Reconciling Smith Company's unbalanced balance sheet and accounting errors
This paper attempts – a futile effort mind you – to address an online university's tragicomic idea of an accounting problem. Starting with a rather unorthodox approach to accounting – a quasi-balance sheet that does not balance – we add a few transactions to that, without ever resolving the core problem of the fictitious numbers imploding on themselves.
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Financial Accounting
In Module 2, the $35,000 worth of goods was never purchased, so that figure is irrelevant. Now with Module 3, we begin with a balance sheet that does not balance. To this, several changes are to be made. The company raised an additional $225,000, which balances because Common Stock increases by that amount, and the company receives that much Cash. The dividends represent a decline in cash of that amount, and a decline in Retained Earnings. The asset is covered by $400,000 in the land less $50,000 in cash, and the other $350,000 goes to Notes Payable. The result is as follows:
The first major adjustment that needs to be made, based on Module 2, is that the company needs to add back the $35,500 worth of inventory. This should never have been removed. The second adjustment is that the profit would have been higher, by $35,500 because the cost of goods sold included this sale that never happened. That will increase equity by $35,500. This still leaves the balance sheet unbalanced.
31-Dec-12
Balance Sheet
Assets
Current Assets
Cash
16700
Accounts Receivable
24500
Inventory
60500
Total Current Assets
101700
Fixed Assets
Equipment, net
425,000
425,000
Total Assets
526700
Liabilities
Short-Term Liabilities
Accounts Payable
67,000
Total Current Liabilities
67,000
Long-term Liabilities
Long-Term Debt
145,000
145,000
Total Liabilities
212000
Equity
Common Stock
10,000
Paid-in capital
125,500
Total Equity
135,500
Total Liabilities and Equity
347,500
When the items for Module 3 are included, the balance sheet looks as follows:
Smith Company
31-Dec-12
Balance Sheet
Assets
Current Assets
Cash
169700
Accounts Receivable
24500
Inventory
60500
Total Current Assets
254700
Fixed Assets
Equipment, net
425,000
Land
400,000
825,000
Total Assets
1079700
Liabilities
Short-Term Liabilities
Accounts Payable
67,000
Total Current Liabilities
67,000
Long-term Liabilities
Long-Term Debt
495,000
495,000
Total Liabilities
562000
Equity
Common Stock
235,000
Paid-in capital
103,500
Total Equity
338,500
Total Liabilities and Equity
900,500
The net profit for the year would have been $70,650. This would not be sufficient to make up for the difference between the asset side of the balance sheet and the liabilities & equity side. The problem, of course, is that the balance sheet did not balance in the first place, something that tends to happen when numbers are fictitious.
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