welcome to the advanced section of the quickbooks for home finance course
in this section we will learn about personal financial statements
if you have any questions about this topic you can leave them in the comment section below
and i'll do my best to help you and of course if you feel the video helped you i hope you will
click like and don't forget to subscribe to get updates on new videos that come out all the time
this is the advanced section of the course because it is optional that means that if you are
satisfied with everything you've learned so far you can stop now and be very happy with what you
learned in the course if you do not need to report your financial statements to anyone other than for
taxes then you do not need this section however if you choose to take this section you do not need to
know textbook accounting to be able to understand the remaining videos you will learn some
introductory accounting ideas along the way they are easy to understand and they are common sense
so what are financial statements in the first place well normally they would be reported about
a business they are documents and reports that show both how well the company is operating
and what financial position the company is in at any given moment so let's think first about
how well the company is operating the income and expenses of the company are compared to each other
on a report called the profit and loss it shows the operating income of the company versus the
operating expenses and when i say operating income i mean the normal income from doing what
they do to make money and when i say operating expenses i mean the normal reoccurring expenses
that pay for the necessary things to be able to earn income then there are other income or
expenses that do not affect the operating income but changes the overall net income or net profit
and these are things that change the income that are not part of your normal operations
now let's talk about the other report the report that shows the financial position of the company
it's called the balance sheet and it shows how much money or value the company has
it shows the value of everything the company owns that means how much they paid for the
assets it also shows all the debts and obligations of the company and assigns a money value
to those and they are called liabilities it shows the net worth of the company and the net worth
is defined in this lesson as the difference between the value of the assets that they own
and the amount owed to the liabilities which would make sense
now the profit and loss shows how well you did during a period of time the balance sheet shows
the current value of the company at any given moment but where do they get their numbers from
all the numbers on both of these reports come from our good friend the trial balance after you run
your trial balance the income and expense accounts get transferred over to the profit and loss
and the assets and liabilities which are the rest of the accounts in the trial balance get placed on
the balance sheet for example here's what a profit and loss would look like and by the way the profit
and loss is also called an income statement and if you look at the profit and loss from the file
that you're in you'll notice that the bartending income and the landscaping income are the same
individual money amounts that you saw a moment ago in the trial balance but on this profit and
loss statement we put all income accounts together to gain another number that shows on this report
the total income you may also notice that the individual expenses are the same numbers that
they were a moment ago in the trial balance but they're put together on the profit and loss in a
category and you get the total of the category the total expenses are shown on the profit and loss
then the profit and loss compares the total income to the total expenses to give you one final number
the net income and the net income indicates how well you did during a particular period of time as
a business or as an individual the balance sheet is shown here it shows the assets of the company
and what you spent or how much they're worth at the moment that you're reporting the balance sheet
it shows any debt or liability that either the company or the individual has or really owes
at the moment you run the balance sheet and the difference is called the net worth
if it's a business you would call it the owner's equity if it's a person you would call it the net
worth and not all balance sheets are in this format but all balance sheets show the assets
liabilities and the net worth of the company and again those numbers came from the trial balance
and they were summarized into the categories that you see here so who needs to make financial
statements in the first place well companies and businesses must make financial statements in order
to operate but individuals people also need to make their own personal financial statements
and you may well ask why would individuals need financial statements well one reason is it will
help you prepare for your taxes so you have some sense of how much estimated taxes to send in
as well as how much you'll actually pay when you file you may need to show
personal financial statements to a bank or some lender if you're going to take a personal loan
you may need them for a marriage or divorce issues regarding community property
when a person passes away their financial holdings and liabilities get transferred to another entity
called an estate an estate is actually a separate legal entity it has its own assets liabilities net
worth income and expenses and profit they must be reported on financial statements in the same way
that a business would need to and these are the methods that accountants would use to manage an
individual's estate even before a person may have passed on so that when they do pass away there's
a clear accounting of every financial aspect of the person if there was a will or some kind of um
trust established from the estate in fact a trust fund is also a separate legal entity
it has its own assets liabilities net worth income expense and profit they must be reported on
financial statements in the same way that a business would need to and these are the methods
that accountants would use to manage a trust which is usually a contract established by an attorney
or a notary both an estate and a trust could have income and expenses not just a liability
for example if the person who passed on had both a house and a mortgage the house would be the asset
the mortgage would be a liability and if they had tenants renting from them before they passed away
the tenants are still responsible for paying the rent but the rent would go to the estate
if you make a trust fund that's represented by a bank account in the bank
and the bank earns interest that interest would be income and would have to be recorded on an income
statement or profit and loss similar to the one that you saw a moment ago so this is the reason
why individuals have to do the same record keeping and same accounting as a business if they wish to
report personal individual financial statements for any legal reason they might have and that's
the reason why i added this advanced section to the course i hope you enjoy it as much as you've
enjoyed the first part of the course and i know that you will find it interesting and
informative