Accounting Tutorial_The Balance Sheet

Accounting Tutorial: The Balance Sheet Chapter 2

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Tuxedos
Formal Wear Inventory
Loan Calculator In order for us to apply for a business loan, we will need to create a balance sheet. A balance sheet is also needed in our business plan. A balance sheet is a document that shows what is owned, what is owed and what the business is worth on a specific date. The first line of a balance sheet names the company, the second contains the words "Balance Sheet" and the third has the date. We first must determine what assets we will need to operate our business. They will differ based on the nature of the company, its size, number of employees , type of business, etc. I have created two balance sheets in the scroll boxes below: The first is for the service business: Bromley's Tuxedo Rentals, the second is for Bromley's Formal Wear, the merchandising business. Remember the merchandising business must buy merchandise for resale. In the case of our formal wear company, these would be mens' suits, shirts, bride's dresses and gowns for the brides maids, etc. The service business just rents tuxedos, they do no sell them. A number of assets have been determined. When any new company is started, the owners must invest their own money into the business. A bank will not loan money, unless they see that the owners have a vested interest in the success in the business. The central office or business partner will provide "seed money" in exchange for common stock. The stock will be valued at $10 per share. The regional director will determine the amount. It is suggested that firms submit a written rationale for their business idea and a three to six months operating expense budget prior to being granted the seed money. Since we are dealing with a corporation, owners invest money by buying stock. Seed money does not need to be paid back unlike loan payments. It is a good choice for buying equipment and assets needed to run the company. Let's assume that our seed money amount totals $20,000. Our cash balance is $15,000 + $50,000 + $20,000 = $85,000. This amount is the same for both companies. Let's start with the tuxedo rental business. They need $25,000 for display cases. $20,000 for racks to display the tuxedos; a $2,000 cash register, a computer $1,500; Software to run the computer, $1,000; Office supplies, $500; file cabinets, $300, a desk $400; a chair $100 and $100,00 worth of tuxedos to rent. This totals $150,800. Totals for your own VE business can come for looking on line to get prices, catalogs from office supplies and furniture companies, advertisements on TV, radio, magazines and newspapers. Lots of beneficial information can be obtained from your business partners. To calculate Furniture and Fixtures amount on the balance sheet, I added the display cases, $25,000 plus clothing racks; $20,000 and the cash register, $2,000 for a total of $47,000. To calculate Office Equipment I added the computer; $1,500; file cabinet, $300; desk, $400 and chair $100 for a total of $2,300. For Office Supplies, I added $1,000 for software; and $500 for office supplies for a total of $1,500. The cost for the tudedos is listed under "Other Assets". The total of all assets is $235,800.00 If you clik on the link for Tuxedos you can see how the amount for tuxedos was determined. To create the balance sheet for the formal wear company, the only change we need to make is to put the $100,000 into the Merchandise Inventory account instead of the other assets classifications. If you click on the link for Formal Wear Inventory, you can see how the amount was determined. Ask your business partners for help when trying to determine the amount of inventory to purchase. The next lessons on the income statement and break-even analysis will help you in determining the amount of your beginning inventory. To come up with a beginning inventory, we need some additional numbers: 1. Projected sales to break even 2. Cost of goods sold percentage for our type of business from BisStats.com 3. If we multiply our mark up percentage times our projected sales amount we will come up with an approximate beginning inventory amount. For example, if our projected sales are $250,000 per month and our markup percentage is .50 then our beginning inventory amount would be $125,000. Inventory can be adjusted each month by simply purchasing more merchandise. All the other numbers will remain the same. To calculate the the amount of the loan needed for our business, we will need $150,800. in our example, the bank gave us the loan for 10 years. The interest rate is 12%. We need to use an amortization calculator to determine the monthly payments for this loan. Click on the link above for loan calculator and enter the information. As you can see we will have a monthly payment of $2,163.54 each month. Payments on the principal amount of the loan, $150,800 and the interest vary each month. For example for our first month the amount paid toward the principal is $655.54, the interest is $1508.00. For the second month, payment on the principal is $662.10 and the interest is $1,501.44. For the third month, the amount applied toward the principal is $668.72 and the amount of interest is $1,494.82. Under Notes Payable, we want to list the $150,800. This amount is the same for both the tuxedo rental company and the formal wear. Borrowing is an expensive proposition. For us to borrow $150,800, the interest paid over the ten- year period will be $108,825.03. VE International has changed the rules for borrowing money. They set the term of the loan as 5 years. The interest rate is the current prime rate (as of September 1st of the current school year) plus 1% for a variable rate loan and an additional 2% for a fixed loan To calculate the stockholders' equity section, proceed as follows. Remember, the CEO invested $15,000. Each of the five Vice Presidents invested $10,000 each for a total of $50,000. Each of the other 20 employees of the company invested $1,000 for a total of $20,000. Our Common stock is thus $15,000 + $50,000 + $20,000 = $85,000. This amount is the same for both companies. The accounting equation states that ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY. A balance sheet must follow the rules of this equation. Let's see if our balance sheet is in fact, in balance. Assets = $235,800 Liabilities = $150,800 Common Stock = $85,000 $150,000 + $85,000 = $235,800 Yes, we are in balance. After the Stockholders' Equity section, we must now show that the balance sheet is in balance. We add the total liabilities and stockholders' equity together (150,800 + 85,000 = 235,800. That is the same amount of our assets, so our balance sheet is in balance. As you will learn later, this accounting equation will be used throughout our study of the principles of accounting. On your worksheet, write out the balance sheet for the type of company that you have. By now you should be able to complete a balance sheet for your own virtual enterprise company. Just follow the steps listed above. If you are using the general ledger/financial reports software that I wrote, you may want to set up your chart of accounts and balance sheet amounts at this time. If you are using other software or Excel, you may also want to set up your chart of accounts and these beginning balances. When you reach the chapter on Posting, You can see that I have created a general ledger using Excel for you with all the beginning balances for Bromley's formal Wear. The VE loan numbers for the 2013-2014 year are as follows : 60 month loan at 5.25% fixed. Use these number in you calculations.

Bromley's Tuxedo Rentals Balance Sheet Current Date ASSETS Cash.................................85,000.00 Accounts Receivable......................00.00 Furniture and Fixtures.............. 47,000.00 Acc. Depreciations Furniture..............0.00 Office Supplies.......................1,500.00 Other Assets........................100,000.00 Office Equipment......................2,300.00 Acc. Dep. Office Equipment................0.00 Prepaid Insurance.........................0.00 Total Assets........................235,800.00 LIABILITIES Notes Payable.......................150,800.00 Accounts Payable Workers' Comp Payable Federal Income Tax Payable FICA Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable SDI Tax Payable State Income Tax Payable State Employment Training Tax STOCKHOLDERS' EQUITY Common Stock........................85,000.00 Retained Earnings Total Liabil & Stock. Equity .....$235,800.00 Bromley's Formal Wear Balance Sheet Current Date ASSETS Cash.................................85,000.00 Accounts Receivable......................00.00 Furniture and Fixtures.............. 47,000.00 Acc. Depreciations Furniture..............0.00 Office Supplies.......................1,500.00 Other Assets..............................0.00 Office Equipment......................2,300.00 Acc. Dep. Office Equipment................0.00 Prepaid Insurance.........................0.00 Merchandise Inventory...............100,000.00 Total Assets........................235,800.00 LIABILITIES Notes Payable.......................150,800.00 Accounts Payable Workers' Comp Payable Federal Income Tax Payable FICA Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable SDI Tax Payable State Income Tax Payable State Employment Training Tax STOCKHOLDERS' EQUITY Common Stock...........................85,000 Retained Earnings Total Liabil & Stock. Equity .....$235,800.00

1. On the balance sheet for the tuxedo rental business, what is the total amount of assets?
$150,800 $235,800 $85,000
2. What is the amount invested by the CEO?
$15,000 $20,000 $85,000

