The subject company for our case study is called Legacy Realty. Legacy Realty is a sole proprietorship, which is a type of company that is owned by one single individual, and where that individual and the business are legally treated as the same.
The purpose of Legacy Realty as a business is to own, lease, and manage its own rental properties. It purchases houses and condominiums and leases them out to tenants. They also perform their own management of their units, making repairs, performing maintenance, and collecting rent. Legacy Realty is located in Washington DC, and they have a small staff of five people.
|Type of company||Sole proprietorship|
|Business purpose||Own, lease, and manage rental properties|
Staff of 5 people
Legacy Realty needs a balance sheet to provide information about the business position. It is prepared at a moment in time, rather than covering a period of time; it is the only financial statement that is made at a specific date. The balance sheet informs about a business's resources, detailing the resources that are available or owned, in the case of assets, as well as the resources that are owed to others, in the case of liabilities. The net difference, then, on a cumulative basis, is equity, which is also detailed on the balance sheet.
In order to begin preparing the balance sheet, we need to start with some information from the trial balance worksheet, specifically from the adjusted trial balance.
As you can see, we've prepared the trial balance, listing all of the general ledger accounts, as well as their corresponding debit and credit balances. We've also prepared the adjustments and adjustment explanations, making corrections to the accounts to match all revenues and expenses with the correct period. We've also corrected any errors or omissions may have been made throughout the accounting period and recording process.
Using this information, we have also prepared the adjusted trial balance, accounting for all of those adjustments that were made. Similar to the trial balance, the adjusted trial balance is a listing of all of the general ledger accounts, as well as the corresponding debit or credit balances within those accounts.
This adjusted trial balance is going to be the source for the financial statements, containing all the information needed to create those statements for Legacy Realty.
Now we are ready to prepare the balance sheet for Legacy Realty. We always start with the header, which includes the company name, then "Balance Sheet," and the line "As of December 31, 2012." It is important to note that this line is different than the one on the income statement and statement of changes in owner's equity.
We also need to pull the information from all of the permanent accounts from the adjusted trial balance--the assets, liabilities, and equity.
Starting with current assets, we list the cash, accounts receivable, supplies, and prepaid insurance, which are the total current assets. We also break out the long-term assets, which, in this case, comprise land, buildings, and the accumulated depreciation for those buildings. Therefore, total current assets plus total long-term assets equal total assets of $616,500.
Now we can move on to liabilities, starting with short-term liabilities. Short-term liabilities include accounts payable and unearned revenue. Similar to how assets are broken out by current and long-term, liabilities are also broken out by short-term and long-term. In this case, we only have a notes payable as long-term liabilities. Adding short-term and long-term liabilities provides total liabilities of $340,000.
Now, remember that the balance sheet formula is assets equals liabilities plus equity. Therefore, we now have to add in our equity. We pull equity information from the statement of changes in owner's equity.
From this statement, we pull in the ending balance in the owner's capital account, at the end of the year, of $276,500. This captures the beginning balance and any net income or loss, as well as any drawings or contributions that may have been made by the owners.
Finally, we total up our liabilities and equity, which, in this case, is $616,500. It's important to perform a check: do assets equal liabilities plus equity? They do, so our balance sheet balances.
Source: Adapted from Sophia instructor Evan McLaughlin.