The BALANCE SHEET for BEGINNERS (Full Example)

00:06:58
https://www.youtube.com/watch?v=CMv1zlZhb4Q

Summary

TLDRIn this video, James teaches viewers how to create a balance sheet, a key financial statement that summarizes a business's assets, liabilities, and equity at a specific point in time. He explains the accounting equation (assets = liabilities + equity) and the importance of ensuring that the balance sheet balances. The tutorial covers the distinction between current and non-current assets and liabilities, as well as the role of retained earnings. Using a trial balance from a dating app called Tumble, James demonstrates both a basic and detailed balance sheet, highlighting common mistakes and how to correct them. The video concludes with a reminder to like and subscribe for future content on financial statements.

Takeaways

  • 📊 A balance sheet is a snapshot of a business's financial position.
  • 💰 Assets = Liabilities + Equity is the core accounting equation.
  • 📅 Current assets are short-term, while non-current assets are long-term.
  • 📉 Retained earnings represent profits held for future use.
  • 📝 A trial balance is essential for creating a balance sheet.
  • ⚖️ The balance sheet must always balance: total assets = total liabilities + equity.
  • 📈 Common stock is a type of capital contribution from owners.
  • 🔄 Current liabilities are short-term obligations, non-current are long-term.
  • 🔍 Detailed balance sheets categorize assets and liabilities into current and non-current.
  • 🎥 Next video will cover the cash flow statement.

Timeline

  • 00:00:00 - 00:06:58

    In this video, James introduces the concept of a Balance Sheet, one of the three main financial statements alongside the income statement and cash flow statement. He explains that a Balance Sheet provides a snapshot of a business's assets, liabilities, and equity at a specific point in time, emphasizing the accounting equation: assets = liabilities + equity. James outlines the structure of a basic Balance Sheet, highlighting the importance of balancing total assets with total liabilities and equity. He also distinguishes between current and non-current assets and liabilities, and explains the components of equity, including capital contributions and retained earnings.

Mind Map

Video Q&A

  • What is a balance sheet?

    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 are the three main financial statements?

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

  • What is the accounting equation?

    The accounting equation is assets = liabilities + equity.

  • What are current and non-current assets?

    Current assets are short-term assets, while non-current assets are long-term assets.

  • What is retained earnings?

    Retained earnings are the accumulated profits of a business held for future use.

  • How do you create a balance sheet?

    To create a balance sheet, you need a trial balance showing the closing balances of all accounts.

  • What is the importance of a trial balance?

    A trial balance ensures that total debits equal total credits, indicating that the accounts are in balance.

  • What is common stock?

    Common stock is a type of capital contribution made by the owners of a business.

  • What is the difference between current and non-current liabilities?

    Current liabilities are short-term obligations, while non-current liabilities are long-term obligations.

  • What will the next video cover?

    The next video will cover the cash flow statement.

