To get the IS and the BS, we start from the trial balance

we adjust it (introduce some extra transactions, with double-entry)

then, we extract all the lines making up the IS, replace them by just the bottom line

the result _is_ the BS, needing to be reorganised.

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The end of accounting period 1 is also the beginning of accounting period 2. The closing inv. become the opening inv.

All the IS accounts are set anew (empty). But the accounts in the BS begin the new year with figures in them.

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Assets are concrete, easy to understand : think of a bicycle resting on the wall outside the building.

Liabilities are more abstract, they cannot be "perceived" as easily : who this bicycle belongs to doesn't show.

Liabilities are not "things in the firms", whereas assets are. Liabilities are just records of liabilities of the firm, or of the origin of some money that flow in in the past from the shareholders (+ retained profit).

Double entry accounting is "complicated" because it is a _value_ accounting.

There are movements of values, with no cash involved, for instance a sale on credit, or the acquisition of a van on credit.

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When we buy a van on credit, we receive some concrete value (the van, debit into an equipment account), and we _create_ some value corresponding : the IOU we give the supplier.

This IOU is recorded on the liability side of our BS (and on the asset side of the BS of the supplier).

For us, it is some abstract value we owe, a bit like "who the bicycle belongs to?"

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It is important to understand that, issuing an IOU, we _created_ some value. We increased the "quantity of value" in the economy.

Modern cash is of the same nature : liabilities of the central bank, with legal tender status (ie we cannot refuse to be paid with them).

there is a parallel between
1) the construction of nation-states (1000 -> XXth century)
2) the construction of tax systems
3) the emergence of fiduciary money imposed by the state (needing a central bank, XIXth century)

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When we sell a dress 120 euros in cash coming out of our inventory valued at 50 euros, we cannot record this in one transaction 

cash debit      120
inventory credit 50

it is not a balanced transaction.

So Italian merchants invented a fake "sales" account to be credited, while the cash in debited

sales credit    120
cash debit      120

and they also created a "cost" account to be debited, while the inventory is credited 50

inventory credit 50
COGS debit       50

now everything "works", and we can compute a profit in a special document called the Income statement, where we will list

the sales 120 (credit)
the COGS   50 (debit)
and various other expenditures (in debit)

yielding a bottom line, which replaces all the accounts of the IS in the (adjusted) TB.

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A financial product is a contract between two parties, A and B, specifying movements of cash between them now and in the future.

The movements in the future may depend upon contingent conditions, random events, etc.

Bonds, shares of stocks, options, swaps and insurance contracts fall into this category, as well as CDS, CDO, ABS, and other products we hear about in the news.

There may be no movement now: case of forwards and futures contracts. For instance at date t (today), A and B agree to exchange wheat for money at date T (six months from today), and the price is fixed today at t.

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