Mark Farber: Hi.
I'm Mark Farber.
This is Accounting Fundamentals.
In our last video, we started preparing the financial statements and we built the income
statement.
Remember, that came from the bottom of our adjusted trial balance.
We built the statement of owner's equity, which came from the middle part.
Now we're ready to build the balance sheet, which is going to use the top part.
Again, the reason that we have to go in order is, in order for us to build the statement
of owner's equity, we needed to know what the net profit number was; that was part of
the calculation for working out the owner's equity.
I've put up here, just as a reminder to us, that we calculated the ending owner's equity
or owner's capital as $10,000 and we're going to need that for the balance sheet.
I said there's a reason that we do these things in order, and that's the reason.
We need the calculation from one statement in order to build the next statement.
Let's build our balance sheet.
Balance sheets can be presented in two ways.
You can do them in two parts: assets, liabilities and equities, or you could do it all one after
the other.
Very often when you read them, they'll be all in one straight line, mostly because it
just fits onto a page better that way, but because of the way this space is laid out,
and quite frankly, it makes more sense, we're going to do it in the horizontal way, I guess
you would say.
Once again, we need the company name.
I didn't name this company, so we'll just put, "Company Name."
We should get into the habit of always doing that.
And then title this, "Balance Sheet."
Unlike the income statement or the statement of owner's equity, which covered a period
of time, a balance sheet is only good for one day, one moment in time.
Think of your bank account.
If I ask you how much cash was in your account last year, that doesn't really make much sense
because it depends on what day I'm talking about.
On one day there may have been a lot of cash, on another day, maybe right after Christmas,
there wasn't very much cash.
It would have varied throughout the year.
A balance sheet, because it represents accounts that vary from day-to-day, has to be as at
a particular date.
You could just write that date, December 31st or I'm actually going to write, "As at December
31, 20X1," which just drives home that notion that this is for one day and one day only.
Now, our balance sheet consists of three main parts.
On the left side is the assets.
Remember, left side, debit side.
And now we're going to list off the assets that we have here.
We have two assets: cash and there's $4,000 of cash, and accounts receivable.
I'm just going to write, "AR," and that was $11,000.
And so our total assets are equal to $15,000.
On this side of the balance sheet is liabilities and equity, or owner's capital if you want.
I'm just going to call it equity.
By the way, does this look familiar?
Accounting equation.
We've gone full-circle because the balance sheet, basically is the accounting equation.
On this side we have our liabilities.
Have bank loan, and that's $3,000, and we have salary payable, $2,000.
Our total liabilities are equal to $5,000.
Important to show that, by the way, what the total liabilities are.
Then we have owner's equity.
I'll just write like that.
That comes from the previous statement.
If you go back to the previous video, you would have seen that we calculated that as
$10,000.
And with an insane amount of luck, total liabilities, “liabs”, and I'm just going to put.
"OE," is equal to five plus 10.
$15,000.
Magic.
That's the key.
Remember what I said at the very beginning.
The accounting equation always, always, always has to be in balance.
We kept checking it with adjusting it with our trial balance and our adjusted trail balance
to make sure it was always in balance.
It's for this purpose here.
If it's in balance when we prepare our balance sheet, the balance sheet will balance; that's
where it gets its name from.
The assets will be equal to the liabilities plus the equity.
Okay?
This tells us a little story about the company.
It tells us that the company has $4,000 of cash and is owed another $11,000.
Its total assets are $15,000.
In order to get that 15,000, it's borrowed $3,000 from the bank for whatever purpose
and it owes its employees $2,000 that it will pay out on the next pay date.
Total liabilities are 5,000.
And remember what we said, owner's equity is the portion of the assets that accrue to
the owners.
If the owners collect this 11,000 and add it to the $4,000 of cash, they will have $15,000
of cash.
They will then pay off all their liabilities that they owe, $5,000, and they'll be left
with $10,000 for themselves.
That's what the balance sheet basically helps us to understand, is how did the company pay
for the assets, and in return, if the company were to sell off all the assets, how much
would the owners get to keep of that amount or of that theoretically amount?
That takes us through our financial statements.
These were obviously very simple in comparison to the statements you might get from a large
corporation, but the process is exactly the same, there's just more steps, well not even
more steps, they're just a little bit more complicated in the transactions themselves;
there's more of them and they might get a little more complex.
The basic process is exactly the same.
We now have a good handle on how to build our financial statements, but we're not done
yet.
In our next video, we'll look at how we close out our financials, close out our accounts,
in order to get ready for the next period.
Because once we've done this balance sheet and all the other financials as of December
31st, 20X1, we have to get ready for the next year: 20X2.
And we'll look at how we do that next.