3. The total amount of the loan, including interest is?
$150,800 $85,000 $168,896
4. The accounting equation states?
Assets = Liabilities + Stockholder's Equity Assets = Liabilities - Stockholders' Equity Assets = Stockholders' Equity - Liabilities

Tuxedos Formal Wear Inventory Loan Calculator	In order for us to apply for a business loan, we will need to create a balance sheet. A balance sheet is also needed in our business plan. A balance sheet is a document that shows what is owned, what is owed and what the business is worth on a specific date. The first line of a balance sheet names the company, the second contains the words "Balance Sheet" and the third has the date. We first must determine what assets we will need to operate our business. They will differ based on the nature of the company, its size, number of employees , type of business, etc. I have created two balance sheets in the scroll boxes below: The first is for the service business: Bromley's Tuxedo Rentals, the second is for Bromley's Formal Wear, the merchandising business. Remember the merchandising business must buy merchandise for resale. In the case of our formal wear company, these would be mens' suits, shirts, bride's dresses and gowns for the brides maids, etc. The service business just rents tuxedos, they do no sell them. A number of assets have been determined. When any new company is started, the owners must invest their own money into the business. A bank will not loan money, unless they see that the owners have a vested interest in the success in the business. The central office or business partner will provide "seed money" in exchange for common stock. The stock will be valued at $10 per share. The regional director will determine the amount. It is suggested that firms submit a written rationale for their business idea and a three to six months operating expense budget prior to being granted the seed money. Since we are dealing with a corporation, owners invest money by buying stock. Seed money does not need to be paid back unlike loan payments. It is a good choice for buying equipment and assets needed to run the company. Let's assume that our seed money amount totals $20,000. Our cash balance is $15,000 + $50,000 + $20,000 = $85,000. This amount is the same for both companies. Let's start with the tuxedo rental business. They need $25,000 for display cases. $20,000 for racks to display the tuxedos; a $2,000 cash register, a computer $1,500; Software to run the computer, $1,000; Office supplies, $500; file cabinets, $300, a desk $400; a chair $100 and $100,00 worth of tuxedos to rent. This totals $150,800. Totals for your own VE business can come for looking on line to get prices, catalogs from office supplies and furniture companies, advertisements on TV, radio, magazines and newspapers. Lots of beneficial information can be obtained from your business partners. To calculate Furniture and Fixtures amount on the balance sheet, I added the display cases, $25,000 plus clothing racks; $20,000 and the cash register, $2,000 for a total of $47,000. To calculate Office Equipment I added the computer; $1,500; file cabinet, $300; desk, $400 and chair $100 for a total of $2,300. For Office Supplies, I added $1,000 for software; and $500 for office supplies for a total of $1,500. The cost for the tudedos is listed under "Other Assets". The total of all assets is $235,800.00 If you clik on the link for Tuxedos you can see how the amount for tuxedos was determined. To create the balance sheet for the formal wear company, the only change we need to make is to put the $100,000 into the Merchandise Inventory account instead of the other assets classifications. If you click on the link for Formal Wear Inventory, you can see how the amount was determined. Ask your business partners for help when trying to determine the amount of inventory to purchase. The next lessons on the income statement and break-even analysis will help you in determining the amount of your beginning inventory. To come up with a beginning inventory, we need some additional numbers: 1. Projected sales to break even 2. Cost of goods sold percentage for our type of business from BisStats.com 3. If we multiply our mark up percentage times our projected sales amount we will come up with an approximate beginning inventory amount. For example, if our projected sales are $250,000 per month and our markup percentage is .50 then our beginning inventory amount would be $125,000. Inventory can be adjusted each month by simply purchasing more merchandise. All the other numbers will remain the same. To calculate the the amount of the loan needed for our business, we will need $150,800. in our example, the bank gave us the loan for 10 years. The interest rate is 12%. We need to use an amortization calculator to determine the monthly payments for this loan. Click on the link above for loan calculator and enter the information. As you can see we will have a monthly payment of $2,163.54 each month. Payments on the principal amount of the loan, $150,800 and the interest vary each month. For example for our first month the amount paid toward the principal is $655.54, the interest is $1508.00. For the second month, payment on the principal is $662.10 and the interest is $1,501.44. For the third month, the amount applied toward the principal is $668.72 and the amount of interest is $1,494.82. Under Notes Payable, we want to list the $150,800. This amount is the same for both the tuxedo rental company and the formal wear. Borrowing is an expensive proposition. For us to borrow $150,800, the interest paid over the ten- year period will be $108,825.03. VE International has changed the rules for borrowing money. They set the term of the loan as 5 years. The interest rate is the current prime rate (as of September 1st of the current school year) plus 1% for a variable rate loan and an additional 2% for a fixed loan To calculate the stockholders' equity section, proceed as follows. Remember, the CEO invested $15,000. Each of the five Vice Presidents invested $10,000 each for a total of $50,000. Each of the other 20 employees of the company invested $1,000 for a total of $20,000. Our Common stock is thus $15,000 + $50,000 + $20,000 = $85,000. This amount is the same for both companies. The accounting equation states that ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY. A balance sheet must follow the rules of this equation. Let's see if our balance sheet is in fact, in balance. Assets = $235,800 Liabilities = $150,800 Common Stock = $85,000 $150,000 + $85,000 = $235,800 Yes, we are in balance. After the Stockholders' Equity section, we must now show that the balance sheet is in balance. We add the total liabilities and stockholders' equity together (150,800 + 85,000 = 235,800. That is the same amount of our assets, so our balance sheet is in balance. As you will learn later, this accounting equation will be used throughout our study of the principles of accounting. On your worksheet, write out the balance sheet for the type of company that you have. By now you should be able to complete a balance sheet for your own virtual enterprise company. Just follow the steps listed above. If you are using the general ledger/financial reports software that I wrote, you may want to set up your chart of accounts and balance sheet amounts at this time. If you are using other software or Excel, you may also want to set up your chart of accounts and these beginning balances. When you reach the chapter on Posting, You can see that I have created a general ledger using Excel for you with all the beginning balances for Bromley's formal Wear. The VE loan numbers for the 2013-2014 year are as follows : 60 month loan at 5.25% fixed. Use these number in you calculations.
Bromley's Tuxedo Rentals Balance Sheet Current Date ASSETS Cash.................................85,000.00 Accounts Receivable......................00.00 Furniture and Fixtures.............. 47,000.00 Acc. Depreciations Furniture..............0.00 Office Supplies.......................1,500.00 Other Assets........................100,000.00 Office Equipment......................2,300.00 Acc. Dep. Office Equipment................0.00 Prepaid Insurance.........................0.00 Total Assets........................235,800.00 LIABILITIES Notes Payable.......................150,800.00 Accounts Payable Workers' Comp Payable Federal Income Tax Payable FICA Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable SDI Tax Payable State Income Tax Payable State Employment Training Tax STOCKHOLDERS' EQUITY Common Stock........................85,000.00 Retained Earnings Total Liabil & Stock. Equity .....$235,800.00	Bromley's Formal Wear Balance Sheet Current Date ASSETS Cash.................................85,000.00 Accounts Receivable......................00.00 Furniture and Fixtures.............. 47,000.00 Acc. Depreciations Furniture..............0.00 Office Supplies.......................1,500.00 Other Assets..............................0.00 Office Equipment......................2,300.00 Acc. Dep. Office Equipment................0.00 Prepaid Insurance.........................0.00 Merchandise Inventory...............100,000.00 Total Assets........................235,800.00 LIABILITIES Notes Payable.......................150,800.00 Accounts Payable Workers' Comp Payable Federal Income Tax Payable FICA Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable Sales Tax Payable SDI Tax Payable State Income Tax Payable State Employment Training Tax STOCKHOLDERS' EQUITY Common Stock...........................85,000 Retained Earnings Total Liabil & Stock. Equity .....$235,800.00
1. On the balance sheet for the tuxedo rental business, what is the total amount of assets? $150,800 $235,800 $85,000	2. What is the amount invested by the CEO? $15,000 $20,000 $85,000
3. The total amount of the loan, including interest is? $150,800 $85,000 $168,896	4. The accounting equation states? Assets = Liabilities + Stockholder's Equity Assets = Liabilities - Stockholders' Equity Assets = Stockholders' Equity - Liabilities