Now let's take some time to apply what you've learned by recording transactions one through five from the garden spot case. In the first transaction, Mary Joe met with her lawyer to incorporate the business and she and Josh her husband invested $60,000 in the company in exchange for shares of common stock. They had thought about borrowing the money from her mother, but they eventually decided just to take it out of the savings account that they had accumulated over the past ten years. I've outlined a structured workspace for us to use. It includes the balance sheet equation at the top, the bottom left hand box will be where we write our journal entries, and then we have the additional workspace where we can put our T accounts. Remember there are four things you have got to know in order to be able to record the journal entry. The accounts affected, the type of account, whether it increases or decreases, and the dollar amount. With this transaction, the company see's an increase in cash when Mary Jo and Josh invest in the company. So I'm going to record an increase to cash which is a left side entry or a debit because it's not that account that's increasing for $60,000 and a right side. To an account called capital stock which is an owners equity account. It increases by $60,000. Let's post these to the T accounts. We'll need a cash T account that I'll put here because it's on the assets side of our workspace. And we'll need a capital stock T account. Which I'll put here in the owner's equity section of our workspace. Of course, we're just getting started, so these have no transactions that have hit them yet. So we have a beginning balance in each account of zero. Let's post the journal entry to the T accounts. We need to make a left side entry to the cash T account, for $60,000. Dollars, I'm going to put a one out beside that entry to note that it was associated with transaction one. We need to put a right side entry [SOUND] into the right side of the capital stock T account. And of course, I've also included a one out beside that entry to denote that it was associated with transaction one. Now remember we always like to make sure that the balance sheet equation stays in balance after we record a transaction. So let's check to make sure that's the case. In this transaction, our assets increased by $60,000, because our cash balance went up. And our owner's equity increases by $60,000 because our capital stock balance went up. So, both sides of the equation increase by $60,000, so the equation stays in balance, and we're quite happy about that. Now what if? Mary Jo had borrowed the $60,000 from her parents instead of using her savings account to get the $60 to invest in the company. The transaction that we record would be no different and here's why. There's a concept that we'll call the entity concept. Which tells us that what we want to do is report financial information only for the entity of interest. Which in this case, is The Garden Spot. So let's draw, This area will represent our company, The Garden Spot. Now, recognize that Mary Jo is affiliated with The Garden Spot because she's the manager. But she also has another affiliation with the company. She and her husband Josh are the investors or owners. They gave the company $60,000 in cash and they received stock of $60,000. But they could have been anybody. The investors didn't have to be Mary Jo and Josh. They could have been anybody so they're a different entity than is the garden spot. If they had gone to marry those parents and taken out a loan that would be a loan on their books not on the garden spot's books. But instead of doing that they went to the bank account and got $60,000 from their bank account and use that to invest in the garden spot. So the transaction for the garden spot would have been no different. The only transaction it's engaged in is issuing stock to owners, in exchange for 60,000 in cash.
