Acme Example –

Keeping the Balance Sheet in Balance

Class 2:
Monday, May 22
Issue Shares

a) Acme raises $60,000 in cash by issuing 1,000 shares of common stock.

ASSETS = LIABILITIES + OWNERS’ EQUITY

Issue Shares – T Accounts

a) Acme raises $60,000 in cash by issuing 1,000 shares of common stock.

Contributed
Cash Capital

Beg Bal 0 0

Entry

End Bal
Purchase Land and Building

b) Acme, Inc. purchases land and a building for $50,000 in cash. Of the total
cost, $14,000 is allocated to land and $36,000 to the building

ASSETS = LIABILITIES + OWNERS’ EQUITY

Purchase Land and Building – T Accounts

b) Acme, Inc. purchases land and a building for $50,000 in cash. Of the total
cost, $14,000 is allocated to land and $36,000 to the building

Cash Land Building

Beg Bal 60,000 0 0

Entry

End Bal
Purchase Inventory on Credit

c) Merchandise for resale (inventory) was purchased for $30,000 on account (for
credit rather than cash). The goods were marked to sell for $50,000.

ASSETS = LIABILITIES + OWNERS’ EQUITY

Purchase Inventory for Credit – T Accounts

c) Merchandise for resale (inventory) was purchased for $30,000 on account (for
credit rather than cash). The goods were marked to sell for $50,000.

Accounts
Cash Inventory Payable

Beg Bal 10,000 0 0

Entry

End Bal
Hire Employees

d) On the first day of the month, three employees were hired. Their expected
wages for the first year were $45,000 or $3,750 per month.

ASSETS = LIABILITIES + OWNERS’ EQUITY

Sell Inventory for Cash

e) Merchandise that had cost $5,000 was sold for $8,000 in cash.

ASSETS = LIABILITIES + OWNERS’ EQUITY

Sell Inventory for Cash – T Accounts

e) Merchandise that had cost $5,000 was sold for $8,000 in cash.

Retained
Cash Inventory Earnings

Beg Bal 10,000 30,000 0

Entry

End Bal
Make Payment to Supplier

f) The supplier from whom the merchandise was purchased (in transaction c) was
paid $17,000 cash on account. At the same time, orders were placed for
additional merchandise at a cost of $9,000.

ASSETS = LIABILITIES + OWNERS’ EQUITY

Make Payment to Supplier – T Accounts

f) The supplier from whom the merchandise was purchased (in transaction c) was
paid $17,000 cash on account. At the same time, orders were placed for
additional merchandise at a cost of $9,000.
Accounts Retained
Cash Payable Earnings

Beg Bal 18,000 30,000 3,000

Entry

End Bal
Sell Inventory for Cash and Credit

g) Inventory that had cost $15,000 was sold for $25,000. This time, only $6,000
of the sale price was received in cash; the balance was due in 30 days.

ASSETS = LIABILITIES + OWNERS’ EQUITY

Sell Inventory for Cash and Credit – T Accounts

g) Inventory that had cost $15,000 was sold for $25,000. This time, only $6,000 of
the sale price was received in cash; the balance was due in 30 days.

Accounts Retained
Cash Receivable Inventory Earnings

Beg Bal 1,000 0 25,000 3,000

Entry

End Bal
Receive Payment on Prior Credit Sales

h) $2,000 in cash was received from customers on account

ASSETS = LIABILITIES + OWNERS’ EQUITY

Receive Payment on Prior Credit Sales – T Accounts

h) $2,000 in cash was received from customers on account

Accounts Retained
Cash Receivable Earnings

Beg Bal 7,000 19,000 13,000

Entry

End Bal
Receive Previously Ordered Inventory

i) The inventory ordered previously (transaction f) was received, but it was not
paid for yet.

ASSETS = LIABILITIES + OWNERS’ EQUITY

Receive Previously Ordered Inventory – T Accounts

i) The inventory ordered previously (transaction f) was received, but it was not
paid for yet.

Accounts Retained
Cash Inventory Payable Earnings

Beg Bal 9,000 10,000 13,000 13,000

Entry

End Bal
Pay Employees

j) Pay wages of $3,000 in cash to employees

ASSETS = LIABILITIES + OWNERS’ EQUITY

Pay Employees – T Accounts

j) Pay wages of $3,000 in cash to employees

Retained
Cash Earnings

Beg Bal 9,000 13,000

Entry

End Bal
Pay Dividend

k) At the end of January, the directors declare and pay a dividend of $2,000 in
cash

ASSETS = LIABILITIES + OWNERS’ EQUITY

Pay Dividend – T Accounts

k) At the end of January, the directors declare and pay a dividend of $2,000 in cash

Retained
Cash Earnings

Beg Bal 6,000 10,000

Entry

End Bal
Are There Other Things We Need to Record?

