Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792
Hey, everyone, and welcome to our video today on the balance sheet. So what are we covering today? Well, today we're covering the balance sheet. We're going to talk about the balance sheet. We're going to talk about, what is it? What is the balance sheet? We're also going to talk about what the accounting equation is and the balance sheet formula, and how those are related. And then we're going to finish up by going through a balance sheet example.
So let's start with learning about the balance sheet. But let's take a step back. What are financial statements? Those are reports providing financial information about a business at a given time. So those are our financial statements. Now what is the balance sheet specifically? That's a financial statement that provides information about the assets, liabilities, and equity of a business at a given time.
So we can think of the balance sheet as the business position. It's at a moment in time, rather than over a period, and it's the only financial statement that's prepared at a specific date. It's not period-based. It's as of a specific point in time. And it details a business's resources. So the resources owned or available are assets, liabilities owed to others are liabilities, and then that difference is on a cumulative basis is our equity. So let's dive a little bit deeper into what that means.
The balance sheet-- let's start with the accounting equation. So what is the accounting equation? It's a fundamental premise in accounting, which states that a company's assets will be equal to the sum of its liabilities and its equity. So assets equals the sum of its liabilities and its equity. So that's our accounting equation-- assets equals liabilities plus equity. Well, now that also happens to be the balance sheet formula. So the accounting equation and the balance sheet formula are the same-- assets equal liabilities plus equity.
Let's dive a little bit deeper into that formula itself. So what are assets? Assets are our physical or non-physical resources owned by an organization that have economic value. So those are our resources, our available resources. Then we have liabilities. Those are the debts and other financial responsibilities of an organization. So those are our monies owed to others, any obligations that we have of financial nature.
And finally, we have equity, the remaining value once liabilities are subtracted from assets. So that's our net difference on a cumulative basis. So that's our accounting equation and our balance sheet formula.
So now let's look at an example. Let's build our balance sheet. Well, we have to start with our header. So when we have our balance sheet, our header's going to be our company name, balance sheet, and then, because it's at a specific point in time, we're going to have a line that says as of blank. In this case, as of December 31, 2012. So as of this point in time. So that's our header for our balance sheet.
Then we're going to put in our assets. So we have our header, then our assets, starting with our current assets. So we'll have cash, accounts receivable, supplies, prepaid insurance. So these are all of our current assets. And then we're also going to have long-term assets. So assets is broken up into current and long-term, long-term being, in this case, our buildings. So we have total long-term assets. And then we total both of those together, and that provides our total assets.
Now after we have our assets, then we would have our liabilities. And now liabilities, we're starting with our short-term liabilities, in this case our accounts payable. And then we're going to have long-term liabilities. So the liabilities on the balance sheet are broken up into short-term and long-term. And just like our assets, our current assets and long-term assets, liabilities are reported similarly in that they're short-term liabilities and long-term liabilities.
So then we're going to have our notes payable, so that's our loan to the bank that spans several years. So that's why we consider it a long-term liability. So then we're going to total up our liabilities. Now after our liabilities, the last piece is our equity. So we're going to have all of our equity items. So we'll have an owner's investment, retained earnings, which are earnings kept in the business and not distributed to owners.
We're going to subtract out our withdrawals to give us our total equity. So that's what the equity piece looks like. And then we're going to total up our liabilities and our equity, because remember, just like the accounting equation, the balance sheet formula is the same-- assets equal liabilities plus equity.
So if we have total assets of $156,000, you also see that we have total liabilities and equity of $156,000. So everything balances, and we are good to go.
So let's recap. What did we talk about today in a nutshell? We talked about the balance sheet today, and that's a financial statement that provides information about the assets, liabilities, and equity of a business at a given time. So at a specific date. It's very important for the balance sheet. We looked at the balance sheet formula and the accounting equation-- assets equals liabilities plus equity. And then we went through our comprehensive example.
I hope everybody enjoyed this video, and I hope to see you next time.
Reports providing financial information about a business at a given time.
A financial statement that provides information about the assets, liabilities and equity of a business at a given time.
A fundamental premise in accounting which states that a company's assets will be equal to the sum of its liabilities and its equity (Assets = Liabilities + Equity).
Physical or non-physical resources owned by an organization that have economic value.
Debts and other financial responsibilities of an organization.
The remaining value once liabilities are subtracted from assets.