a c c o u n t s d e m y s t i f i e d
14
As you will see, even when we have entered all the transactions up
to our balance sheet date, we need to make various adjustments
if the balance sheet is going to reflect the true financial position of
the company.
Bear in mind always that a balance sheet is only a snapshot at a particular
moment – a few seconds later it will be different, even if only slightly.
SBL’s balance sheet
SBL made well over a hundred transactions in its first year. Rather than
go through every one of them, I have summarised them so we have a
manageable number. I have also identified the three adjustments we need
to make [Table 2.1].
Don’t worry for the time being if you don’t understand some of the things
on this list – I will explain them as we go along.
What we are going to do is look at the effect each of these transactions
and adjustments has on SBL’s balance sheet. We will do this using the
balance sheet chart as follows:
We will draw one chart for each transaction or adjustment.
Each chart will show two balance sheets the balance sheet imme-
diately before the transaction/adjustment and the balance sheet
I will shade in the boxes that change due to each transaction or
c r e at i n g a b a l a n c e s h e e t
15
Table 2.1 Summary of SBL’s first-year transactions and adjustments
silk bloomers limited
1 Issue shares for £10,000.
2 Borrow £10,000 from Sarah’s parents.
3 Buy a car for £9,000.
4 Buy £8,000 worth of stock (cash on delivery).
5 Buy £20,000 worth of stock on credit.
6 Sell £6,000 worth of stock for £12,000 cash.
7 Sell £12,000 worth of stock for £30,000 on credit.
8 Rent equipment and buy stationery for £2,000 on
credit.
9 Pay car running costs of £4,000.
10 Pay interest on loan of £1,000.
11 Collect £15,000 cash from debtors.
12 Pay creditors £10,000.
13 Make a prepayment of £8,000 on account of stock.
14 Pay a dividend of £3,000.
15 Adjust for £2,000 of telephone expenses not yet billed.
16 Adjust for depreciation of fixed assets of £3,000.
17 Adjust for £4,000 expected tax liability.
To see a step-by-step presentation of the accounting for these transac-
a c c o u n t s d e m y s t i f i e d
16
Transaction 1 – pay £10,000 cash into SBL’s bank account as
starting capital (share capital)
Figure 2.1
0
Assets Claims
Before this
transaction
SBL
Balance Sheet
10
20
30
40
50
60
70
After this
transaction
Assets Claims
Cash
Share
capital
£'000
c r e at i n g a b a l a n c e s h e e t
17
Before this transaction, SBL had no assets and therefore no claims over
those (non-existent) assets.
The first thing Sarah did was to pay £10,000 of her own money into the
company’s bank account so that the company could commence opera-
tions. In return she received a certificate saying she owned 10,000 £1
shares in the company. Thus the company acknowledges that she has a
claim over any net assets the company might have.
Since the company has no other assets or liabilities yet, the whole
£10,000 must be owed’ to the shareholders. Sarah, as the only share-
holder, would claim it all.
To account for this transaction, we create a box on the assets bar called
cash with a height of £10,000 and another box on the claims bar called
share capital, also with a height of £10,000. This is SBL’s balance sheet
immediately after completion of this transaction.
a c c o u n t s d e m y s t i f i e d
18
Transaction 2 – SBL borrows £10,000 from Sarah’s parents
Figure 2.2
0
Assets Claims
Before this
transaction
SBL
Balance Sheet
10
20
30
40
50
60
70
After this
transaction
Assets Claims
Cash
Share
capital
£'000
Cash
Share
capital
Loan

Get Accounts Demystified, 6th Edition now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.