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Summary Explanation book the accounting game
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Extensive summary of the accounting game book explaining everything.
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On a balance sheet the left side is ALWAYS equal to the right side. The accural METHODCompany starts with $5. This $5 is also called cash (what we have), but also original investment (who
owns it).
After a while, they loan $10, this is also called notes payable (IOU), and goes under ‘who owns it’. But
it also goes by cash because its money you own.
What we have (ASSETS) Who owns it (LIABILITIES)
Cash $5 Notes payable $10
$ 10 (loan)
What you own (OWNERS EQUITY)
Original investment $5
Since there are two owners on the right half, we will draw a horizontal line that divides the right side
into two parts. The upper right side represents the people that the business owes money to…or to
whom you are LIABLE.
Assets = Liabilities + Owner’s Equity
You need 50 lemons and 5 pounds of sugar. Lemons cost $0.20 and sugar is $0.40 per pound = $12
Since you spent twelve dollars on supplies, you need to take that amount out of Cash and record it
somewhere new under Assets, which is called inventory.
What we have (ASSETS) Who owns it (LIABILITIES)
Cash $3 Notes payable $10
Supplies (INVENTORY) What you own (OWNERS EQUITY)
Supplies $12 Original investment $5
50 lemons and 5 pounds of sugar makes 60 glasses of lemonade
Cost of production: $12
60 glasses cost $12
Cost per glass (unit cost): 12 : 60 = $0,20
COST of Production $____
= Cost per Unit (Glass) $_____
# of glasses ____
One glass is $0,50, and you sold 50 glasses, so you earned $25 (SALES). It has cost you 50 x $0,20 =
$10 to make these glasses of lemonade.
SALES – COST OF GOODS SOLD = GROSS PROFIT (earnings so far).
So your profit or earnings are $25 - $ 10 = $15.
$10 is subtracted from supplies and $25 is added to cash (earnings)
What we have (ASSETS) Who owns it (LIABILITIES)
Cash $28 Notes payable $10
Supplies (inventory) $2 What you own (OWNERS EQUITY)
Original investment $5
Earnings week to date $15
,Expenses are the costs of doing business other than those related to producing your product.
You have to pay $2 to your parents for glasses you use, $1 to the kid who made your sign, and $2 to
your neighbours for the place. Together $5 which is paid from cash and earnings week to date. You
also want to pay of the loan so $10 is paid from cash and notes payable.
This together is the income statement. the Balance Sheet is like a snapshot of a business, then the
Income Statement is like a movie.
The balance sheet shows what a company owns (assets) and owes (liabilities) at a specific moment in
time, while the income statement shows total revenues and expenses for a period of time.
What we have (ASSETS) Who owns it (LIABILITIES)
Cash $13 Notes payable $0
Supplies (inventory) $2 What you own (OWNERS EQUITY)
Original investment $5
Earnings week to date $10
, SALES - COGS (Cost of Goods Sold) = GROSS PROFIT
GROSS PROFIT – EXPENSES = NET PROFIT (the bottom line)
Earnings, net profit, net income and the bottom line are all the same.
Income statement:
25
0
2
10
12
2
10
15
Glass rental $2
Advertising $1
Rent $2
$5
$10
Whatever the length of the income statement, it’s called the ACCOUNTING PERIOD.
Businesses create what’s called a GENERAL LEDGER, which is a moment by moment record of
everything that happens.
The lemonade not sold is called ending Inventory.
Take Beginning Inventory + Purchases - Ending Inventory. The result is the actual Cost of Goods Sold.
$0 + $12 - $2 = $10
The thing that connects the beginning and ending balance sheets is the Income Statement.
A loan only shows up on the Balance Sheet when you still owe it.
You need at least three financial statements to present the whole picture. The third statement keeps
track of Cash Flow.
This Ending Inventory from last week becomes a beginning inventory for the new week. The old
inventory automatically becomes the beginning Inventory for the next week.
The ending balance sheet is for last week, so for a new week we have to make a beginning balance
sheet.
Retained Earnings: Earnings that are history, or earnings from past accounting periods
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