The BALANCE SHEET for BEGINNERS (Full Example)

Summary

In this accounting tutorial, James explains how to create a Balance Sheet, one of the three key financial statements. He outlines the accounting equation: Assets = Liabilities + Equity, and demonstrates how to balance the sheet using Tumble's trial balance. James highlights the importance of including revenue and expenses for a balanced sheet and shows how to differentiate between current and non-current assets and liabilities. The video concludes with a detailed balance sheet example, emphasizing the balance between total assets and total liabilities plus equity.

Takeaways

• 📚 The balance sheet is one of the three main financial statements, alongside the income statement and the cash flow statement.
• 🔍 It provides a snapshot of a business's assets, liabilities, and equity at a specific point in time, reflecting the accounting equation: Assets = Liabilities + Equity.
• 💼 Assets are categorized into current (short-term) and non-current (long-term), including tangible and intangible assets.
• 💵 Liabilities are also divided into current (short-term) and non-current (long-term), such as payables and long-term loans.
• 🏦 Equity consists of capital contributions (like common stock) and retained earnings, which are profits reinvested into the business.
• 📊 To create a balance sheet, a trial balance is needed, showing the closing balances of all general ledger accounts at a point in time.
• 📈 A detailed balance sheet further breaks down assets and liabilities into current and non-current categories for a more comprehensive view.
• 🚫 A common mistake is creating a balance sheet that doesn't balance because it omits revenue and expense accounts, which affect retained earnings.
• 💡 Retained earnings are crucial for the balance sheet's balance as they represent the business's accumulated profits and are part of equity.
• 📝 The process of creating a balance sheet involves organizing accounts into their respective sections and ensuring the total assets equal total liabilities plus equity.

Q & A

What are the three main financial statements?

The three main financial statements are the balance sheet, the income statement, and the cash flow statement.

What does a balance sheet represent?

A balance sheet is a financial report that provides a snapshot of a business's assets, liabilities, and equity at a specific point in time.

What is the accounting equation as mentioned in the script?

The accounting equation is Assets = Liabilities + Equity, which reflects that what a business owns (assets) is equal to what it owes (liabilities) plus what it owes to its owners (equity).

What are the two types of assets mentioned in the script?

The two types of assets mentioned are current assets, which are short-term assets like receivables and prepaid expenses, and non-current assets, which are long-term assets and can be tangible or intangible.

How are liabilities divided in the balance sheet?

Liabilities are divided into current liabilities, which are short-term obligations like payables and accrued expenses, and non-current liabilities, which are long-term obligations such as long-term loans.

What are the two components of equity discussed in the video?

The two components of equity discussed are capital contributions, which is the money invested by the business owners, and retained earnings, which are the accumulated profits held for future use.

What is a trial balance and how is it used in creating a balance sheet?

A trial balance is an accounting report that shows the closing balances for every general ledger account at a point in time. It is used to ensure that the balance sheet balances, as it includes all accounts and their balances.

Why is it important for a trial balance to be in balance before creating a balance sheet?

A trial balance being in balance is important because it ensures that the debits and credits are equal, which is a prerequisite for the balance sheet to also balance, with total assets equaling total liabilities and equity.

What mistake is commonly made when creating a balance sheet, as mentioned in the script?

A common mistake is to forget to include revenue and expenses, which are part of retained earnings and should be included in the equity section of the balance sheet to ensure it balances.

How do you create a detailed balance sheet?

To create a detailed balance sheet, you divide assets and liabilities into current and non-current, and then list them along with equity components like common stock and retained earnings, ensuring that total assets equal total liabilities plus equity.

What is the significance of the balance sheet balancing?

The balance sheet balancing is significant as it confirms the financial stability and accuracy of a company's accounting, showing that the value of what the business owns is equal to the value of what it owes to creditors and owners.

Outlines

00:00

📈 Introduction to the Balance Sheet

James introduces the concept of a Balance Sheet, which is one of the three main financial statements, alongside the income statement and the cash flow statement. He explains that a balance sheet provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. The accounting equation, assets = liabilities + equity, is the foundation of the balance sheet. James emphasizes the importance of the balance sheet balancing, meaning the total assets must equal the sum of total liabilities and equity. He also explains the difference between current and non-current assets and liabilities, and the components of equity, which include capital contributions and retained earnings.

