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Pete’s Pizzaria. An Illustration of Basic Bookkeeping D.B. Hamm, CPA Nov. 2003. Opening the Business. Pete opens his business with $25,000 cash from personal savings (retirement). He opens a business bank account Entry as follows: Debit: Cash……………$25,000
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Pete’s Pizzaria An Illustration of Basic Bookkeeping D.B. Hamm, CPA Nov. 2003
Opening the Business • Pete opens his business with $25,000 cash from personal savings (retirement). He opens a business bank account • Entry as follows: • Debit: Cash……………$25,000 • Credit: Pete, Capital…………$25,000
Storefront Acquisition • Pete signs a two-year lease on a small storefront at $800/month. He is required to pay the first 6 months in advance: • Entry: • Debit: Prepaid Rent (an asset)..$4,800 • Credit: Cash………………………$4,800
Equipment • Pete purchases a used pizza oven, kitchen equipment and a cash register from a business contact. Cost: $8,400 • Entry: • Debit: Equipment…..….$8,400 • Credit: Cash……..…………$8,400
Personnel • Pete hires two in-store cooks, a cashier, and a delivery person. All are paid by the hour; the delivery person gets a mileage allowance for use of a personal car • Entries (as required, say weekly) • Debit: Wages Expense………..$600 • Debit: Mileage Expense……… $30 • Credit: Cash……………………..$630 • Note: this simplified illustration ignores payroll withholdings, etc.
Supplies • When Pete is ready to start business, he orders pizza supplies (dough, sauce, condiments, etc.) “on account” from a restaurant supply firm. Cost: $920 • Entry: • Debit: Supplies Inventory……$920 • Credit: Accounts Payable……….$920
Business is Booming • Pete’s Pizzas are a hit with the local college crowd and families looking for a good, inexpensive pizza • Entries for the first evening’s sales (all cash) • Debit: Cash…………………$1,020 • Credit: Sales ………………….$1,020
Payments • Pete continues to buy pizza supplies as needed (almost daily) and makes payments at the end of each week to his vendors • Typical entry (from 1st purchase): • Debit: Accounts Payable…….$920 • Credit: Cash…………………$920
Adjusting Entries (#1) • Pete conducts business for the month, selling $22,900 of pizzas, paying $2,650 in wages and delivery expense, and buying $12,100 in supplies (entries as required). • At the end of the month, he still has $820 in supplies on hand. All his pizza supplies were assigned to “Supplies Inventory” • Debit: Supplies Expense…….…$11,280 • Credit: Supplies Inventory…………..$11,280 • This adjustment “costs out” the supplies actually used (12,100-820 left). Pete is a very small business; many larger firms will do this daily, or for every sale.
Adjusting Entries #2 • At month end, Pete has now used up one month’s rent of the 6 months prepaid • Entry: • Debit: Rent Expense……….$800 • Credit: Prepaid Rent…………$800 • Now $4,000 (5 months’ rent) is still prepaid, unless Pete pays additional rent.
Adjusting Entries #3 • Pete must allocate his ‘long term’ cost in equipment over its useful life. This allocation is called depreciation. We will discuss specific methods of depreciation later • Entry: • Debit: Depreciation Expense……..$100 • Credit: Accumulated Depreciation…...$100 • (Assume 7 yr life, straight line: $8,400/7=1,200 /12 = $100 per month)
Adjusting Entries #4 • Assume the end of the month falls in mid-week. Pete owes $300 in wages as of the end of the month, but will not pay them until Friday (in the new month) • Entry: • Debit: Wages Expense……….$300 • Credit: Wages Payable…………$300 • Note: Pete must either “reverse” this entry in the new month, or must close out the payable when he pays payroll on Friday.
Trial Balance • Pete will prepare a ‘trial balance’ of all accounts to insure they balance: Debits = Credits
Income Statement • Sales – Expenses = Net Income
Closing Entry • At the end of the cycle, Pete will “close out” all income statement accounts, leaving only balance sheet accounts open. Debit balances are credited and vice versa:
