 Hello in this presentation that we will discuss the balance sheet Objectives at the end of this presentation. We will be able to describe the balance sheet list the components of the balance sheet and Define and explain each component of the balance sheet when considering the balance sheet we will be looking at components equivalent to those in the accounting equation the accounting equation as we have seen in a prior presentation is Assets equal liabilities plus equity these will be the components of the balance sheet Remember that the assets of course are going to be those things that the company has they have those things in order to help Generate revenue in the future revenue generation being the key the goal of the organization Liabilities being something that is owed in the future due to something that happened in the past therefore past Transaction resulting in future obligation Liability then we have the equity section which could be in the format of the owner's equity for a sole proprietor or partnerships equity for a partnership or Stockholders equity for a corporation However, all three of those formats represent in essence the same thing the ownership or the book value of the organization meaning assets minus liabilities is in essence the book value of The organization it's important to remember that the balance sheet is as of a point in time This can seem obvious, but it is not as obvious as it may seem Given that it's different than the income statement Which is reported as of a time frame meaning if we have our timeline here The balance sheet will be reported as of a specific point on that timeline Only needing one date then to define when the balance sheet will be reported as of Unlike the income statement where we do need two dates on the timeline So that we have a beginning and an ending date when considering the balance sheet and considering this concept of the balance sheet Representing a point in time rather than a time frame. I first would think about the major Account on the balance sheet the first account most people probably think of when they think of the balance sheet that being Cash and asking the question if I was to ask somebody as of this point in time How much cash they have they could then tell me as of this point in time They can check their pockets and say this is how much money we have on me or I have on me at this point in time They may not want to say that but if they chose to they could they can tell me how much money They have on them at this point in time unlike the income statement accounts like revenue and expenses Where if we were to ask the question how much revenue do you earn? That's that's a verb statement. That's an action statement That has to have a time frame that has to have a beginning and an end time Not just a point in time in order to answer this question therefore when we consider this timeline the balance sheet will be as of a point in time and the income statement will be some somewhere back and Telling the story so the income statements gonna need another point and that'll give you kind of that story of how we got from here This point in time to that point in time and the income statement will give you some of that activity To tell you where we got to at the end in this case our balance sheet account representing this point in time When considering our components of the balance sheet, they will be the same as the accounting equation including assets liabilities and equity Note that when we look at these components, we need to value these things differently than just counting the units that are there for example Clearly cash is going to be counted in terms of dollars So if we had a thousand dollars of cash that is what we would have no problem there However, if we had four units of ink cartridges, we're not going to put those on the books as four units of ink cartridges This may seem obvious, but it's actually a problem It's a conversion problem similar to the types of problems that we would have if we go to a different country and have a different currency And that we have to do some type of conversion in this case We're going to convert those four units of ink cartridges to dollars and represent the dollar amount of in this case 200 You may be asking how would we come up with that 200? Where does that 200 come from? We'll start to talk about that later Especially when we get to supplies like ink cartridges We might have cost flow assumptions first in first out last in first out some kind of average method because all the ink cartridges May or may not possibly not cost exactly the same amount Even though they are the exact same ink cartridges because prices change over time So we'll talk about that later But for now we just we want to emphasize the idea that we're gonna have to report these things in terms of dollars Everything's gonna have to be reported in terms of dollars for example the land if we have land over here We're not gonna report on the balance sheet that we have so many acres of land We're gonna have to report that we have in this case $40,000 worth of land and again that conversion is going to cause problems because the value of the land will change over time And there's a question as to what we should do as the value of that land changes We have the same for the property plants and equipment in terms of a building We're gonna say it's $60,000 not one building this and the car. We're gonna say $15,000 not one car So note when we report all the assets we're basically gonna add all these up and Remember that when we do that as we do that we're gonna report it of course in the measuring tool of dollars But then recognize the fact that we don't have all those dollars in order to get actual dollars We'd have to sell the ink cartridges the land and the building in the car So when we're considering the balance sheet we have to we have to keep that in mind We have to separate these types of assets out and consider what type of assets we have Especially how much cash do we have and do we have enough cash in order to pay off our current our obligations that will be due Relatively soon. So if we look at the asset section then of our balance sheet, we're gonna have assets We're gonna break out generally current assets pretty much all the time Typically, we were gonna have current assets and then a colon representing a subcategory that subcategory of current assets Then we're gonna put in the accounts cash being our first account almost all the time It's gonna be indented because it's in the subcategory of current assets Then we have our supplies also a current asset meaning it's pretty close to cash meaning we're gonna use it fairly soon Therefore it's gonna be a current asset current assets typically being more Liquid assets or assets that will be used relatively soon in order to help achieve the goal of the business of that goal Of course to generate revenue then we have the total current assets again We indented it further here and we're gonna pull those total assets to the right-hand side These two columns do not represent debits and credits. They just represent a subtotal No debits and credits will be on the financial statements We will use debits and credits to build the financial statements, but we're not going to show The external users debits and credits because then we would have to explain Debits and credits so debits and credits are going to be a tool we will use We will not see them here on the balance sheet or any financial statement Next component property plans and equipment. We then have a colon. This is going to be a subcategory as well We have land that's going to be our first property plants and equipment Notice that property plants and equipment are going to be those longer term assets Meaning that land is something that we cannot use very easily in order to pay off current obligations