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-- a case study on the balance sheet. So what's today's video about? Well, we're going to talk about a subject company-- Legacy Realty. We're going to talk about our company and the balance sheet, and why our company needs to have a balance sheet. And then, we're going to do a case study of preparing a balance sheet for our company.
So let's learn a little bit about our case-study company, Legacy Realty. What type of company is it? Well, it's a sole proprietorship, which is a type of company that is owned by a single individual and where the individual and the business are legally treated as the same.
What's the business's purpose? They own, lease, and manage rental properties. So the business purchases homes and condominiums, leases them out to tenants, and performs their own management of the units, repairs, and maintenance, and collection of rent. Where's the business located? In Washington, DC. And they have a small staff of five people.
So now, our company and the balance sheet. Does our company really need a balance sheet? Well, of course, we need a balance sheet. Well, why do we need a balance sheet? The balance sheet tells us about our business position. It's prepared at a moment in time, rather than covering a period of time. And it's the only financial statement that's made at a specific date.
And it tells us about our business resources. So it tells us the resources that are available to us, or the resources that we own, in the case of assets, as well as the resources that are owed to others, in the case of liabilities. And then the net difference, on a cumulative basis, is going to be our equity. OK? So our assets, our liabilities, and our equity are detailed on the balance sheet. And, if we think about the balance sheet formula, assets equal liabilities plus equity.
So what do we need to begin preparing our balance sheet? Well, we need to start with some information from our trial-balance worksheet. Specifically, we need some information from the adjusted trial balance. So let's go ahead and take a look at our trial-balance worksheet and see if we can get that information that we need.
OK, everyone. So, what we have, here, is our trial balance. Now, what we've done, so far, at this point, is that we've prepared our trial balance. And we have also made our adjustments, as well as prepared our adjustment explanations. So what these adjustments are are what we do to match revenues and expenses with the correct period, as well as correct for any errors or omissions that we may have made throughout the accounting period, and throughout the recording process.
So we've prepared our trial balance. We've prepared our adjustments and those explanations. Now, we have our adjusted trial balance. And the adjusted trial balance is just our trial balance, and then we have our adjustments that we made, to get to this adjusted trial balance.
And similar to the trial balance, the adjusted trial balance is a listing of all of our general ledger accounts-- so we have all of our general ledger accounts-- as well as the corresponding debit or credit balance for that account. So that's what our adjusted trial balance is. That's going to be our source for our financial statements. So let's take that information that we have, here-- the adjusted trial balance-- and keep moving.
Great. So, now that we have that information from our adjusted trial balance, we can begin to prepare our balance sheet for Legacy Realty. So what's the starting point.? Well, we always start with the header. So we're going to put our company name, then "Balance Sheet," and then "As of December 31, 2012." That's important, because that's different than our income statement and our statement of changes in owner's equity.
So what information do we need? Well, we need our adjusted trial balance. We need all of our permanent accounts, which are all of our assets, our liabilities, as well as our equity.
So let's start with our assets. Starting with our current assets, we're going to list our cash, accounts receivable, supplies, and prepaid insurance. And those are our total current assets. And then we also break out our long-term assets, which, in this case-- you can see, there, on our adjusted trial balance-- is going to be our land, buildings, and the accumulated depreciation for those buildings. So we have our total current assets, our total long-term assets, to give us our total assets of $616,500.
And now, the balance sheet is assets and liabilities and equity. So now, we can move on to our liabilities, starting with short-term liabilities. And we have accounts payable, in this case, as well as unearned revenue, for our total short-term liabilities.
And now, similar to assets, how assets are broken out by current and long term, liabilities are broken out-- short term and long term. So we have our long-term liabilities-- which, in this case, we only have a notes payable as our long-term liabilities-- which gives us total liabilities of $340,000. And now we remember that our balance-sheet formula is assets equals liabilities plus equity. So now we have to add our equity.
So where do we get our equity information from? Well, we pull that from the statement of changes in owner's equity. And from that, we can pull in the ending balance in our owner's capital account, at the end of the year, of $276,500. And now that captures the beginning balance, as well as any net income or loss, as well as any drawings or contributions that may have been made by the owners. So that's our equity.
And then we can total up our liabilities and our equity, which, in this case, is $616,500. So then we can check. Do our assets equal our liabilities plus equity? They do. Our balance sheet balances, and we are good to go.
So let's go ahead and review, real quickly, about what we talked about, today. In a nutshell, we discussed our case-study company-- Legacy Realty. We looked at an example of preparing a balance sheet, starting with our adjusted trial balance and our statement of changes in owner's equity. Those are the two sources we used, in order to create our balance sheet.
I hope everybody enjoyed this video, and I hope to see you next time.
(00:00-00:35) Introduction and Overview
(00:36-02:05) Case Study Company and Balance Sheet
(02:06-06:22) Preparing Balance Sheet
(06:23-06:47) Wrap-up and Conclusion