The financial statements are prepared directly from the adjusted trial balance.
The focus of this video is the classified balance sheet.
The balance sheet includes a company's assets, liabilities and equity accounts.
Specifically, the ending owner's capital which come from the statement of owner's equity.
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 their order of 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 the operating cycle in the future video, but just so you know 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 the cash or sold,
are classified as long-term assets or sometimes called noncurrent assets.
Liabilities, which taken longer than one year to payoff, are classified as long-term liabilities or sometimes long-term debt.
So let's use the adjusted trial balance and prepare the classified balance sheet.
We take the assets and liabilities from the trial balance
and we put those on the balance sheet. Additionally, we will use the ending capital
owner's capital balance from the statement of owner's equity.
The balance sheet has a company name, the name of the financial statement, 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 the investors and creditors
wanna know the financial position today not some accumulated amount that has no meaning.
For example, which of these two are more relevant to financial decision-making?
How much money you have right now, or how much money you have 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 will list our current assets in order of liquidity and then total them.
Next, we will prepare are 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 since all we have are plant assets.
Finally, we total our assets.
Then we move on to the liability side and start with current liabilities.
Here we will list our current liabilities in order of liquidity and then total them.
Then our long-term liabilities are listed and we will total our liabilities.
Finally, we prepare the owner's equity section.
Here is where we report the ending owner's capital from the statement of owner's equity.
Then that becomes total owner's equity.
Finally, we total liabilities and owner's equity.
If we've done everything correctly it 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 except one.
Owner's capital has a different account balance than what we reported.
This will get corrected in the next step in the Accounting Cycle, which is "Closing Journal Entries."