Balance Sheet Explained in Simple Terms - Accounting Balance Sheet Tutorial in Excel

welcome to the balance sheet explained in simple terms in this video I'm gonna explain our accounting report the balance sheet and I'm gonna explain it in simple terms quickly and simply as usual on this channel which reminds me Amanda here you're watching the business finance coach where I simplify business if you're new here consider subscribing while still watching this video if you aren't aware I give away the free business spreadsheet template which I am showing me in this video you can get that for free to organize your accounting in taxes as a small LLC or self-employed business owner but the balance sheet template is only in my small business MBA course do download that spreadsheet if you want to learn more there's a whole video eCourse that goes along with it for now back to the balance sheet explained in simple terms we're gonna start out with a few basic concepts about accounting in business so accounting is to business what a languages to communication accounting records keep track of every transaction that affects value or something that has monetary value money in a business and then a business owner or owners or investors or any interested parties can understand that business by looking at the accounting reports now there are tons of accounting reports but the two main accounting reports that are the biggest picture reports that are required if you want to buy or sell a business get a loan to do anything having to do with monetary value of a business you are going to look at the income statement and the balance sheet and honestly these two reports are reports that business owners should be looking at on a regular basis at least monthly so while we are talking about the balance sheet in this video I do need to say that the income statement and the balance sheet cover the entire picture of a business and they work in tandem with each other the balance sheet represents value while the income statement reports profitability think about your bank account for a second does your bank account tell you how profitable you are what is the value of your bank account so you could only look at the value of your bank account on any given day you have to actually look at your bank account balance value at a certain moment in time in order to know what the value of your bank account is in order to know how profitable you are you would need to look over a period of time and see how many deposits of income came through I'm going to come back to this individual example once we go over the link between the balance sheet and the income statement because that's critical to understand to understand how all of accounting works and how the value of the business is represented in these reports for now let's jump into the balance sheet so you can see reports are always structured the same the name of the business goes first the name of the statement second and for a balance sheet we would insert the date that this balance sheet is for here as of XYZ date now the balance sheet has three sections assets things we own equal liabilities things we owe plus owner's equity so you can see that down here total assets are a hundred and forty thousand two to eight total liabilities and owner's equity one forty two to eight this statement represents the accounting equation assets equals liabilities plus owner's equity and what this means is everything I own is equal to everything I owe plus my owners equity in the business and this owner's equity this is where the link comes in to the income statement this is how the income statement and the profitability of the business affects the business value so first let's take a closer look at these accounts now one concept you need to be aware of is short term and long term something is short term if it has to do with less than a year and things are long term if they're more than a year so with assets we have current assets we start with bank balance that's something we own right your bank balance has a value as of a certain day and it's something new own now your current assets are listed in order of liquidity and liquidity means how quickly it could turn to cash so obviously a bank balances first because it is cash accounts receivable represents money receivable customers that are going to pay you money they owe you money you've already recorded the work that you've done for them as revenue on your income statement and you've done everything you needed to do to earn that money you're just waiting for them to pay you then we have our prepaid expenses what happened here was we paid money from our bank account on expenses but we can't deduct those expenses yet on our income statement so instead we record it here until it will be moved to our income statement because we still have that value technically in our business that other company didn't earn our prepaid expenses that we paid yet they would have to give us that money back if they don't fulfill their promise lastly there's inventory so as you can see inventory would take the longest time to turn into cash we'd have to sell it for sales in our business and here we have our total current assets next we have fixed assets assets means anything that we own that's used in the business and fixed assets represents any asset that has a life of more than a year and we plan to use it for more than a year things like a building office furniture equipment of any kind and with fixed assets they remain on our books at our purchase cost basis we get to take depreciation expense over time so our balance sheet always shows the value of our assets and then the value of total depreciation expense having been taken in the business to date which is represented with accumulated depreciation account and this amount offsets all of our assets so the net amount goes here seventy nine thousand two hundred so eventually our accumulated depreciation could be the total amount of all of our assets and this amount would be zero but we can still see the value of all those assets on our balance sheet which can be really helpful for people looking at the value of the business then we have our total assets down here summing this subtotal column next we have the liabilities and owner's equity section first with liabilities we have current so unearned revenue these are amounts that customers paid us in advance so in this case we have a liability to perform whatever we do to earn that money accounts payable that could be expenses or services that we owe to another business in general longer-term do liabilities things that you owe such as an SBA loan or a mortgage will show up in this section and our total liabilities are summing over here now even something like a credit card would go in the liabilities section owner's equity here we have retained earnings and our owner capital accounts so any money that the owner puts into the business and any money that the owner takes out of the business that's tracked in a contributions account and a draw account with the total amount represented under owners capital now you need to have an account for each owner or for each types of stockholders it depends on the type of business as far as what the owner accounts will be now last but not least we have retained earnings retained earnings reflects earnings that the company has made to date this is how the income statement gets to the balance sheet so the income statement is revenue total sales minus expenses equals net income or lost and I have a real income statement over here in the template total revenue by month expenses by month and that equals our net business income or loss if expenses are more than income there's a loss and that amount is going to go into retained earnings at the end of each period now there is a major accounting concept that makes all of this work in accounting there's no negative numbers and instead the balance sheet all of these accounts seen here are called permanent accounts they are running total since the business began and they all start at zero on the other hand our income statement accounts revenue and expenses these are temporary accounts at the end of each period often a year for most businesses these accounts start over at zero and run for the period to track income in expenses so that we have our net income and then that amount gets transferred into our retained earnings so that these accounts can start over at zero for the next period and track what profitability alright guys that's all for the balance sheet explained in simple terms do let me know if you have more questions if you are interested in my business spreadsheet template check out the link to my website below if you're interested in the balance sheet template specifically do check out the small business MBA do let me know if you have questions in the comments below what were your questions how did you find this video does this make sense do you understand let me know I'd love to hear from you if you like this video if it clarify things please do hit the like button that helps me out on YouTube otherwise I'll see you next time guys bye

Channel: Business Finance Coach

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Id: UXtRoEO9zp0

Length: 11min 0sec (660 seconds)

Published: Fri May 17 2019