The financial statements are prepared directly from the adjusted trial balance. The focus of this video will be the classified balance sheet.
The balance sheet includes company assets, liability, and equity accounts including
ending retained earnings which comes from the statement of retained earnings.
In order to understand how to prepare a classified balance sheet we need to learn a few new terms.
A classified balance sheet lists assets and liabilities in order of their liquidity.
Liquidity measures quickness of cash, meaning how quickly assets will be turned to cash or how soon liabilities need to be paid.
Then assets and liabilities are listed in the order of their liquidity.
Assets that will be turned to cash sold or used within one year or one operating cycle, whichever is more, are classified as current assets.
Liabilities that will be paid within one year or one operating cycle, whichever is more, are classified as current liabilities.
We will define operating cycle in a future video but just so you, almost all companies have many operating cycles within one year,
so the year is basically the cutoff.
Assets which have useful lives longer than one year or will require more than one year
to be turned to cash or sold, are classified as long-term assets
or sometimes called noncurrent assets.
Liabilities which take longer than one year to pay off are classified as long-term liabilities or sometimes called long-term debt.
So let's use the adjusted trial balance to prepare the classified balance sheet.
We will take the assets, liabilities, and common stock from the trial balance and put that on the balance sheet.
Additionally, will use the ending retained earnings from the statement of retained earnings.
The balance sheet has the company name, the name of the financial statements, and the date,
which is either just the date or sometimes "as of" and then the date.
The balance sheet reports assets, liabilities, and equity for a point in time rather than a period of time.
This is because investors and creditors wanna know the financial position today,
not some accumulated amount that has no meaning.
As an example, which of these two is more relevant to future decision-making?
How much money you have right now or how much money you've had over your entire life?
Certainly what you have now is the only thing that would impact a future financial decision like buying a home.
On the asset side, we start with the current asset section.
Here we list our current assets in the order of liquidity and then total them.
Next will prepare our long-term assets section.
These items are often grouped like this; investments, plant assets, intangible assets and other noncurrent assets.
In this introductory video we'll just list them as plant assets, since all we have for this company are plant assets.
Finally, we total our assets.
Then we move to the liability side and start with current liabilities.
Here we will list our liabilities in order of liquidity and then total them.
Long-term liabilities are then listed and then we will total liabilities.
Finally, will prepare the stockholder equity section.
First, we will report common stock from the trial balance and retained earnings from the statement of retained earnings.
Then we will total stockholders' equity
Finally, total liabilities and stockholders' equity are reported.
If we've done everything correct, that should be the same amount as total assets.
One final note,
all of the accounts and amounts reported to our investors and creditors are the same as the adjusted trial balance amounts except one.
Retained earnings has a different account balance than what we reported.
We will get this corrected in the next step in the Accounting Cycle, "Closing Journal Entries."