To understand how to prepare a sample balance sheet, let’s trace how Sunny started his now successful business, Sunny Sunglasses Shop.
As an avid outdoorsman and golfer, Sunny recognized the need for quality sunglasses at a reasonable price. He researched the industry and saw profitable gross margins for retail sunglasses.
He decided to start his business, Sunny Sunglasses Shop, on January 1, 2010. On this day, he withdrew $50,000 from his own account and invested it in the business.
Sunny Sunglasses Shop purchases inventory for $4,500, and land for future use for $20,000.
Rather than use up valuable cash resources, Sunny puts a $2,000 down payment on the land, and takes out a 15-year mortgage for the balance of $18,000. The mortgage stipulates that $900 is due and payable annually.
Sunny also entered into a credit agreement with its supplier to pay $3,000 cash for the inventory, and pay the balance of $1,500 within 90 days.
Finally, Sunny insured the store for one year by paying $2,400 for insurance.
The company now has two more assets on the company balance sheet: inventory and prepaid expenses.
The inventory was purchased for $3,000 cash $1,500 on credit, for a total value of $4,500. The provider now has a liability of $1,500 due within 90 days. Accounts payable represents this short-term liability for inventory purchased.
Prepaid expenses for insurance is an asset since it represents an insurance policy for one year, and that is a future advantage to the company which has not been consumed yet.
The firm also now has a noncurrent asset of $20,000 in land. It is a noncurrent asset which is expected to outlast one year.
In this business balance sheet example, Sunny used a classified balance sheet format. The classified balance sheet helps users of monetary statements by grouping these accounts into classes such as the function of the account, the business use of the resources, and whether resources and liabilities are short-term or long-term.
The land was purchased with $2,000 cash and a mortgage for $18,000. Part of the cash balance invested in the business that represented owner’s equity was used for these asset land. The land below the accounting equation is thus represented as:
The $18,000 balance less $900 is taken into account a long-term liability because Sunny does not should pay the $17,100 balance within 1 year. Only the $900 is classified as a current liability which is due within one year. Owner’s equity remains $50,000, although the original cash balance of $50,000 that represented the original the business was partially transferred to other assets. In the above example, $2,000 was transferred from cash to land.
Total assets were purchased for $7,400, so a portion of the cash asset simply transferred to other asset types. The retailer then took on some additional debt to finance additional assets. Therefore, Sunny Sunglasses Shop’s properties and investments increased by $19,500 ($18,000 mortgage plus $1,500 of inventory on credit), but the original owner’s equity balance remains the same at $50,000.