Accounting

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Balance Sheet Format – Listing Transactions-Combined Examples

The following examples will continue to follow the activity of Chess Pizza from month to month, and how this activity is reflected in the balance sheet and the profit and loss statement.

The balance sheet of Chess Pizza as of the end of January 2008 is as follows:

Chess Pizza’s Balance Sheet as of January 31, 2008 ($)

AssetsLiabilities + Equity
Current AssetsShort-term Liabilities
Cash9,000
Inventory5,000Bank loans9,000
Fixed AssetsEquity
Building10,000
Equipment6,000Share capital25,000
Furniture4,000
Total34,000Total34,000

 

Activity during February:

In February, the company spent $4,000 on raw materials, all of which it used to make pizza (the company decided not to use its existing inventory, but to keep it for an emergency). The company also paid $5,000 in salaries. The company sold pizzas for $11,000. All the transactions were in cash.

These transactions will be listed as follows in the profit and loss statement:

The Chess Pizza Company’s Profit and Loss Statement – February 2008 ($)

Sales11,000
Cost of sales9,000(Raw materials + salaries)
Net profit2,000

(It is assumed that the company pays no taxes).

The balance sheet items that change as a result of the company’s activity in February are circled as follows:

In the assets column:

The cash item will increase by $2,000.

Explanation: $11,000 in sales, minus $9,000 in expenditures.

In the liabilities column:

Since the company earned $2,000 from the sale of pizzas, a retained earnings item with $2,000 will be added to the equity item (in the right column). The retained earnings item was not included in the balance sheet for the preceding month, because its total was 0.

Chess Pizza’s Balance Sheet as of February 28, 2008 ($)

AssetsLiabilities + Equity
Cash11,000Short-term liabilities
Inventory5,000Bank loans9,000
Fixed AssetsEquity
Building10,000Share capital25,000
Equipment6,000Retained earnings2,000
Furniture4,000
Total36,000Total36,000

Activity during March

Sales: $15,000. Payment terms – cash.

Expenditures:

  1. Purchase of raw materials – $6,000. Payment terms: April 2008.
  2. Payment of salaries – $4,000. Payment terms: cash.

  3. Newspaper advertising – $1,000. Payment terms: cash.

These transactions will be listed as follows in the profit and loss statement:

The Chess Pizza Company’s Summary Profit and Loss Statement – March 2008 ($)

Sales15,000
Cost of sales10,000(Raw materials $ 6,000 + salaries $4,000)
Gross profit5,000
Selling expenses1,000
Net profit4,000

 

The balance sheet item that change as a result of the companys activity in march are as follows:

In the assets column:

The cash item will increase by $10,000. Explanation: $15,000 in sales, minus $5,000 in expenditures (salaries + newspaper advertising).

In the liabilities column:

The accounts payable item will increase by $6,000. Explanation: Purchases of raw materials, for which the company will pay in the future. Since the company earned a $4,000 profit, this sum will be added to the retained earnings item.

The company balance sheet as of March 31, 2008 will be as follows (changes from the preceding month are circled):

Chess Pizza’s Balance Sheet as of March 31, 2008 ($)

AssetsLiabilities + Equity
Current AssetsShort-term liabilities
Cash21,000Accounts payable6,000
Inventory5,000Bank loans9,000
Fixed AssetsEquity
Building10,000Share capital25,000
Equipment6,000Retained earnings6,000
Furniture4,000
Total46,000Total46,000