Business Accounting: Balance Sheet And Income Statement

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6-6 Snugasabug Rug Company Balance Sheet
December 31,199X
Assets		Liabilities
Cash	$ 55,000	Accounts Payable	$ 60,000
Accounts receivable	103.000	Notes payable	90,000
Inventories	75,000	Mortgage	85,000
Machines & Equipment	110,000	Subtotal	$235,000
Building and Land	185,000	Net Worth
		Common stock	$190.000
		Retained earnings	103,000
		Subtotal	$293,000
Totals	$528,000		$528,000

wo of the most useful reports for measuring and understanding the health of a business are its bal­ance sheet and the income statement. The bal­ance sheet summarizes a corporation's assets, what it owns; its liabilities, what it owes; and its net worth, the difference between the two sums at a given time. The income statement summarizes a firm's revenues, costs, and the difference between the two (the profit or loss) over a period of time. Accounting systems can vary, but the examples below are typical.

The Balance Sheet. For every business the differ­ence between what it owns (assets) and what it owes (liabilities) is its net worth. In other words:

assets - liabilities = net worth

or

assets = liabilities + net worth

Balance sheets usually are presented in the second form, with the assets on one side and the liabilities and net worth on the other.

Table 6-6 is the balance sheet of the Snugasabug Rug Company.

About the balance sheet:

• Accounts receivable are the sums owed to Snugasabug by its customers.

• Inventories are rugs and other merchandise the company has for sale.

• Accounts payable are the sums that Snugas­abug owes its suppliers.

• Notes payable are short-term loans owed by the corporation.

• A mortgage is a long-term loan, usually used to finance a building.

• Net worth is the portion of a company's assets belonging to its owners after its obligations have been met. Also known as Owners' Equity, net worth is calculated by subtracting a firm's liabili­ties from its assets.

Snugasabug had net assets of $528,000 and liabili­ties of $235,000, leaving it with a net worth of $293,000. Net worth also represents the original value of Snugasabug's common stock ($190,000) and the additional funds, or surplus ($103,000), that it acquired over the years.

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6-7 Snugasabug Rug Company Income Statement
January 1, 199x to December 31, 199x
Sales		$570,841
Costs of Goods Sold (COGS)		-320,300
Gross Profit		250,541
Expenses
Depreciation	$16,290
Selling costs	31,360
Administrative costs	21,500
Interest	20,000
Total Expenses		89,150
Income Before Taxes		161,391
Income Taxes		-32,200
Net Profit (after taxes)		$129,191
Dividends Paid to Stockholders		-50,000
Retained Earnings		$79,191

he Income Statement. The income statement, or profit-and-loss statement, shows how much a business has made or lost over a period of time (usually a year). The income statement (Table 6-7) shows that Snugasabug sold $570,841 worth of its rugs. It cost the company $409,450 to produce and sell these goods, leaving it with a profit of $161,391. Out of this, $32,200 was paid in taxes, leaving Snugasabug with a net profit after taxes of $129,191.

Snugasabug’s board of directors voted to distribute $50,000 in dividends to its stockholders, while the balance of the funds ($79,191) was retained by the company and added to its surplus.