• Some events occur during a period for which

– There is no explicit transaction
– There is no cash flow (this period)

• Many of these require judgment and are subjective

• Many of these are done at the end of the period, when we already know a lot
about what earnings is going to be
• These are called Adjusting Entries
Employee Benefits

l) The employees earned $1,000 of other benefits (vacation, sick leave, health
care costs, pensions etc) that the firm has not yet paid.

ASSETS = LIABILITIES + OWNERS’ EQUITY

Employee Benefits – T Accounts

l) The employees earned $1,000 of other benefits (vacation, sick leave, health care
costs, pensions etc.) that the firm has not yet paid.

Wages Retained
Cash Payable Earnings

Beg Bal 4,000 0 8,000

Entry

End Bal
Depreciation Expense

m) Acme, Inc. estimated that it expected to use the building (transaction b) for ten
years before replacing it. During the first month the market value of the real
estate had increased two percent.

ASSETS = LIABILITIES + OWNERS’ EQUITY

Depreciation Expense – T Accounts
m) Acme, Inc. estimated that it expected to use the building (transaction b) for ten
years before replacing it. During the first month the market value of the real
estate had increased two percent.
Retained
Cash Building Earnings

Beg Bal 4,000 36,000 7,000

Entry

End Bal
Others?

• Allowance for Uncollectibles or Returns

• Income Tax Expense
• Mark to Market Adjustments
• Impairment Charges (Write Downs)
• Accrued Interest Expense or Income
Summary of Transactions
Asset Accounts Liability Accounts Shareholder Equity
Accts Wages Contributed Retained
Cash Receiv Inventory Land Build Accts Pay Pay Capital Earnings
(a) 60,000 60,000
(b) -50,000 14,000 36,000
(c ) 30,000 30,000
(d)
(e) 8,000 -5,000 3,000
(f) -17,000 -17,000
(g) 6,000 19,000 -15,000 10,000
(h) 2,000 -2,000
(i) 9,000 9,000
(j) -3,000 -3000
(k) -2,000 -2,000
(l) 1,000 -1,000
(m) -300 -300

End Bal 4,000 17,000 19,000 14,000 35,700 22,000 1,000 60,000 6,700

89,700 23,000 66,700

 Summary of T Accounts

Stockholders' Equity
Asset Accounts Liability Accounts Accounts

Wages Contributed Retained

Cash Accts Receiv inventory Land Building Accts Payable Payable Capital Earnings
(a) 60,000 60,000
(b) 50,000 14,000 36,000
(c ) 30,000 30,000
(d)
(e) 8,000 5,000 3,000
(f) 17,000 17,000
(g) 6,000 19000 15,000 10,000
(h) 2,000 2,000
(i) 9,000 9,000
(j) 3,000 3,000
(k) 2,000 2,000
(l) 1,000 1,000
(m) 300 300

End Bal 4,000 17,000 19,000 14,000 35,700 22,000 1,000 60,000 6,700
 Acme Inc
Balance Sheet
Current Assets Current Liabilities

Cash $ 4,000 Accounts Payable $ 22,000

Accounts Receivable 17,000 Wages Payable 1,000
Inventory 19,000
Total Current Assets 40,000 Total Liabilities 23,000

Long Term Assets Owners’ Equity

Land 14,000 Contributed Capital 60,000

Building 36,000 Retained Earnings 6,700
Less Accum Deprec (300)
35,700
Total Long Term Assets 49,700 Total Owners’ Equity 66,700

TOTAL ASSETS $ 89,700 TOTAL LIABILITIES $ 89,700

AND OWNERS’ EQUITY
 ACME, INC
INCOME STATEMENT

Sales $ 33,000
Less: Cost of Goods Sold 20,000
Gross Profit 13,000

Compensation Expense 4,000

Depreciation Expense 300
Other Expense

NET INCOME $ 8,700

 ACME, INC
STATEMENT OF STOCKHOLDERS’ EQUITY
Contributed Retained
Capital Earnings Total

Beginning Balance 0 0 0

Plus: Shares Issued 60,000 0 60,000

Net Income 8,700 8,700

Less: Dividends Declared (2,000) (2,000)

Ending Balance $ 60,000 $ 6,700 $ 66,700