Assume that Lisa wishes to open a neighborhood pizza parlor, and she founds a new company for the purpose, called Chess Pizza.
On December 31, 2007, she invests $25,000 of her own money, while at the same time arranging for the new company to obtain a $4,000 bank loan. The company has $29,000 = $25,000 + $4,000. She then buys:
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A building for $10,000.
- Equipment for $6,000.
Furniture for $4,000.
Lisa deposits the remaining $9,000 in cash in the company bank account. In exchange for the $25,000 that she invested in the company, the company issues shares worth $25,000 to Lisa.
Lisa acts in effect as a clerk in the company. All her actions are undertaken for the company.
As of December 31, 2007, the company’s balance sheet is as follows:
Chess Pizza’s Balance Sheet as of December 31, 2007 ($)
| Assets | Liabilities + Equity | ||
| Current Assets | Liabilities | ||
| Cash | 9,000 | Bank loans | 4,000 |
| Fixed Assets | |||
| Building | 10,000 | Equity | |
| Equipment | 6,000 | Share capital | 25,000 |
| Furniture | 4,000 | ||
| Total | 29,000 | Total | 29,000 |
Lisa plans to open the pizza parlor to the public at the beginning of February 2008. In January, she completes her preparations, in the course of which the company takes another bank loan of $5,000, and uses it to buy raw materials for making pizza.
At the end of January, the company prepared another balance sheet reflecting the transactions conducted in January 2008. The balance sheet will indicate as follows:
Chess Pizza’s Balance Sheet as of January 31, 2008 ($)
| Assets | Liabilities + Equity | ||
| Current Assets | Liabilities | ||
| Cash | 9,000 | Bank loans | 9,000 |
| Inventory | 5,000 | ||
| Fixed Assets | Equity | ||
| Building | 10,000 | Share capital | 25,000 |
| Equipment | 6,000 | ||
| Furniture | 4,000 | ||
| Total | 34,000 | Total | 34,000 |
A new item totaling $5,000, called “Inventory”, has been added to the assets column, while the Bank loans item in the liabilities column has grown by $5,000. There are no changes in the other balance sheet items.
