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 ($)
| Assets | Liabilities + Equity | ||
| Current Assets | Short-term Liabilities | ||
| Cash | 9,000 | ||
| Inventory | 5,000 | Bank loans | 9,000 |
| Fixed Assets | Equity | ||
| Building | 10,000 | ||
| Equipment | 6,000 | Share capital | 25,000 |
| Furniture | 4,000 | ||
| Total | 34,000 | Total | 34,000 |
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 $11,000. All the transactions were in cash.
These transactions will be listed as follows in the profit and loss statement:
The Chess Pizza Company’s Profit and Loss Statement – February 2008 ($)
| Sales | 11,000 | |
| Cost of sales | 9,000 | (Raw materials + salaries) |
| Net profit | 2,000 |
(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 $2,000 will be added to the equity item (in the right column). The retained earnings item was not included in the balance sheet for the preceding month, because its total was 0.
Chess Pizza’s Balance Sheet as of February 28, 2008 ($)
| Assets | Liabilities + Equity | ||
| Cash | 11,000 | Short-term liabilities | |
| Inventory | 5,000 | Bank loans | 9,000 |
| Fixed Assets | Equity | ||
| Building | 10,000 | Share capital | 25,000 |
| Equipment | 6,000 | Retained earnings | 2,000 |
| Furniture | 4,000 | ||
| Total | 36,000 | Total | 36,000 |
Activity during March
Sales: $15,000. Payment terms – cash.
Expenditures:
- Purchase of raw materials – $6,000. Payment terms: April 2008.
-
Payment of salaries – $4,000. Payment terms: cash.
-
Newspaper advertising – $1,000. Payment terms: cash.
These transactions will be listed as follows in the profit and loss statement:
The Chess Pizza Company’s Summary Profit and Loss Statement – March 2008 ($)
| Sales | 15,000 | |
| Cost of sales | 10,000 | (Raw materials $ 6,000 + salaries $4,000) |
| Gross profit | 5,000 | |
| Selling expenses | 1,000 | |
| Net profit | 4,000 |
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 $4,000 profit, this sum will be added to the retained earnings item.
The company balance sheet as of March 31, 2008 will be as follows (changes from the preceding month are circled):
Chess Pizza’s Balance Sheet as of March 31, 2008 ($)
| Assets | Liabilities + Equity | ||
| Current Assets | Short-term liabilities | ||
| Cash | 21,000 | Accounts payable | 6,000 |
| Inventory | 5,000 | Bank loans | 9,000 |
| Fixed Assets | Equity | ||
| Building | 10,000 | Share capital | 25,000 |
| Equipment | 6,000 | Retained earnings | 6,000 |
| Furniture | 4,000 | ||
| Total | 46,000 | Total | 46,000 |
