Now let's apply what we've learned by recording transactions six through eight for the Garden Spot. The Garden Spot had sales of $400,000 during the year, $315,000 of which were cash sales, and the remaining $85,000 of which were sales on account. The inventory that they sold had originally cost a total of $240,000. I'm going to suggest that we treat this transaction as two parts. The first part will be the recording of the revenues or the sales that occurred during the year. And the second part will be recording the cost of the inventory that had been sold. So let's start by recording the sales. When we record revenues or sales, we are going to increase retained earnings. So, I'm making a right side entry to Retained Earnings, which is an Owner's Equity account. I'm going to put a notation in this entry to remind myself what the entry is for. Here, I've made a notation that it's revenues. Retained earnings is increasing by $400,000. Now, on the left side of the entry, I'm going to record an increase in the asset accounts, which the company received in exchange for the sales. It received cash for part of the sales, and it received an accounts receivable, or a promise to pay from the customer, for the remaining part of the sales. Let's make a left hand side to cash, which is an asset account. It increases by $315,000. We'll make another left side entry to Accounts Receivable. I've abbreviated that as AR. An increase of $85,000. So Accounts Receivable, again, is that account we use when customers purchase something, we record revenues but the customer hasn't paid yet. We might even want to call it, how much the customer owes me, and call that the asset account. But, typically, the accounting lingo is Accounts Receivable. Now, notice that the total of the left sides of the entry is equal to $400,000, which is the same as the total of the right side of the entry. So we feel comfortable about that. Now, let's post this entry to the T accounts. Let's start by posting the left side entry to cash for $315,000, and to the left side of the cash T account. I'm going to make a notation out the left here that this is associated with transaction six, but I'm going to go a little bit further since I have suggested that we treat this transaction in two parts. Let's call the revenue part 6A. So anything associated with this entry we will label as 6A. The next thing I need to do, is post an increase in the accounts receivable account as a left side of $85,000 to that T account. We haven't used that T account yet, so I'm going to create it. Accounts receivable, asset account. Now, recall this is going to have to have a beginning balance but it's zero. And we're going to post the left side entry to the Accounts Receivable account on the left side of that T account. Again, I'm going to label this 6A. And then, finally, I need to pass the right side entry to the Retained Earnings account and to the Retained Earnings T accounts. But notice we don't have that yet in our work space because we haven't used it yet. So I'm going to create one. Retained Earnings. It's an Owner's Equity account, so I've put it in the Owner's Equity section of the work space. It has a beginning balance of zero, and I'm going to post the revenues to the right side of that T account. Again, I'm making a notation that it's associated with transaction 6A. One additional thing I'm going to suggest that you do, is anytime you make a notation or an entry in the retained earnings T account, put a notation out beside the entry in the T account that's consistent with the notation that you gave to the entry in the journal entry. So I'm going to put Revs as an abbreviation for revenues. Both sides of the equation increase by $400,000, so we remain in balance. Let's go to transaction six, Part B. Okay, recall that part B, is recording the cost of the inventory sold, okay? So when we record the cost of inventory sold, we record that as a left side entry to Retained Earnings. We'll call that Cost of Goods Sold. Retained Earnings decreases, because this is an expense, by $240,000. Now, the corresponding right side piece to this entry is the reduction in the Inventory Asset account. So inventory, which is an asset, Decreased by $240,000. Let's post these to the T account. The left hand side to the Retained Earnings account of $240,000. We'll make a notation that that's transaction 6, part B. And we'll put out to the left here that that was the Cost of Goods Sold expense. Let's record the reduction in inventory as the right side entry to the inventory T account. We'll put a notation that that is transaction 6 part B. Let's make sure that assets that continues to be equal to liabilities plus owner's equity. Assets decreased by $240,000, because we sold inventory, we reduced the inventory balance. Owners Equity decreased by $240,000 because of the Cost of Goods Sold expense that reduced the Retained Earnings T account. So, again, both sides of the equation go down by $240,000, we remain in balance.
