Posted: November 19th, 2022

Financial Accounting Page 1
Bob’s Biz - A Story with Transactions
Episode 1 – Financing
One day in November Bob, and his friend Alice were sitting in Starbucks enjoying their favorite
beverages. Alice had been working for some time in the purchasing department of a local maker of
high-tech Flamistans. Alice was describing her latest frustrations trying to ensure a steady supply of
good quality widgets. Bob knew a thing or two about widgets, including the fact that any flamistan
maker would need several sizes and types during production. In a fateful moment of near insanity,
Bob imaged out of the blue, “Hey, I could do that!” In that instant the idea for a new business
appeared in the world.
Having decided to get into the “widget game”, Bob needed certain things:
• First, he needed money (wealth) with which to finance everything else.
• Next, he would need to use some of that money to get set up in business
• Finally, he would need to get up and running for a while before he could reasonably expect
to see some sales and profits start rolling in.
How to get started? Bob ran off to his local government office and incorporate a new company,
Bob’s Widget Wonderland (BWW). Lots of paperwork followed. Since Bob’s best friend Edith is a
lawyer, Bob was able to get everything done for only $1,000. This was good because Bob only had
about $30,000 of his own to get started.
Once that first legal hurdle was over, Bob immediately did a couple of things:
1. Bob purchased 30,000 shares of BWW capital stock for $30,000. The capital stock had a par
value of $1.00 per share.
2. Bob got his friend Dave to help him set up some accounting records for his company. As the
very first entry in his new accounting journal, Bob recorded the sale of capital stock in 1
above. Show how Bob did this in the BWW Journal and label it transaction 1. Open a Cash
account and a Capital Stock account in the general ledger.
3. Next Bob filed all the receipts related to incorporating BWW and paid himself back out of
BWW’s cash. Record this transaction in the BWW journal and label it transaction 2. Use the
Cash account and open a new Organizational Expense account.
Bob told several of his family and friends what he was doing and invited them to invest in his new
venture:
4. Alice was excited. However, she new that her company would probably be one of Bob’s
customers, so she declined to invest. She did not want to have a conflict of interest that
might get her in trouble with her boss.
5. Bob’s cousin Carol, however, did not hesitate. “Put me down for $10,000!”, she declared.
Bob sold her 5,000 shares of BWW stock for $2.00 per share. Record this transaction for Bob
Financial Accounting Page 2
and label it transaction 3. This time use the cash account and capital stock account. Also,
open a new Additional Paid-in Capital account!
6. Dave the accountant also committed $10,000. Bob sold him 4,000 shares at $2.50 per share
(he decided to reserve the $2.00 price as a “family special”). Record this transaction for Bob
and label it transaction 4. Again, use the cash, capital stock, and additional paid-in capital
accounts.
7. Edith the lawyer was not so enthusiastic about investing in the company’s stock. However,
she proposed to lend Bob some money instead. After some negotiating, Edith lent $20,000
to BWW on November 30th, repayable in two years. The loan had an interest rate of 6.0%
per annum (per year). The interest was payable quarterly (i.e., every three months),
beginning at the end of February. Record the loan transaction for Bob and label it
transaction 5. Use the cash account and open a new Notes Payable account. Notice that Bob
does not owe any interest on the first day of the loan. The “clock” has only just started
ticking!
At this point, it is worth asking what BWW’s financial situation looks like. The end of the month is a
good time to do this. Let’s prepare BWW’s first set of financial statements.