#5: Balance Sheet-Part 2 (2005)

Balance Sheet Example

To understand the balance sheet, we will start an American corporation, Beach Toys, Inc.
The new company will make a few common business transactions in its first month of operation.
Then we will construct a balance sheet.
The balance sheet shows the company's financial position on a certain date.

The Owners

Maria Fuentes, John Smith, and Kazuko Watanabe are the stockholders in Beach Toys, Inc.
Beach Toys sells mats, beach umbrellas, sand toys and other items to use at the beach.
The items are sold in Delaware and at other American shores.

Incorporation

The company starts by incorporating in one of the 50 states.
A corporation begins its life when it incorporates.

The U.S. government does not charter corporations.
When one state "charters" a corporation, the company can do business in any state in the U.S.

Beach Toys, Inc., incorporates in the State of Delaware.
Read all the words in the block called, "Why Choose Delaware as Your Corporate Home?"
Delaware is the legal home of many famous corporations.

Transactions

Beach Toys, Inc has these transactions on January 10, 2005:

Fuentes puts $20,000 cash into the business. She receives 2,000 shares of $10 par value stock.

Smith puts $30,000 cash into the business. He receives 3,000 shares of $10 par value stock.

Watanabe puts $40,000 cash into the business. She receives 4,000 shares of $10 par value stock.

The company buys land for $8,000 and a building for $50,000.

Each transaction affects the accounting equation:

Each of the first three transactions increases the asset Cash. Cash increases by the amount each owner paid to the corporation.

Each of the first three transactions increases Owners' Equity by the same amount.

The fourth transaction increases the assets Land and Building. The asset Cash decreases by the same total amount.

When these entries are recorded in a journal, the entries are:

transaction #	accounts	debit	credit
1	Cash	$ 20,000
1	Common Stock		$ 20,000
(to record Fuentes's investment)
2	Cash	$ 30,000
2	Common Stock		$ 30,000
(to record Smith's investment)
3	Cash	$ 40,000
3	Common Stock		$ 40,000
(to record Watanabe's investment)
4	Land	$ 8,000
	Building	$ 50,000
	Cash		$ 58,000
(to record the purchase of land & building)

Here is another way to see the effect of these transactions on the accounting equation.

This is a transaction worksheet.

You can get the Excel version of the transaction worksheet.

	Assets			Liabilities	Stockholders' Equity
Transaction #	Cash	Land	Building		Common Stock
1 (Fuentes)	20,000				20,000
2 (Smith)	30,000				30,000
3 (Watanabe)	40,000				40,000
4 (purchases)	(58,000)	8,000	50,000
Total	32,000	8,000	50,000	0	90,000
Total Assets			90,000
			90,000	Total Liabilities & Stockholders' Equity

January 10 Balance Sheet

The stockholders of Beach Toys want to know the financial position of the company after the four transactions are done.

The accounting equation shows the financial position of the company.
A balance sheet is a formal statement that shows each part of the accounting equation.

The following balance sheet shows the information that the owners want:

Beach Toys, Inc.
Balance Sheet
January 10, 2005
ASSETS		LIABILITIES	$ 0
Current Assets
Cash	$ 32,000
Long-term assets
Land	8,000
Building	50,000	STOCKHOLDERS' EQUITY
Total Long-term Assets	58,000	Common stock, 9,000 shares, $ 10 par	90,000
TOTAL ASSETS	$ 90,000	TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 90,000

Homework

Suppose that Beach Toys, Inc., bought the land for $10,000 (not $8,000). Suppose also that they bought the building for $60,000 (not $50,000). Assume that they bought both assets with cash. Make a new balance sheet or transaction worksheet. Then answer these questions.
1.	What is the new cash value on the balance sheet?
2.	What is the new value of the long-term assets?
3.	What is the new value of the total assets?
4.	What is the new value of the total liabilities and stockholders' equity?
5.	Please send me the Japanese translation for the following words. Please write the words in romajii.

Vocabulary

English	Japanese
inventory
investment
liabilities
payable
property
stockholders' equity