Now it's time to prepare the financial statements as of the second year of operations for the Gordon spot. Let's start with the income statement, recall that we've entered all of our revenue transactions and all of our expense transactions into the retained earning T-account. That makes very straightforward to prepare an income statement. Remember, all we need to do is just transfer each individual item to the face of the income statement. One thing I want to point one is that when we recorded dividends, you might notice that I put them, way down at the bottom left of the retained earnings to your account. Why did I do that? Well I did that because dividends is not an expense, and so it doesn't show up in the income statement. It's simply a reduction in retained earnings, as we return things to the owners. But it's not an expense that affects the income statement. So I did that just to make my life and your life easier. And then inside the box, we have anything that shows up on the income statement with dividends which don't show up on the income statement showing up in the bottom left hand of the T account. You might remember when we did the year one income statement that we had earnings of 5,610. And we have an ending balance in year 1 for the retained earnings T account of 5,610. Now that makes sense because that is the beginning balance at the beginning of year 2, so we should feel good about that. But you might recall that I asked the question, is it always the case that net earning or net income is equal to the ending balance in retained earnings? You remember the answer to that? The answer was no, and there were two reasons that the answer was no. The first one was that in the first year of operations, we started with the beginning balance of 0, and we paid no dividends. So the entire change in retained earnings was captured in the retained earnings ending balance. But because in year 2, we start with a beginning balance that's not equal to 0 and we've paid dividends. We can't rely on that income to be the same as the ending balance in the retainer in T account. Now just for, A reminder, Retained earnings, we have a beginning balance of 5,610 and an ending balance of 26,935. We add net income or net earnings into the retained earnings T account. And I think you probably see that what we've been doing this is exactly that. Because what's in the box is our income statement and then we take our dividends here, on the left hand side. So sort of a shorthand T account here, where I've summarized everything and net income. We see that beginning retained earnings plus net income. Any earnings that we generate that we add it to retain earnings less what we pay in dividends gives us our ending balance in retained earnings. And that's a formula that's captured by the T account here. But it's a handy one to remember, to keep in the back of your mind because it will become useful on a number of occasions. Okay, let's move now to the balance sheet. Recall the format of the balance sheet? Pretty straightforward. Assets, liabilities, owners equity, we go to the T-accounts that we've been using into which we put a post of our journal entries. And we list everyone of those account names on the balance sheet, I've done that here for us. Recalling that we have combined the truck account and the equipment account into an account called PP&E or property plant and equipment. So we have each of our accounts and recall how we got the balances that went on the balance sheet. When we did this previously, we took the T account for that balance sheet account. We took the ending balance, and we put it right on the balance sheet. We've done a lot of work, we've made our life pretty easy at this point. So we do that for each one of our accounts. At which point in time, we have a completed balance sheet. Now notice, so again several things we want to check. Assets are equal to liabilities plus owner's equity, nice work. Recall our financial statement framework that we've seen many times before. And let's think about the second year at the garden spot. Remember we have a balance sheet, beginning balance sheet for the year that would be exactly the same as the balance sheet we saw at the end of year one. We have an ending balance sheet for the second year, as of the end of the second year. And we have an income statement that captures what happened during the year. So remember, we have a snapshot on this date, a snapshot on this date. We have something that provides us with a video of how we got from one snapshot do the other snapshot. Let's make sure we know where the numbers from the financial statements will be sitting. At the end of year one or at the beginning of year two, We had a cash balance of $3,010. Our balance sheet at the end of year two tells us we have a cash balance of $10,610. So the accumulation of everything that had happened to the company as of January 1st was represented in this balance sheet, which had a cash balance of 3,010. The accumulation of everything that's happened up to December 31st is represented in this balance sheet and that shows a cash balance of $10,610. We had a retained earnings balance at the end of year one, beginning of year two of 5,610. And we had an ending retained earnings balance on the December 31 balance sheet $26,935. So that retained earnings balance tells us that over the life of the Garden Spot which at this point and time is two years. I mean the life of the Garden Spot, the company has generated earnings and of $26,935 that it is retained in the business, recall it did pay some dividends. But it is retained over its life, $26,935 of earnings. That earning on that income statement this year, 29,325. Revenues, expenses. Also recall that these, the income statement helps us understand how we got from the beginning retained earnings balance to the ending retained earnings balance. So our beginning retained earnings plus our income is equal to the ending retained earnings balance unless we pay dividends. And in this case, we paid dividends of $8,000. So this takes the numbers that we've just completed on the financial statements as at the end of year two at the Gardens Spot. And places them in our framework, so we can start to cement that way of thinking in our minds.