05:03

🔍 Creating a Detailed Balance Sheet

In this section, James demonstrates how to create a detailed balance sheet by dividing Tumble's assets and liabilities into current and non-current categories. He explains that current assets include cash, accounts receivable, and other short-term assets, while non-current assets are long-term investments like property, plant, and equipment. Similarly, current liabilities are short-term obligations like accounts payable and taxes payable, and non-current liabilities are long-term debts like long-term loans. The equity section is further broken down into common stock, representing capital contributions, and retained earnings, which are profits held for future use. James concludes by showing how all these components are assembled into a detailed balance sheet that maintains the balance of assets, liabilities, and equity.

Keywords

💡Balance Sheet

A Balance Sheet, also known as a statement of financial position, is a financial report that provides a snapshot of a business's assets, liabilities, and equity at a specific point in time. In the video, it is described as one of the three main financial statements alongside the income statement and cash flow statement. The balance sheet must always balance, meaning total assets must equal total liabilities plus equity.

💡Assets

Assets are the resources owned by a business that have economic value and can provide future benefits. In the script, assets are divided into current (short-term) and non-current (long-term) categories. Examples of current assets include receivables and prepaid expenses, while non-current assets include property, plant, and equipment.

💡Liabilities

Liabilities represent the obligations or debts that a business owes to third parties. These are also divided into current (short-term) and non-current (long-term) liabilities in the balance sheet. In the video, examples of current liabilities include payables and accrued expenses, while long-term loans fall under non-current liabilities.

💡Equity

Equity represents the ownership interest in a company, which is the residual interest after deducting liabilities from assets. It consists of capital contributions (e.g., common stock) and retained earnings. In the video, equity is explained as the difference between assets and liabilities, showing what the business owes back to its owners.

💡Accounting Equation

The accounting equation is the foundation of the balance sheet and states that Assets = Liabilities + Equity. This equation ensures that the balance sheet remains balanced. The video emphasizes that this equation captures a snapshot of a business’s financial position at a given time.

💡Trial Balance

A Trial Balance is an accounting report that lists the closing balances of all ledger accounts at a specific point in time. It shows that the total debits equal the total credits, confirming that the accounts are balanced. In the video, a trial balance for a company called Tumble is used as the basis for creating its balance sheet.

💡Retained Earnings

Retained Earnings represent the cumulative profits of a business that have not been distributed as dividends and are instead retained for future use. In the video, retained earnings are part of the equity section of the balance sheet and are derived from the company’s net profit, adjusted for dividends.

💡Current Assets

Current Assets are short-term resources that are expected to be converted into cash or used up within one year. Examples mentioned in the video include cash, accounts receivable, and prepaid expenses. These assets are essential for the business’s day-to-day operations.

💡Non-Current Liabilities

Non-Current Liabilities are long-term financial obligations that a company expects to settle beyond one year. In the video, long-term loans are given as an example of non-current liabilities. These obligations are contrasted with short-term liabilities, which are settled within a year.

💡Capital Contributions

Capital Contributions refer to the money invested into a business by its owners. For companies with shareholders, this is often called common stock. In the video, capital contributions are part of the equity section of the balance sheet and are distinguished from retained earnings, which represent accumulated profits.

Highlights

Balance Sheet is one of the three main financial statements, along with the income statement and cash flow statement.

A balance sheet provides a snapshot of a business's assets, liabilities, and equity at a specific point in time.

The accounting equation is assets = liabilities + equity, which must balance on a balance sheet.

Assets are divided into current and non-current, with current assets being short-term.

Non-current assets include tangible assets like property, plant, and equipment, and intangibles.

Liabilities are also categorized into current and non-current, with current liabilities being short-term obligations.

Equity consists of capital contributions (like common stock) and retained earnings, which are profits held for future use.

A trial balance is necessary to create a balance sheet, showing the closing balances of all general ledger accounts.

An adjusted trial balance includes all adjusting entries, ensuring the balance sheet's accuracy.

The balance sheet must balance, with total assets equaling total liabilities and equity.

Revenue and expenses are part of retained earnings and must be included in the equity section of the balance sheet.

The process of creating a detailed balance sheet involves dividing assets and liabilities into current and non-current categories.

Common stock represents the money invested into the business by its owners and is a component of equity.

Retained earnings are calculated by starting with opening retained earnings, subtracting dividends, and adding net profit.

A detailed balance sheet includes specific line items for current and non-current assets and liabilities, as well as equity components.

The balance sheet is a critical tool for understanding a business's financial position at a given moment.

The video concludes with a teaser for the next video, which will cover the cash flow statement.

Transcripts

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  

by the way if you're finding these videos useful  and you'd like to support the channel then you  

can click on the join button below thanks to all my channel members

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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

remember to like and subscribe if you found this useful

in the next video we'll cover the cash flow statement see you then