[MUSIC] Okay, we've looked at the business cycle. Let's have a little look in some more depth at the statements that we're going to include. We sort of looked at the cash flow but we maybe need to look in a little bit more depth at the income statement and the balance sheet. And some of the accounting concepts and conventions that actually dictate how we should present and what should be included, and maybe what shouldn't be included, in these income statements and balance sheets. So the income statement, a profit statement if you wish. This is where it counts for sales and what we call matched expenses. Now that's a key point here. Because really what we're talking about is we need to match the expense that was incurred during that particular period in time, irrespective of whether it's been paid or not. So this is very different to your cash flow. Cash, remember, just measures the cash in and cash out. Profit is not the same as cash. So our income statement, this statement that measures profit, is based upon the expenses, and even sales, that were incurred or we see during the year or made during the year. Irrelevant of whether the cash has been paid or not. So, if we think about sales, and I've already mentioned at the very beginning, if we want to maybe increase our sales, one way to increase sales is to sell on credit. Now, that could mean at any one point in time, there is customers who still owe you money. Now we recognize a sale as soon as the customer accepts delivery, and as long as that delivery is accompanied by the invoice, we can say we have made that sale, as a general rule. So, if we've made that sale, but we're allowing our customers 30 days credit terms to pay, then we're recognizing a sale, we're recognizing the revenue, even though we haven't actually received the cash for it. Of course, what that means is that we have created something called our trade receivables or commonly called debtors. And this is what debtors are. Debtors, trade receivables, are our customers who still owe us some money for the sales that we have recognized as revenue. What about our expenses? It's often that we pair expenses in arrears, in other words, your wages. Your wages that people have worked for during that month are probably not paid until the following month. So at any one given point in time, even though they've done the work for you, you will then owe them that money. So there's this lag. A bit like in our cash flow statements, there's this lag between actually incurring the expense and paying for the expense. Just because we haven't paid it, however, which is where it's different to the cash flow statement, we still include it as the expense when we're calculating our profit figure. Thus cash flows over a particular period may well differ from your profit flows. The balance sheet, now referred to as a statement of financial position, shows all the sources of finance and its investment. So it shows things like share capital, retained earnings. It also lists, at a given point in time, the financial values of items that are owned as resources. Of course I've already mentioned these, these are the assets. And, also, those amounts that are owed, the liabilities. And if we show those three things, effectively what we've got here is a snapshot at any one given point in time, of everything the business owns, everything it owes, and how it was financed through this investment. [MUSIC]
