Sample Balance Sheet Example

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 personal account and invested it in the business.

As a reminder, this affects the accounting equation as follows:

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 business balance sheet now looks like this:

Company Balance Sheet Example

Notice that the balance sheet example maintains the balance of the accounting equation:

or

The company spent a total of $7,400 in cash, leaving a balance of $42,600 ($50,000 – $7,400).

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 company 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 because it represents an insurance policy for one year, which is a future benefit to the company that has not been consumed yet.

The company also now has a noncurrent asset of $20,000 in land. It is a noncurrent asset because it is expected to last longer than one year.

In this business balance sheet example, Sunny used a classified balance sheet format. The classified balance sheet helps users of financial 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 the asset land. The land under the accounting equation is thus represented as:

The $18,000 balance less $900 is considered a long-term liability because Sunny does not need to pay the $17,100 balance within one year. Only the $900 is classified as a current liability since it is due within one year. Owner’s equity remains $50,000, even though the original cash balance of $50,000 that represented the original investment in 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 company then took on some additional debt to finance additional assets. Therefore, Sunny Sunglasses Shop’s assets and liabilities 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.

Sample Cash Flow Statement

The statement of cash flows shows how cash flowed through the business during the reporting period, resulting in the cash balance increasing or decreasing for the period.

Let’s review Sunny Sunglasses Shop’s sample cash flow statement example step by step to understand how each transaction affects cash.

Notice that the sample cash flow statement begins with net income of $15,283 as reported on the 2010 profit and loss statement and ends with the cash balance of $41,383 as reported on the 2010 balance sheet analysis page. The statement of cash flows therefore reconciles net income for the year with the ending cash balance on the balance sheet.

Sample Cash Flow Statement

The $41,383 as reported on the December 31, 2010 company balance sheet also represents the net change in cash for the period of 2010 since Sunny began his business in 2010, and the beginning cash balance was $0. This net change in cash is also reflected on the sample cash flow statement.

For a complete description of the purpose and use of each section in the statement of cash flows, see the statement of cash flow purpose and format.

Accounts receivable represents sales to customers on account, and not for cash actually received for the sale. Because net income includes this amount in sales and net income, we subtract this increase in accounts receivable for the year to determine actual cash received. Had the balance of accounts receivable decreased, the decrease would indicate a cash payment on the account which the income statement does not report, and we would add it as an actual cash receipt.

An increase in inventory represents products purchased for sale, and therefore decreases the cash balance. Since the inventory for the period increased from zero to $5,625, and inventory is not part of the income statement, we subtract this amount on the sample cash flow statement since it represents cash paid in operations for inventory.

The sample balance sheet for 2010 had a balance of $2,400 for prepaid expenses. This amount represents insurance on the business paid for the full year. The business reported the $2,400 at the beginning of the year as an asset for future use. By year end, the total amount expensed equaled $2,400, so the asset reported on the December 31 Balance Sheet is now zero.

Any prepaid expense amount represents what the business paid in cash for an asset for future use. We would subtract prepaid expenses in cash operations since the business would not report it on the income statement as an expense, but the business already paid for it. Since the company already expensed the item completely by year-end, and the prepaid amount is now zero at year-end, the amount paid in cash and the amount reported on the income statement are equal ($2,400), and no adjustment to cash is necessary.

Accounts payable represents inventory or other items purchased for which the business did not actually pay cash. Rather, the business promised to pay in the future by purchasing items on account. Therefore, an increase in accounts payable for the year is added back to cash on the sample cash flow statement. Inventory purchased in the operations section decreased cash. Since part of the inventory was purchased on account, we add this amount back to cash.

The statement of cash flows is formatted based on purchases or sales classified as investing and financing activities. This means that even if an asset is purchased with financing, the entire amount of the asset is shown in the investing section, and any amount financed is shown separately to determine the actual cash outlay.

For example, the purchase of a company vehicle for $12,800 and land for $20,000 represent a total cash outlay of $32,800 in the investing section.

The statement of cash flows includes both assets purchased in the investing section, as well as amounts used to finance purchases in the finance section. Since the company actually borrowed $8,800 to finance the purchase of the automobile reported in the investing section, and $18,000 to finance the purchase of land also reported in the investing section, these amounts are added back to cash since they do not represent cash paid for the assets acquired.

The company actually paid a total of $2,000 for the land, and $4,000 for the automobile, which represents the net cash paid for the investing and financing activities of these two items.

Finally, the financing section also includes any amount the owner invested into the business. Sunny started the year by investing $50,000 into his new business. This represents actual cash received for the year.

The total cash received and paid during the year equals the total net change in cash for the year of $41,383. The different examples for cash flow statements may sometimes follow a different format but always come to the same result: the difference between the beginning balance of cash on the balance sheet for the period, and the ending cash balance.

Sample General Ledger Journal Entry with General Ledger Examples.

The next step in the accounting cycle is to post the accounting entries made in the accounting journal to the accounting ledger.

The following general ledger accounts use Sunny Sunglasses Shop’s chart of accounts to classify each posting by account number.

Let’s continue our example by posting the four transactions in the accounting journal into the accounting ledger.

