1. Pete’s Pizzaria An Illustration of Basic Bookkeeping D.B. Hamm, CPA Nov. 2003

2. 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

3. 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

4. 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

5. 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.

6. 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

7. 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

8. 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 1 st purchase): –Debit: Accounts Payable…….$920 –Credit: Cash…………………$920

9. 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.

10. 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.

11. 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)

12. 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.

13. Trial Balance Pete will prepare a ‘trial balance’ of all accounts to insure they balance: Debits = Credits

14. Income Statement Sales – Expenses = Net Income

15. Balance Sheet A=L+OE

16. 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:

17. Post Closing Trial Balance