Accounting Training

Chapter 2
Balance Sheet
Business Loan

Copyright ©Jerry Belch 2015
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Balance Sheet

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. If you look at your chart of accounts, the balance sheet contains: the assets, the liabilities and the stockholders' equity accounts. The first line of a balance sheet names the company, the second contains the words "Balance Sheet" and the third has the date.
  1. We first must determine what assets we will need to operate our business.
  2. They will differ based on the nature of the company, its size, number of employees , type of business, etc.
  3. I have created two balance sheets in the 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 men's 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.

Seed Money

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. A VE company of 25 employees typically has about $25,000 to $30,000, worth of operating expenses each month. Payroll taxes account for about 20% of payroll. We will use $28,500 for calculations which would equal $85,500 for 3 month's operating expenses. Let's just call it $85,000 needed for seed money. Our cash balance and our common stock will equal $85,000. This amount is the same for both companies. Get the forms to request seed money and the guidelines from the VEC. They make changes to these forms each year.

Assets needed

Let's start with the tuxedo rental business.
  • They need $25,000 for display cases.
  • $20,000 for racks to display the tuxedos.
  • $2,000 cash register
  • computer $1,500
  • software to run the computer, $1,000
  • office supplies, $500
  • File cabinets, $300,
  • desk $400
  • chair $100
  • $100,00 worth of tuxedos to rent.
  • This totals $150,800.

Totals for your own 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.

Furniture and Fixtures Account

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.

Office Equipment

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.

Cost of the tuxedos

The cost for the tudedos is listed under "Other Assets". The total of all assets is $235,800.00 If you click on the link for Tuxedos in the projects for this week box, you can see how the amount for tuxedos, shirts, ties, shoes was determined.

Balance Sheet for merchandising business

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.

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
  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.

Cost of business loan

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 $1,508.00. 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.

Stockholders' Equity Calculation

To calculate the stockholders' equity section, proceed as follows. Our Common stock is the amount of the seed money, $85,000. This amount is the same for both companies.

Accounting Equation

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 = $125,000
  • $150,800 + $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. By now you should be able to complete a balance sheet for your own company. Just follow the steps listed above. Printout a balance sheet template, fill in the amounts, save it to your working folder and print out a copy.
The VE loan numbers for the 2013-2015 year are as follows
  • 60 month loan at 5.25% fixed.
  • Use these number in you calculations.
  • Make sure to get and submit the Business Loan Application and the Loan Application Information sheets to the Virtual Enterprise Center. Note Due Dates

Service Business Statements

Bromley's Tuxedo Rentals
Balance Sheet
Current Date

Accounts Receivable00.00
Furniture and Fixtures47,000.00
Acc. Depreciations Furniture0.00
Office Supplies1,500.00
Other Assets100,000.00
Office Equipment2,300.00
Acc. Dep. Office Equipment0.00
Prepaid Insurance0.00
Total Assets235,800.00
Notes Payable150,800.00
Accounts Payable
Workers' Comp Payable
Federal Income Tax Payable
FICA Tax Payable
Medicare Tax Payable
Federal Unemployment Tax Payable
State Unemployment Tax Payable
Sales Tax Payable
SDI Tax Payable
State Income Tax Payable
State Employment Training Tax
Total Liabilities$150,800
Common Stock85,000.00
Retained Earnings
Total Liabil & Stock. Equity$235,800.00