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by Strong Eagle » Sat, 23 Jul 2016 11:51 pm
You have made a one dollar error and your balance sheet is out of balance. Let’s start at the beginning.
You incorporate the company 9/9/2014. The balance sheet for 30/9/2014 (or as of 9/9) should look like this:
Journal Entries
Debit: Cash: 1
Credit: Paid Up Capital: 1
Balance Sheet
Assets
Cash: 1
Net Worth
Paid Up Capital: 1
Total Liabilities and Net Worth 1
Now you have business activity for the rest of the year. Let’s take a look at your income statement for 2014. It looks like
Income Stmt
Income: 7,970
Expense: 2,088
Net Profit: 5,882
But this is double entry bookkeeping… and therefore there must be corresponding balance sheet accounts affected. Since you have no liabilities, all your expenses must have been paid for in cash. And since there is no cash end of period, your journal entries must be:
Journal
Credit: Income: 7,970
Debit: Cash: 2,087
Debit: Receivables: 5,883
AND
Debit: Admin Expense: 2,088
Credit: Cash: 2,088
Balance Sheet
Assets
Cash: 0
Receivables: 5,883
Total Assets: 5,883
Liabilities: 0
Net Worth
Paid Up Capital: 1
Retained Earnings – current period: 5,882
Total Liabilities and Net Worth: 5,883
Using these numbers, your cash flow statement for 2014 is correct… you generated -$1 of cash after paying your admin expenses. You are using the indirect cash flow method. Under the direct method:
Cash Flow
Cash from Operating Activity
Cash receipts from customers: 2,087
Cash paid for expenses: -2,088
Cash generated from operations: -1
Cash from Financing Activities
Sale of Shares: 1
Cash generated from financing: 1
Net Increase/Decrease Cash: 0
So… 2014 is OK… everything works. But your 2015 and 2016 reports do not work properly. You apparently converted 5,883 worth of receivables to cash, and then issued a dividend of 5,882. And now, your balance sheet is out of balance for 2015. Your assets are 0, your equity is 1, and this cannot be.
If you want a zero net worth account to wrap up the company (and you do), then your journal transactions should have been:
Journal
Debit: Cash: 5,883
Credit: Receivables: 5,883 (converting receivables to cash)
Credit: Cash: 5,883
Debit: Retained Earnings - Dividends Paid: 5,883
Balance Sheet
Assets
Cash: 0
Receivables: 0
Total Assets: 0
Liabilities: 0
Net Worth
Paid Up Capital: 1
Retained Earnings – Prior period: 5,882
Retained Earnings/Dividends paid – Current Period: -5,883
Total Liabilities and Net Worth: 0
And this changes your cash flow statement for 2015. You have that dollar unaccounted for.
Cash Flow
Operating Activities: 0
Cash from Receivables: 5,883
Cash Paid in Dividends: 5,883
Net Increase/Decrease Cash: 0
Now you are in balance and can get rid of that stupid dollar.
In the alternative, you could issue yourself dividends for 5,882 but then you would have to leave $1 in your cash account to balance equity and assets, and then your company is not zeroed out and therefore you cannot wind it up.
Since you have already claimed a 5,882 dividend you can change expenses by a dollar, or revenue by a dollar and get an in balance set of books that way.
