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Preparing Balance Sheets

Preparing Balance Sheets

Author: Evan McLaughlin

In this lesson, the student will learn how to prepare a balance sheet.

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"Preparing Balance Sheets"

Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons,

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Hey, everyone, and welcome to our video, today, on preparing a balance sheet. So what are we covering, today? Well, we're covering the balance sheet, today. We're going to cover two things. We're going to do a balance-sheet review, and then we're also going to walk through a detailed example of preparing a balance sheet. So let's start with our balance-sheet review.

So what is the balance sheet? It's a financial statement that provides information about the assets, liabilities, and equity of a business, at a given time. So it's our business's position. So remember, it's at a moment in time, rather than over a period of time. So it's not a period-based financial statement. It's the only financial statement that's at a specific date.

It also helps us understand our business resources-- the resources owned or available which are our assets, resources owed to others-- which would be our liabilities-- and then the net difference, on a cumulative basis-- which is our equity. So let's look at the balance sheet review.

Let's start with the accounting equation-- a fundamental premise, in accounting, which states that a company's assets will be equal to the sum of its liabilities and its equity. Now, the accounting equation also happens to be equal to our balance-sheet formula. So they're the same thing.

So what does that mean? Our assets equal our liabilities, plus our equity. Now, this is going to guide us, as we walk through our balance-sheet example, in how we set up the balance sheet. So remember, assets equal liabilities plus equity.

So now, let's get started on preparing our balance-sheet example. And now the starting point, for preparing our balance sheet, is going to be the adjusted trial balance, which we can get from our trial-balance worksheet. So let's take a few minutes, take a look at our trial-balance worksheet, and then we can begin to dive into preparing our balance sheet.

OK, everyone. So what we're looking at, here, is our trial-balance worksheet. And now-- so, since we're starting to prepare our balance sheet, these are the steps we've already gone through. We've already prepared our trial balance, we've made our adjustments, and now we've also prepared our adjusted trial balance, because that's what we used to build our financial statements.

So you'll see, in our adjusted trial balance, we have a detail of all of our ledger accounts. We've made all of the adjustments that we need to make. And now we have our adjusted trial balance. So now we can begin to prepare our balance sheet.

But, in order to prepare our balance sheet, not only do we need our adjusted trial balance information, but we also need to have our income-statement information, because we need to know how much net income there is, for the year, and plug that into our equity. So here's all the raw information that we're going to need-- our adjusted trial balance, as well as our income statement-- so let's start preparing that balance sheet.

Now that we've gathered the information that we need, from our trial-balance worksheet, let's start putting it down and preparing our balance sheet. So here's our example. And a balance sheet always starts with our header. So we're going to have our business name, "Balance Sheet," and then we're always going to put "As of" a specific date, which, in this case, is December 31, 2012. So remember, it's at a specific date.

And now here's our adjusted trial balance information. Now what do we have, here? We have all of our permanent accounts, which are all of our assets, liabilities, and equity. So these are all of our permanent accounts that we need, to prepare our balance sheet.

So we'll start with our current assets. We'll take our cash, our accounts receivable, our supplies, and our prepaid insurance. Those are all of our current assets. Then we're going to take our long-term assets, which, in this case, you can see that we own a building. So we have buildings.

Then we also have accumulated depreciation, so the net amount of our long-term assets, in this example, is $39,000. So we have total assets of $173,500. So now that's our total assets.

So let's think about that accounting equation-- the balance-sheet formula. Assets equal liabilities plus equity. So the next piece. We have our liability. Short-term; we have our accounts payable, in this case. And we also have long-term liabilities, you'll see, there, on the adjusted trial balance. We have notes payable of $25,000. So we have total liabilities of $30,000.

Now, the final piece-- our equity, starting with our retained earnings, there, from our adjusted trial balance. And now the next piece comes from our income statement. So our equity. We have retained earnings of $12,000. And then we also have to add our net income for the period. So we're also going to have net income of $133,500.

And now we also have owner drawings, from our adjusted trial balance, of $2,000. We have to subtract those out, for our total equity. And then, again, we have to add our liabilities and our equity, to get to the total.

So now, we'll see that we have total assets of $173,500, and we also have total equities and total liabilities and equity of $173,500. So they're equal. Our accounting equation balances, as does our balance-sheet formula.

So let's summarize what we talked about, today. In a nutshell, we talked about the balance sheet, a financial statement that provides information about the assets, liabilities, and equity of a business, at a given time. We went through a great comprehensive example, today, of preparing a balance sheet and a great review.

I hope everybody enjoyed this video, and I hope to see you next time.