RECORDING A CORPORATION’S FIRST
PERIOD OF OPERATIONSUsing the integrated financial statement framework shown in Exhibit 1, we will illus-
trate the recording of transactions for a corporation’s first period of operations. We
will assume that on September 1, 2007, Lee Landry, M.D., organizes a professional
corporation to practice general medicine. The business is to be known as Family
Health Care, P.C, where P.C. refers to professional corporation. We describe eachstockholders’ equity on the balance sheet. If at the end of the period this equality does
not hold, then an error has occurred in either recording or summarizing transactions.
For example, if a $10,000 purchase of equipment for cash is incorrectly recorded as an
increase in both equipment and cash, the total assets will exceed the total liabilities and
stockholders’ equity by $20,000 at the end of the period. Likewise, if equipment was
increased by $10,000, but cash was not decreased by $10,000, the total assets will ex-
ceed total liabilities and stockholders’ equity by $10,000 at the end of the period. In
both cases, the inequality of the equation will indicate that an error has occurred in the
recording process.
The equality of the equation at the end of the period doesn’t necessarily mean that
no errors have occurred. For example, assume that a business purchased $10,000 of
equipment on credit and recorded the transaction as an increase in equipment of
$10,000. However, instead of increasing the liabilities by $10,000, the transaction was
recorded as a $10,000 decrease in cash. In this case, the accounting equation still bal-
ances, even though cash and liabilities are understated by $10,000.
The integrated financial statement approach provides two additional controls.
First, the ending cash amount shown in the statement of cash flows column must agree
with the end of the period cash amount shown under assets in the balance sheet col-
umn. Second, the net income or loss from the income statement column must agree
with the net effects of revenues and expenses on retained earnings.^256 Chapter 2 Basic Accounting Concepts
2 We discuss additional accounting controls in Chapter 7.Q.When $3,000 of cash
was received for fees
earned, it was erroneously
recorded as an increase
in cash of $300 and an
increase in retained earn-
ings (fees earned) of
$3,000. Will the
accounting equation
balance?A.No. Total assets will be
less than total liabilities
plus stockholders’ equity
by $2,700.Got the Flu? Why Not Chew Some Gum?
HOW BUSINESSES MAKE MONEY
Facing a slumping market for sugared chewing gum, such as
Juicy Fruit and Doublemint, Wm. Wrigley Jr.
Companyis reinventing itself by expanding its
product lines and introducing new chewing gum
applications. Wrigley’s new products include sug-
arless breath mints and more powerful flavored
mint chewing gum, like Extra Polar Ice. In addition,
Wrigley is experimenting with health-care applica-
tions of chewing gum. Wrigley’s Health Care
Division has already developed Surpass, an
antacid chewing gum to compete with Rolaids and
Mylanta. Wrigley is also developing a cold-relief chewinggum and a gum that would provide dental benefits, such as
whitening teeth and reducing plaque. Given that
the U.S. population is aging, the company figures
that people might prefer chewing gum to taking
pills for sore throats, colds, or the flu. The effects of
these new initiatives will ultimately be reflected in
Wrigley’s financial statements.Source:Adapted from “A Young Heir Has New Plans
at Old Company,” by David Barboza, The New York
Times, August 28, 2001.Analyze, record, and sum-
marize transactions for a
corporation’s first period
of operations.