Let’s assume that David, a web designer, after working for many years with IT companies, has recently started a new web design company to provide website design and other related services to local businesses in his location. The company is named “Web Design Inc.”
Running a web design company can pose many challenges. You need to get involved in all the aspects of the business, including renting the place, setting up the infrastructure, buying the required software, recruiting trained staff, marketing and promoting your business, and most importantly managing their finances.
In the following lectures, we will use various transactions at Web Design Inc. to explain the various concepts of accounting.
This article provides a summarized version of these transactions and their impact on the financial statements. It is recommended that you print a copy of this document and keep it handy while reviewing the lectures.
- The business was started on June 1, 2012.
- The business follows the accounting period April 1, 2012 to March 31, 2013.
- David has rented a place for work and the first rent payment will be due on the 5th day of the following month.
Transactions at Web Design Inc.
|Transaction 1||June 1, 2012||Invest Money in the Business
Let’s start the case study from the very beginning of the business, when David started the business. The first transaction was when he invested his personal savings of $10,000 into the business. This becomes the capital for the business. The balance sheet will show $10,000 as the cash available and $10,000 as the owner’s equity.
|Transaction 2||June 5, 2012||Buy a New Laptop
The first expenditure happens on June 5 when David buys a new Laptop for his work. The laptop costs him $800.
|Transaction 3||June 10, 2012||Receive your first order
A first break comes when you sign a contract to develop the website of a restaurant at the cost of $3,000. He receives an advance payment of $1,000 for the project. David will develop this website and on successful completion, he will receive the balance payment.
|Transaction 4||June 30, 2012||Rent is due $500.|
|Transaction 5||July 5, 2012||Rent is paid $500.|
|Transaction 6||July 10, 2012||Complete the project and send the bill for the balance $2,000.|
|Transaction 7||July 20, 2012||Receive the payment of $2,000 from the client.|
The answers will be provided as we progress with the course.