.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 going to explain our accounting report, the balance sheet, and I'm going to 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 in this video. You can get that for free to organize your accounting and 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 e-course that goes along with it. For now, back to the balance sheet explained in simple terms. We're going to start out with a few basic concepts about accounting and business. So, accounting is to business what a language is 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 how all 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, our total assets are $140,228, total liabilities and owner's equity, $140,228. 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 owner's 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 you 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 balance is 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. Here we have our total current assets. Next, we have fixed assets. Assets means anything that we own that's used in the business. 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. With fixed assets, they remain on our books at our purchase cost basis. We get to take depreciation expense over time. 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. This amount offsets all of our assets. The net amount goes here, $79,200. 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 due 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 liability 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 owner's 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 loss. 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 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 and 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 clarified things, please do hit the like button. That helps me out on YouTube. Otherwise, I'll see you next time guys. Bye!