 1,000. Owner's equity increases by 1,000. Both sides of the equation up by 1,000, so we stay in balance. Now let's look at the expense entry. We're going to record expenses of $90, all paid in cash. Let's look at what accounts are affected, and then we'll record the journal entry. We're paying cash for all of these expenses, so our cash account will go down by 90. So cash, which is an asset, is going down by 90. Expenses, recall, when we talked about the income statement, are decreases in owners' equity that are caused by costs that occur to generate revenues. The decrease is in owner's equity. That decrease occurs because the resulting net earnings that are affected by the expenses, eventually make their way into the retained earnings account on the balance sheet. And that thus is their effect on owner's equity. So let's record the entry for the expenses of $90. Cash is going down, it's an asset, so that's going to be the right side of the entry for this one. So let's perhaps start here, retained earnings is decreasing. A decrease in an owner's equity account is a left side or a debit, so let's start there. Retained earnings. Which is an owner's equity account. I'm going to make sure we put our notation here. I'll just call this expenses, since we haven't done specific about what kind of expenses. That is a decrease in retained earnings of $90. Cash is decreasing, that's an asset, so that's our white side or credit part of the entry. Cash, asset decreases by 90. Let's post this entry to the individual T-accounts. We have those already sitting in front of us here on the board. The $90 decrease in retained earnings will be put on the left side of the retained earnings T-account. It's the left side of the journal entries, so it goes on the left side of the T-account. I'm going to put a notation out here. That it is expenses. And then the cash decrease of 90 will go into the right side of the cash T account, effectively reducing its balance. Now let's make sure after recording that transaction, that we are still happy about the balance sheet equation remaining in balance. Cash goes down by 90. So net assets are down by 90. Retained earnings decreases by 90. So owner's equity is down by 90. Both sides of the equation have been decreased by 90. So the equation remains in balance. And we continue to smile about that. So in summary, recording revenue and expense transactions involve a process very similar to what we do to record any transaction. We've got to identify the four pieces of information that we need to record a journal entry. We record the journal entry. We post it to the individual T-accounts. We make sure that the equation stays in balance. The slight tricky part here is that we're going to record these revenues as an increase in retained earnings. And record the expenses as a decrease in retained earnings. Because we're trying to make sure we're seeing the effect of these transactions ultimately on the balance sheet equation. So each of our journal entries where we recorded on the balance sheet account, will be making a notation about the source of that entry, revenues or particular expenses. Beside our indication that it's an entry to the retained earnings T-account.