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  • 00:00:00
    Welcome back to accounting stuff I'm James and today i'll show you how to make a Balance Sheet
  • 00:00:06
    the balance sheet is one of the three main financial statements
  • 00:00:09
    the other two called the income statement which we did in the last video
  • 00:00:13
    and the cash flow statement which we'll cover next time
  • 00:00:17
    a balance sheet or a statement of financial position
  • 00:00:20
    is a financial report that gives us a snapshot of a business's assets, liabilities and equity at a single point in time
  • 00:00:29
    now if you've watched my videos before  then you've probably heard this one
  • 00:00:33
    the stuff that a business owns is equal to  the stuff that a business owes
  • 00:00:39
    in other words a business owns assets and it owes liabilities to third parties
  • 00:00:44
    the difference between the two is called equity which is what the business owes
  • 00:00:49
    back to its owners and so we have the accounting equation
  • 00:00:54
    assets are equal to liabilities plus equity when we take a snapshot of this accounting equation
  • 00:01:01
    at a single point in time we're looking at a balance sheet
  • 00:01:05
    we'll call this one the basic balance sheet and as its name suggests it's got to balance
  • 00:01:11
    that means that total assets must always equal total liabilities and equity
  • 00:01:17
    a detailed balance sheet would look something like this
  • 00:01:20
    we expand out assets into current and non-current  current assets are short-term assets
  • 00:01:26
    things like receivables and prepaid expenses on the other hand non-current assets are long-term assets
  • 00:01:33
    there are two main types the ones that you can touch and the ones that you can't touch
  • 00:01:38
    we do the same thing with liabilities current liabilities are short-term liabilities
  • 00:01:43
    payables, accrued expenses and deferred revenue  and non-current liabilities long-term liabilities
  • 00:01:50
    stuff like long-term loans equity on the other hand is a different kettle of fish
  • 00:01:56
    first we have capital contributions which is the  money invested into the business by its owners
  • 00:02:02
    for a company with shareholders we might call this common stock
  • 00:02:05
    and then we have the businesses retained earnings which are its accumulated profits held for future use
  • 00:02:12
    i do have a balance sheet cheat sheet which summarizes all of this the link's in the description anyways
  • 00:02:18
    How do you make a basic Balance Sheet?
  • 00:02:21
    first you need another accounting report called a trial balance this shows us the closing balances
  • 00:02:28
    for every general ledger account at a point in time here's a trial balance for a dating app called Tumble
  • 00:02:35
    it was run at the end of Tumble's financial year December 31st
  • 00:02:40
    and it's an adjusted trial balance because  all adjusting entries have already been posted
  • 00:02:45
    we can see all of Tumble's accounts and balances  debits are on the left and credits are on the right
  • 00:02:51
    at the bottom we can see that the debits  total to $87,700,000
  • 00:02:57
    which matches the total credits exactly this means that Tumble's trial balance is in balance
  • 00:03:04
    which is very important because if the trial balance is in balance
  • 00:03:07
    then the balance sheet also has to balance
  • 00:03:10
    i don't think i've ever said balance so much in my life accounts in a trial balance are usually
  • 00:03:14
    arranged in a pattern above this line we  have the stuff that Tumble owns its assets
  • 00:03:21
    and below the line we have the stuff that  Tumble owes its liabilities and equity
  • 00:03:27
    we also have its revenue and expense accounts which  we used last time to make the income statement
  • 00:03:32
    by the way if you're finding these videos useful  and you'd like to support the channel then you
  • 00:03:35
    can click on the join button below thanks to all my channel members
  • 00:03:39
    who've done that already you guys are absolute legends and i really appreciate it thank you!
  • 00:03:45
    So how do we make a Balance Sheet?
  • 00:03:48
    There's two ways to do this the right way and the wrong way and i'll show you both
  • 00:03:52
    We'll start with the wrong way because this is a really easy mistake to make
  • 00:03:56
    and it goes something like this we take all of tumble's assets, liabilities and equity accounts
  • 00:04:02
    and we pop them in their sections of the balance sheet in theory it's the right thing to do but check this out
  • 00:04:09
    total assets add up to $36,350,000
  • 00:04:14
    and total liabilities plus equity add up to $25,650,000 that's the difference of $10,700,000
  • 00:04:25
    so this balance sheet doesn't balance what went wrong?
  • 00:04:29
    We forgot to include Tumble's revenue and expenses these are part of Tumble's retained earnings
  • 00:04:36
    it's profits held for future use which also sit in the equity section of its balance sheet
  • 00:04:42
    when we include them total liabilities plus equity also add up to $36,350,000
  • 00:04:51
    so Tumble's basic balance sheet is in balance remember the balance sheet is a snapshot
  • 00:04:57
    of a businesses assets, liabilities and equity at a single point in time
  • 00:05:03
    on the left side we can see what the business owns and on the right side we can see what it owes
  • 00:05:08
    to third parties and its owners
  • 00:05:12
    How do we make a detailed Balance Sheet?
  • 00:05:14
    we follow the same process but first we need to divide Tumble's assets and liabilities
  • 00:05:21
    into current and non-current cash, accounts receivable, other receivables
  • 00:05:25
    and prepaid expenses are all current assets property, plant and equipment and intangibles
  • 00:05:32
    are non-current assets  accounts payable, taxes payable, accrued expenses
  • 00:05:37
    and deferred revenue are all current liabilities  and long-term loans is a non-current liability
  • 00:05:44
    in the equity section common stock is a type of capital contribution
  • 00:05:49
    and everything below that is retained earnings these are Tumble's profits held for future use
  • 00:05:56
    their opening retained earnings at the start of the year less dividends plus Tumble's net profit in the current year
  • 00:06:03
    and that's it we can pick up all these numbers  and put them in our detailed balance sheet
  • 00:06:09
    so we've got current assets $31,050,000 and $5.3m in non-current assets
  • 00:06:18
    current liabilities of $14.4m and  non-current liabilities of $1.2m dollars
  • 00:06:26
    then we have $1,050,000 in common stock which is a type of capital contribution
  • 00:06:33
    and finally $19,700,000 in retained earnings
  • 00:06:39
    or profits held for future use total assets are equal to total liabilities plus equity
  • 00:06:46
    so this balance sheet is in balance thanks for watching
  • 00:06:51
    remember to like and subscribe if you found this useful
  • 00:06:54
    in the next video we'll cover the cash flow statement see you then
Tags
  • Balance Sheet
  • Financial Statements
  • Assets
  • Liabilities
  • Equity
  • Accounting Equation
  • Retained Earnings
  • Trial Balance
  • Current Assets
  • Non-Current Assets