Financing, investing, then operating — every one keeps it true

Columns before debits

Before learning debits and credits, analyse transactions with nothing but signed numbers under column headings. Each column is one account; the columns left of the equals sign are assets, the columns right of it are liabilities and equity; and after every row the two sides must still add to the same total. A transaction that cannot be written as a row that balances is either not a transaction or has been misread.

The worksheet takes transactions in the order a new business meets them: financing (money in from owners and lenders), investing (spending it on long-lived assets), then operating (earning revenue and incurring expenses).

Worked example — Northlake's first ten transactions

Northlake Nordic Centre Inc. was incorporated on 1 November. Columns: Cash · Supplies · PP&E (the lodge and the groomer share this column for now; Module 6 separates buildings from equipment) · = · Bank Loan · Accounts Payable · Unearned Revenue · Common Shares · Retained Earnings.

1. Shares issued for $250,000 cash. Cash +250,000; Common Shares +250,000. Financing.
2. Bank loan of $400,000 received. Cash +400,000; Bank Loan +400,000. Financing.
3. Lodge bought for $610,000 cash. Cash −610,000; PP&E +610,000. One asset swapped for another; totals unchanged. Investing.
4. Groomer bought for $96,000 on account. PP&E +96,000; Accounts Payable +96,000. Investing.
5. Supplies bought for $4,200 cash. Cash −4,200; Supplies +4,200.
6. Season passes sold for $30,000 cash, season starts in December. Cash +30,000; Unearned Revenue +30,000. A liability — nothing has been earned.
7. Day-pass revenue of $18,500 collected in cash. Cash +18,500; Retained Earnings +18,500. Revenue earned raises equity.
8. Wages of $9,600 paid. Cash −9,600; Retained Earnings −9,600. An expense lowers equity.
9. $50,000 of the groomer payable paid. Cash −50,000; Accounts Payable −50,000. Both sides shrink.
10. Dividend of $5,000 declared and paid the same day. Cash −5,000; Retained Earnings −5,000.

And one non-row: on 20 November Northlake signed a contract with a school board for $12,000 of lessons in February. No cash, no service, no obligation exchanged — there is no line. The figure in the diagram shows it struck through.

#    Cash    Supplies   PP&E   =   Loan     A/P    Unearned  Shares    RE
1  +250,000                                                +250,000
2  +400,000                        +400,000
3  −610,000            +610,000
4                       +96,000              +96,000
5    −4,200   +4,200
6   +30,000                                          +30,000
7   +18,500                                                          +18,500
8    −9,600                                                           −9,600
9   −50,000                                  −50,000
10   −5,000                                                           −5,000
─────────────────────────────────────────────────────────────────────────────
     19,700    4,200   706,000      400,000   46,000   30,000  250,000   3,900

Prove it. Assets: $19,700+4,200+706,000=729,900$. Liabilities and equity: $400,000+46,000+30,000+250,000+3,900=729,900$. The proof is the last line of every worksheet, and on the paper it is a mark.

Only three of the ten rows touched retained earnings — the day-pass revenue, the wages and the dividend. Buying the groomer, paying for it, and selling passes for a season not yet begun changed assets and liabilities but not equity. That count is worth doing on every case: it is the list of rows that will reach the income statement or the statement of retained earnings.

What makes a row

A transaction is an exchange — something given, something received — that has already happened. A signed contract, a purchase order, a hire, a price list: none of these is an exchange yet. A deposit received is an exchange (cash for an obligation). A bill received is an exchange (a service consumed for an obligation to pay). The test is not "did cash move" but "did the company give or get something".