Financial Condition
At the beginning of the summer, Jack Wells was looking for a way to earn money to pay for his college tuition in the fall. He decided to start a lawn service business in his neighborhood. To get the business started, Jack used $6,000 from his savings account to open a checking account for his new business, Elegant Lawn Care. He purchased two used power mowers and various lawn care tools for $2,000, and paid $3,600 for a second-hand truck to transport the mowers.
Several of his neighbors hired him to cut their grass on a weekly basis. He sent these customers monthly bills. By the end of the summer, they had paid him $1,200 in cash and owed him another $2,300. Jack also cut grass on an as-needed basis for other neighbors who paid him $1,000.
During the summer, Jack spent $400 for gasoline for the truck and mowers. He paid $1,000 to a friend who helped him on several occasions. An advertisement in the local paper cost $200. Now, at the end of the summer, Jack is concerned because he has only $1,000 left in his checking account. He says, “I worked hard all summer and have only $1,000 to show for it. It would have been better to leave the money in the bank.”
Prepare an income statement, a statement of owner’s equity, and a balance sheet for Elegant Lawn Care. Explain to Jack whether or not he is “better off” than he was at the beginning of the summer. (Hint: T accounts might be helpful in organizing the data.)
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