USA Very basic balance sheet question


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Hi, I hope someone here can help me and I apologize if this is the wrong place to ask this type of question. I am not an accountant but have a question regarding accounting practices for my business.

I am a sole proprietor with no employees. My business provides a service (no inventory and the only equipment is my computer and laptop). The business has no loans or other long term debt. I get income each month from the service I provide and have only a few monthly recurring expenses which are the cost of doing business (web server, advertising, etc.). I use a simple single-entry register for recording my monthly income and expenses and that has always been adequate for providing the information I need to file taxes, etc.

However, I now need to prepare a business balance sheet for a personal mortgage I'm applying for. I've never had to prepare a balance sheet for my business so I have no clue what I'm doing. The mortgage company provided a very basic sample from the internet and said I just need to list my assets and liabilities in that format. The problem is this doesn't balance for me.

As a simple example (not the real case, just an example for this question), let's say I used $100 of my own money to start my business. Let's also say I have no equipment or inventory. For example, I could be a therapist who provides phone counseling. The phone might be an asset (say $250), and I have minimal recurring expenses for the business except a website (say $25/month) and my phone bill (say $50/month). Let's assume that I earn $1000/month for my services. I attribute $200/month of the earning towards estimated quarterly federal income tax payments and I only take out $400/month for my personal income.

If I list these numbers on a very simple balance sheet following the example they sent me, I don't know how to make it balance. On the simple example balance sheet I was given, my example numbers above would look like this at the end of the first month:

ASSETS
Bank Account/Cash $1100 (earnings + initial investment)
Phone $ 250 (my phone's value)
TOTAL ASSETS $1350

LIABILITIES
Accounts Payable $ 75 (my monthly expenses?)
Taxes $ 200 (one month's worth to be paid qtrly)
TOTAL LIABILITIES $ 275

EQUITY
Funds Introduced $ 100 (my initial personal investment)
Draws $ 400 (my personal "pay" that I take from the business)
Current Earnings $1000 (my monthly earnings this month)
TOTAL EQUITY $1500

My understanding is that Assets needs to equal Liabilities + Equity. But it doesn't. Apparently there is some way to account for the difference in my example that I don't understand. Can someone help me understand what I'm missing so I can provide a balance sheet to the mortgage company?

Thanks in advance!
 
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1. First you bought a Phone which presumably is with Cash from the Company - so Bank Account Cash must reduce by $250
2. You have Monthly Expenses and Tax Expenses of $75 and $200 and this must be deducted from Current Earnings by $275
3. You have Draw of $400, which I assume is a form of dividends or capital pay-back, which must be deducted from both Current Earnings and Cash by $400

So

Cash at Bank is now $450
Current Earnings is now $325

Once you do this = Total Asset is $700; Total Liabilities + Equity is $700
 
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Your assets would be the balance of your bank account and the value of the phone.
Your liabilities would be the balance of any loans or invoices you haven't paid yet.
Equity would be the difference between the two.

Monthly expenses won't appear on the balance sheet and neither will your monthly draws. You will, however list the tax's set aside for the quarterly payment.

Tweaking your example above (and ignoring depreciation), let's say you started your business in January. You invested $100, earned $1,000, paid $75 in monthly expenses, purchased your phone for 250, and took your $400 draw. you will make a $600 tax payment at the end of March. Your balance sheet for the end of January would look like this.

Assets
Cash375
Phone250
Total Assets625
Liabilities200January taxes
Equity425
Total liabilities and Equity625

Your income statement would show
Income
Earnings
1,000​
Expenses
Monthly bills75
Taxes200
Total Expenses275
Net Income725

Your equity balance consists of the initial $100 you invested plus $725 net income less $400 draw.
 
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...
3. You have Draw of $400, which I assume is a form of dividends or capital pay-back, which must be deducted from both Current Earnings and Cash by $400
...
Current Earnings is now $325
...
Owner draws are a direct reduction to equity. They don't affect the income statement or net earnings.
 

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