The BALANCE SHEET for BEGINNERS (Full Example) - YouTube

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  

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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

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