Welcome back to accounting stuff I'm James and today i'll show you how to make a Balance Sheet
the balance sheet is one of the three main financial statements
the other two called the income statement which we did in the last video
and the cash flow statement which we'll cover next time
a balance sheet or a statement of financial position
is a financial report that gives us a snapshot of a business's assets, liabilities and equity at a single point in time
now if you've watched my videos before then you've probably heard this one
the stuff that a business owns is equal to the stuff that a business owes
in other words a business owns assets and it owes liabilities to third parties
the difference between the two is called equity which is what the business owes
back to its owners and so we have the accounting equation
assets are equal to liabilities plus equity when we take a snapshot of this accounting equation
at a single point in time we're looking at a balance sheet
we'll call this one the basic balance sheet and as its name suggests it's got to balance
that means that total assets must always equal total liabilities and equity
a detailed balance sheet would look something like this
we expand out assets into current and non-current current assets are short-term assets
things like receivables and prepaid expenses on the other hand non-current assets are long-term assets
there are two main types the ones that you can touch and the ones that you can't touch
we do the same thing with liabilities current liabilities are short-term liabilities
payables, accrued expenses and deferred revenue and non-current liabilities long-term liabilities
stuff like long-term loans equity on the other hand is a different kettle of fish
first we have capital contributions which is the money invested into the business by its owners
for a company with shareholders we might call this common stock
and then we have the businesses retained earnings which are its accumulated profits held for future use
i do have a balance sheet cheat sheet which summarizes all of this the link's in the description anyways
How do you make a basic Balance Sheet?
first you need another accounting report called a trial balance this shows us the closing balances
for every general ledger account at a point in time here's a trial balance for a dating app called Tumble
it was run at the end of Tumble's financial year December 31st
and it's an adjusted trial balance because all adjusting entries have already been posted
we can see all of Tumble's accounts and balances debits are on the left and credits are on the right
at the bottom we can see that the debits total to $87,700,000
which matches the total credits exactly this means that Tumble's trial balance is in balance
which is very important because if the trial balance is in balance
then the balance sheet also has to balance
i don't think i've ever said balance so much in my life accounts in a trial balance are usually
arranged in a pattern above this line we have the stuff that Tumble owns its assets
and below the line we have the stuff that Tumble owes its liabilities and equity
we also have its revenue and expense accounts which we used last time to make the income statement
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So how do we make a Balance Sheet?
There's two ways to do this the right way and the wrong way and i'll show you both
We'll start with the wrong way because this is a really easy mistake to make
and it goes something like this we take all of tumble's assets, liabilities and equity accounts
and we pop them in their sections of the balance sheet in theory it's the right thing to do but check this out
total assets add up to $36,350,000
and total liabilities plus equity add up to $25,650,000 that's the difference of $10,700,000
so this balance sheet doesn't balance what went wrong?
We forgot to include Tumble's revenue and expenses these are part of Tumble's retained earnings
it's profits held for future use which also sit in the equity section of its balance sheet
when we include them total liabilities plus equity also add up to $36,350,000
so Tumble's basic balance sheet is in balance remember the balance sheet is a snapshot
of a businesses assets, liabilities and equity at a single point in time
on the left side we can see what the business owns and on the right side we can see what it owes
to third parties and its owners
How do we make a detailed Balance Sheet?
we follow the same process but first we need to divide Tumble's assets and liabilities
into current and non-current cash, accounts receivable, other receivables
and prepaid expenses are all current assets property, plant and equipment and intangibles
are non-current assets accounts payable, taxes payable, accrued expenses
and deferred revenue are all current liabilities and long-term loans is a non-current liability
in the equity section common stock is a type of capital contribution
and everything below that is retained earnings these are Tumble's profits held for future use
their opening retained earnings at the start of the year less dividends plus Tumble's net profit in the current year
and that's it we can pick up all these numbers and put them in our detailed balance sheet
so we've got current assets $31,050,000 and $5.3m in non-current assets
current liabilities of $14.4m and non-current liabilities of $1.2m dollars
then we have $1,050,000 in common stock which is a type of capital contribution
and finally $19,700,000 in retained earnings
or profits held for future use total assets are equal to total liabilities plus equity
so this balance sheet is in balance thanks for watching
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in the next video we'll cover the cash flow statement see you then