Today we'll continue read through Chapter 2 of The Accounting Game, and we will begin to setup GnuCash so we can follow along with the transactions in the story.

I'll walk you through setting up the five top-level accounts for our accounting equation:

Assets + Expenses = Liabilities + Equity + Income

Let's try to go through The Accounting Game and record each transaction described into our accounting system.

We will begin class, as usual, with a short quiz from our study of the balance sheet last week.

We'll then begin Chapter 2 of The Accounting Game, where we will meet a new financial statement - the income statement.

Let's think back on our story so far:

We've opened a lemondate stand starting with $5 of our own money (owner's equity) and $10 burrowed from mom (notes payable, a liability). After using $12 for 50 lemons at 20¢ a piece and 5 pounds of sugar at 40¢ a pound (our startup inventory and enough to produce 60 glasses of lemonade at a cost of 20¢ each), we sell 50 glasses at 25¢ each, earning $25 in sales and using $10 in cost of goods sold, for a gross profit of $15. We still have to talk about expenses, like the $2 to rent the glasses for the lemonade, the $1 to pay the kid for painting our sign (advertising expense), and the $2 to pay our neighbor to rent the corner of his yard.

As you read chapter 2, be sure to write down your own definitions for the following terms:

• balance sheet
• income statement
• sales
• gross profit
• net profit (a.k.a. the bottom line
• cash flow statement

You should also keep the story of the lemonade stand in mind as you write these definitions. The goal of the book (which we should appreciate) is to make all these ideas easy for us to remember by relating them to a story we can remember.