As a quick recap, the following transactions occurred on January 1, 2010 to start Sunny Sunglasses Shop:

 

Jan. 1 Sunny invested $50,000 into his new business, Sunny Sunglasses Shop.Jan. 1 Purchased inventory for $4,500. Paid $3,000 cash, with the balance of $1,500 due in 90 days.Jan. 1 Purchased land for $20,000 with $2,000 as a down payment, and a 15 year mortgage for $18,000.Jan. 1 Purchased insurance for the year for $2,400.

The above events are posted to the accounting ledger from the accounting journal as follows:

Ledger Accounting: General Ledger Accounts

Notice that the general ledger is a summary of each account. General ledger accounts are also called “T-Accounts” because of the appearance of the letter T.

Both the general ledger accounts and the accounting journal use double entry accounting to keep the accounting equation in balance. The general ledger show each accounting entry in separate general ledger accounts for a summary of each account. Adding the columns for each account and taking the difference between the two columns equals the balance of the account. For example, the debit column of cash totals $50,000, and the credits total $7,400. The difference between the two equals $42,600. If we take the time to tally up the accounts at this point, the accounting equation remains in balance:

The main general ledger account numbers, also listed in the chart of accounts, appear on the right side of each account. Each general ledger account references the source from which the transaction was posted. For example, “GJ-1? means that the accounting entry was posted from the first page of the accounting journal.

Similarly, the accounting journal now references the general ledger accounts in the reference column to show where the accounting entry was posted in the general ledger, which completes the posting for the general journal below.

Accounting Journal with General Ledger Accounts

From Ledger Accounting to the Fourth Step in the Accounting Cycle: The Unadjusted Trial Balance

Sample Income Statement and with Income Statement Format

The profit and loss statement represents the flow of business activity for a particular accounting period, for example a month, a quarter, or a year. This flow of business activity is categorized into revenue and expenses, which determines net income.Accountants compare the profit and loss statement to a “movie” because it shows the flow of business activity for an entire period (e.g. a month, a quarter, or a year). Accountants compare the balance sheet, on the other hand, to a picture of the company, or “snapshot” in time because it shows the resources of the company as of a certain date, for example January 31, 2010.

The profit and loss statement is also called the income statement or the earnings statement. The profit and loss statement is mainly known for getting to the bottom line: net income. But it also provides a valuable source for measuring different levels of income, spotting trends, understanding the strengths and potential weak spots of your business, and measuring the efficiency of operations.

Sunny Sunglasses Shop produced the below profit and loss statement for the accounting period of 2010.

Profit and Loss Statement|Sample Income Statement

From this sample income statement we can see the flow of business activity for one year with the bottom line result or net income.

The result of all operations after revenues and expenses is a net profit of $15,283. This is profit that directly builds the value, or equity, of the business! See why with accounting formulas here.

The company is off to a good start. But net income does not necessarily translate into cash flow under the accrual accounting method since sales and income on credit do not represent actual cash flow for the period.

It is therefore essential that other aspects of the business, such as debt management and cash flow, remain healthy with net profits.

Each of the financial statements should be used together to provide information for all these aspects of the business.

Notice that the earnings statement format separates profit into three areas: gross profit, net operating income, and net income. Click the links for an in depth analysis of each.

The Accounting Trial Balance Sheet with Sample Trial Balance Workshseet

The unadjusted trial balance sheet lists the account balances in the general ledger before adjusting entries are made in the accounting cycle.

The unadjusted trial balance is used to verify the balance of debits and credits, and to review the balances of each account in preparation of the adjusting entries in the next step in the accounting cycle.

Companies will generally prepare the trial balance sheet on a monthly or quarterly basis, in addition to year-end, to ensure that the accounts balance and adjusting entries are made timely throughout the year.

A sample unadjusted trial balance sheet appears below for Sunny Sunglasses Shop for January 2010.

Unadjusted Trial Balance

The unadjusted trial balance shows a listing of each account after one month of business activity in January of 2010. Notice the asset and expense accounts appear on the left side as debits, and the liabilities, owner’s equity, and revenue accounts appear on the right side as credits. This format ensures that each side balances with the other according to the accounting equation. Sales and expenses are reported on the income statement. Income Statement accounts are called nominal or temporary accounts because they are closed to the permanent balance sheet accounts.

The income statement accounts are reported for the specific period, such as a month, quarter, or year, and then closed to assets, liabilities, or owner’s equity on the balance sheet. Closing entries occur at the end of a reporting period to start the income statement balances at zero for the next period. We discuss closing entries later in the accounting cycle.

Real or permanent accounts are accounts with ongoing balances and appear on the balance sheet as assets, liabilities, and owner’s equity. Examples are cash, accounts receivable, loans payable, and owners equity.

Retained earnings represent the accumulated net earnings and losses of the business. Since this is the first year of operations for Sunny Sunglasses Shop, the balance is zero. Sunny will close net income to retained earnings in the closing entry process.

The unadjusted trial balance serves two main purposes: It verifies the equality of the debits and credits.It provides a listing of each account balance to facilitate the adjusting entry process.

From Unadjusted Trial Balance to the Fifth Step in the Accounting Cycle: Adjusting Entries