I have a new company that's not really in full operation yet so hasn't earned much, but I want to make the year end now...
I've personally paid $487 in expenses for stuff I bought for the company that I eventually want to be reimbursed for, but the company only has $34 in revenue so I will pay myself that in this year end and still be owed the remainder next year.
So, on my Income Statement I have:
Sales $34 Expenses $487 Net income ($453)
Now I know my Balance sheet needs to have Assets = Liabilities + Shareholder Equity
But it's not working, as you'll see below I have $521 assets which does not equal $34 liabilities+shareholder equity! I have:
Current Assets $34 (my revenue) Other assets $487 (all the stuff that I bought and paid for personally) TOTAL ASSETS $521
Current Liabilities $34 (I will reimburse myself this to cover part of my expenses) Long term Liabilities $453 (the part of my expenses not yet reimbursed TOTAL LIABILITIES $487
Shareholders Equity = ($453) - my tax software is pulling this from the Income statement.
TOTAL Liabilities + Shareholders Equity $34
Retained Earnings ($453)
OK, so where am I going wrong here in making my Assets = Liabilities + Shareholder Equity???
I'd not be inclined to re-classify any of the DLA as current until the company actually had some prospect of being able to fund the repayment of the loan.
It might be that "all the stuff you bought and paid for personally" hasn't been consumed by operations so far. In that case you'd have some stock or other assets to show on the balance sheet instead of in the income statement. However, your original presentation seemed to be double counting by including things in both the income statement and in the balance sheet.
Regards,
-- Edited by bro0010 on Thursday 7th of August 2014 09:06:28 AM
Sounds like a test question to me rather than real life.
In addition to Ian's answer I find myself looking at the question posed with more questions rather than conclusive answers.
1) Where is the share capital? might be £1 or £100 but there must be some paid up shares
2) Do the expenses include depreciation on the non current assets? The DLA should not include the depreciation expense.
3) the DLA should be all of the money that has been loaned to the company including the original cost of the Asset.
If this is a test question (but not an exam question!) then might be worth posting it in original form and we'll fill out the other bits.
Always remember that with accounting there is as much written between the lines as there is visible on the paper. Sure that everyone who read the question there first thought was, ok, whats not there?
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
OK, it seems there is non-alignment of you explanation and my tax program, so I'll include some screen shots so we can refer to actual line numbers!
You'll notice the Income statement shows $34 in revenue less the $487 expense for the supplies I bought personally and want to be reimbursed for which equals a net loss of ($453)... I think this is correct?
Now over on the balance sheet we see current assets of $34 for the revenue + $355 and $132 for the things that were bought with the money I loaned which equals $521 in total assets on line 2599
For liabilities we see the $34 which I will pay myself for part reimburement of the loan and the $453 I'm still owed for total liabilities of $487 on line 3499.
My tax program takes fills in the Shareholders Equity line with ($453) which it gets from the Income statement.
So, Total Liabilities + Shareholder Equity on line 3640 is $34
The problem is that the tax program of course complains that Total Assets on 2599 of $521 MUST EQUAL the $34 on line 3640 of Liabilities + Shareholder Equity.
I just don't get what entry I'm doing wrong to throw this off balance! Arg!
Thanks so much for your help as I could stare at this for hours!
PS> this is not an exam question, this is real life - just a simple business I started last month.
I don't understand where your figures are coming from. As I said earlier, I don't understand how your program counts 487 as both assets and expenses. Surely it must be one or the other. Are you entering the figures manually into your program?
Thanks so much for your patience... yes, I am entering the numbers manually.
First let me say the $487 consists of incorporation fees, software, and website hosting fees.
On the Income statement, I put the $487 under expenses.
On the Balance Sheet, I put the $487 under assets because I figure those things are assets. But it's also $487 under liabilities because the money for them came from me paid personally and I want to be reimbursed for it when the company earns enough revenue to pay me back down the road (it shows as $34 of which is current because I can pay it back now from the revenues the company has earned so far and $453 to be paid in the future)
Does that make sense? Ha! That's my thinking, but I'm pretty sure it's faulty somewhere
Lexi
-- Edited by Lexi on Thursday 7th of August 2014 10:33:07 PM
Its either an expense or an asset, it can't be both.
lets look at the transaction another way.
You loan the company $487. Yes you bought the goods and introduced them to the business but its the same either way. You have loaned the company money. So in that part you are correct.
Dr Bank $487 Cr DLA $487
Then you use that money to buy stock (thats how I'm reading supplies although you may mean that some of it is actually expenses)
Cr bank $487 Dr Opening Stock (a cost of sale, not an expense, opening stock as you are just starting the business) $487
At the end of the period whatever stock you have left is transfered to closing stock which is an asset, so imagine that you used $10 of stock generating the $34 that would be a revenue $34, cost of sale of $10, profit $24.
The remainder of the stock ($477) is closing stock transferred to current assets
The DLA remains at $487
Remember, to calculate the cost of sale it's Opening stock+purchases-closing stock
So, don't know if I'm anywhere close with the cost of sale or whether any of what you are saying was supplies was really expenses but using the $10 for cost of sale and assuming that there were no actual expenses the scenario you have is
P&L Revenue $34 Cost of sale $10 Gross profit $24 Net Profit $24
B/S Current Assets Bank $34 Closing Stock $477 Total current assets $511
Capital account $24
Liabilities (DLA) $487
Guess what, that all balances out at $511
Thats not using all the figures from your examples, its just trying to keep it simple so hopefully you will see how it works.
Now take that and fill out the truth with the true cost of sale and decide whether any of the $487 was actually expenses (i.e stationary, stamps, Heat & Light, etc).
As you've just started your books you may find it easier to start from scratch than to try and unravel your incorrectly categorised data.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
OK... I think we're starting to get somewhere now! Thanks SO MUCH for your detailed responses.
As mentioned, the $487 consists of incorporation fees, software, and website hosting fees - the is NO product or stock at all.
So, from what you're saying these would all be expenses and go only on the Income statement as Expenses - not as Assets on the Balance sheet, correct? And I did go and remove them from the Balance sheet and everything is then fine
I guess the big problem is I didn't understand what must be a basic concept: that each item must be ONE of an expense and only recorded on the Income Statement OR an asset and only recorded on the Balance sheet. I had the $487 on both as expenses and assets.
Lexi
-- Edited by Lexi on Friday 8th of August 2014 12:12:40 AM
-- Edited by Lexi on Friday 8th of August 2014 12:13:14 AM
-- Edited by Lexi on Friday 8th of August 2014 01:21:42 AM
Yes, from your explanation all of those should be expensed and are not assets of the business.
good luck with the business,
kindest regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
