C - The Shoe Business
How does a small sneaker shop track its money? Let's step into the shoes of a business owner and learn how massive companies like Nike track their billions. Today, we will master the two most important financial records in the world:
- the Balance Sheet
- the Income Statement.
1. Startup Cash
Imagine you find a rare pair of sneakers for €100 that you know you can sell online for €180. There's just one problem: you don't have €100 in your pocket.
To raise the money, you:
- Break your piggy bank and chip in €50 of your own savings.
- Borrow the other €50 from your parents, promising to pay them back.
Now you have €100 cash in hand. If you took a snapshot of your company's financial health right now, you would see a Balance Sheet.
A Balance Sheet is a snapshot of what your business owns (Assets) versus where that money came from (Liabilities & Equity).
- Assets: Resources your company owns that have value
(e.g., Cash, Inventory, Equipment) - Liabilities: Money you borrowed from others
(e.g., Bank loans, loans from parents) - Equity: Your own money invested in the company, plus any profits the business keeps.
IMPORTANT 🤔
The Golden Rule of Accounting: A Balance Sheet must always balance.
This equation represents a simple truth: everything your business owns (Assets) had to be paid for either by borrowing money (Liabilities) or using your own funds (Equity).
Let's check your company's starting Balance Sheet:
It balances perfectly!
2. Buy Inventory
You take your €100 and buy the sneakers.
What happens to your Balance Sheet? You spent all your cash, but you didn't lose any value. Instead, your cash transformed into a new kind of asset: Inventory.
- Cash drops from €100 to €0.
- Inventory (Sneakers) increases from €0 to €100.
NOTE 🤔
Buying inventory is an Asset Swap.
No value was created or destroyed; your resources simply changed form.
3. Sale and Profit
A buyer agrees to buy the sneakers for €180. You ship them, paying a €10 shipping and transaction fee on the platform.
To track this transaction, we look at the Income Statement (also called a Profit & Loss statement). Unlike the Balance Sheet (which is a snapshot of a single moment), the Income Statement tracks how much money you made or lost over a period of time.
- Revenue (Sales): The total money received from customers (e.g., €180).
- Cost of Goods Sold (COGS): The original cost to buy the items you sold (e.g., €100).
- Operating Expenses: Extra costs to run the business (e.g., €10 shipping fee).
- Net Profit: The final money left over.
Where does this €70 profit go? It goes straight to your Balance Sheet under Equity as Retained Earnings (profits kept in the business). Your inventory goes to zero (since you sold the shoes), and your cash increases to €170 (the €180 sale minus the €10 fee).
Let's check the final Balance Sheet:
The Balance Sheet is still perfectly balanced!
4. Simulator
Use the interactive simulator below to walk through these transactions step-by-step. Use the sliders to adjust your starting funds, buy cost, sale price, and fees, and watch how the financial statements update dynamically to balance your accounts!
👟 Shoe Business Simulator
Run a sneaker store and watch your accounts balance in real time
⚙️ Business Decisions
Step 1: Raising Capital (The Launch)
Before opening your shop, you need cash. You combine your own savings (Equity) with a loan from your parents (Liabilities). In accounting, all of this cash goes straight to your assets. Total funding = €100.
What you have (Assets) vs. Where it came from (Liabilities + Equity)
Assets (What you have)
Liabilities & Equity (Funding)
Did you win or lose money this week? (Only tracks sales transactions)
The Income Statement records the sale of your assets. It will unlock in <strong>Step 3: Sell & Profit</strong>.
💻 Python Script
Let's model these transactions programmatically in Python. Run this script to see the balance sheets balance at every step and watch how profits transfer from the Income Statement to the Equity section of the Balance Sheet.
You can find the companion script here: 3-shoe-business.py
# Step 1: Start Business (Funding)
savings = 50.0 # Your savings (Equity)
loan = 50.0 # Parents loan (Liabilities)
cash = savings + loan
inventory = 0.0
print("--- Step 1: Raise Capital ---")
print(f"Assets: Cash = €{cash:.2f}, Inventory = €{inventory:.2f} (Total = €{cash + inventory:.2f})")
print(f"Liabilities: Loan = €{loan:.2f}")
print(f"Equity: Savings = €{savings:.2f}")
print(f"Balanced? {cash + inventory == loan + savings}\n")
# Step 2: Buy Inventory (Asset Swap)
purchase_price = 100.0
# Enforce that we cannot spend more cash than we have
if purchase_price > cash:
print("Error: Not enough cash to buy sneakers!")
else:
cash -= purchase_price
inventory = purchase_price
print("--- Step 2: Buy Sneakers ---")
print(f"Assets: Cash = €{cash:.2f}, Inventory = €{inventory:.2f} (Total = €{cash + inventory:.2f})")
print(f"Liabilities & Equity: Loan = €{loan:.2f} + Equity = €{savings:.2f} (Total = €{loan + savings:.2f})")
print(f"Balanced? {cash + inventory == loan + savings}\n")
# Step 3: Sell & Profit (The Income Statement Flow)
selling_price = 180.0
shipping_fee = 10.0
# Calculate Profit
revenue = selling_price
cogs = purchase_price # Cost of Goods Sold
profit = revenue - cogs - shipping_fee
# Retained earnings increases equity
cash += (selling_price - shipping_fee)
inventory = 0.0
equity = savings + profit
print("--- Step 3: Sell Sneakers & Pay Fees ---")
print(f"Income Statement: Revenue €{revenue:.2f} - COGS €{cogs:.2f} - Fee €{shipping_fee:.2f} = Net Profit €{profit:.2f}")
print(f"Assets: Cash = €{cash:.2f}, Inventory = €{inventory:.2f} (Total = €{cash + inventory:.2f})")
print(f"Liabilities & Equity: Loan = €{loan:.2f} + Equity = €{equity:.2f} (Total = €{loan + equity:.2f})")
print(f"Balanced? {cash + inventory == loan + equity}\n")To execute this locally, run:
python3 python/3-shoe-business.py