We are going to use it for a long extended period of time into the future as Needed in order to help Achieve our goal that goal being revenue generation So we have land notice the property plants and equipment are also often called the depreciable assets sometimes Pp and e another way to say the property plants and equipment section and Notice that land however is not something that will be depreciated meaning Land is not generally going to go down in value. The dirt is the dirt unless we're drilling oil out of the dirt or something like that We don't typically need to reduce the value of the land the building. However, I Is going to be another property plants and equipment something again that we're going to have for an extended period of time to help generate revenue Into the future and achieve that goal of revenue generation and it is something that will depreciate over time and Therefore decline in value and it is a depreciable asset that we're going to have to write down over time Then we have the auto so an auto here's another thing again We're going to use that for an extended period of time So we're going to put it under property plants and equipment and then we have the total property plants and equipment So we are adding up the 40 the 60 the 15 to get the 115 Thousand we are going to end in that again, of course and pull that subtotal out into the right-hand side Once again, the left and right-hand sides not representing debits and credits But representing the subtotals Lined out here and then and then the totals in the outer column Then we're going to have total assets and that's going to be the sum of the outer column the one thousand two and the one hundred and fifteen four One hundred sixteen two hundred note that we're never typically going to be bouncing from calculations to multiple columns meaning This one hundred sixteen is only adding up this outer column We will never typically go from this column and then add up something in the other column over and all this number here Was added up just from this column We're not typically going to add these three columns and then jump back over here and add something to the right-hand side That will typically always be the case as you go to longer financial statements and other types of financial statements It'll really help to read them if you understand those concepts and will also help to create them next We have liabilities Liabilities are typically going to be less in number than assets most of the time the liabilities We will be dealing with the first liabilities typically dealt with in most textbooks and most types of when learning this process Will be those dealing with vendors accounts payable more short term liabilities Those do within 30 to 60 days typically and longer term liabilities notes payable Being an example often being shown as a bank loan when we're first starting out of business We might take out a loan have a longer term asset or a liability that needs to be paid back These then of course will also be represented in terms of dollars dollars that are owed in the future So we've got 170 in this case if we were to look at the liability section then of the balance sheet We're gonna break out liabilities. That's the subsection then current liabilities Current liabilities those liabilities do within a year's time period So note that that's a that's an arbitrary number We just picked a year a year's time period But it's important because a year is a relatively soon time period and what we want to know is we want to know What are those obligations that are being coming up pretty soon that we are gonna have to pay for pretty soon? With cash that we're gonna need to have on hand pretty soon in order to pay for those those liabilities So these are gonna be current liabilities those that are gonna be due within a year's time period note The colon representing the fact that we are going to pull these in to a subcategory We then indent the first account that account Accounts payable counts payable is going to be the most common current liability that we will be dealing with and We're gonna we're gonna put accounts payable and then put the total out there That's the only one we're gonna have on this a short example of the balance sheet So that we then have the total category total current liabilities and we've got that 100 Accounts payable in the outer column Then we're gonna have long-term liabilities in this case. We have long-term debt That's gonna be the bank loan here the assumption then being that the entire amount due the 70,000 is due after a year's time period meaning we took out a loan We're gonna pay it back. We're not paying it back monthly in this case Note that we can we can make the loan terms whatever the loan terms may be most people are familiar with like a loan for a car payment or a loan for a mortgage or something like that But a business loan or many any type of loan could be formatted in any way possible So or in many different ways, maybe not any way possible, but in many different ways So it's very possible that we take out a loan and we're gonna pay back both interest and principal at later At a later time or it's possible that we take out a loan and we pay back just the interest and then pay back the principal at a later time Also note that it is possible that if we had a loan such as a mortgage where we paid off monthly I've loaned that we had a payment schedule similar to that then that one loan Would have a current portion and a long-term term portion meaning it would have a portion that is due within a year's time period And a portion that is not due within a year's time period in this case It's all due after the time period. We'll talk more about Breaking out those types of problems at a later time We then have total liabilities and the total liabilities We're gonna pull out to the outer column and we're just adding up the current liabilities and the long-term liabilities to get to that total liabilities We then have the equity section Equity section is going to be the amount due to the owner and I'm just going to give the amount as of now That's going to be 46 100 and I'll show you one way that we can kind of calculate the amount Right now and that's going to be of course taking the assets minus the liabilities Giving us that equity number in real life, of course as we create the financial statement as we create the balance sheet We will be getting this number from the transactions that took place from the data that we input into our system From the trial balance that we have then generated from that data that we input into the system Most of time when we start out, however, we're basically going to give you The numbers and just and just look at a at the numbers that would be related to a fully completed Balance sheet and then talk about how we are going to construct that so shortly We will then get into the construction of the transactions the posting of the transactions the building of the trial balance and then the building of The balance sheet first we'll look at these components of the balance sheet however therefore the balance sheet as of a point in time December 31st 2001 in this case we then have the assets that we put together the current assets and Property plants and equipment being the two subcategories of assets We have the subcategory accounts on the inner column and the totals pulled out to the outer column We then have total assets on the bottom line of the asset section We then have the liabilities where we have the current liabilities and the long-term liabilities To have a total liabilities section total liabilities 70,000 100 we then have the equity section the amount owed to the owner or the net assets of the business that can be calculated as Total assets minus what is owed to the third party? 116,200 minus 70,000 100 gives us the 46,000 100 We can also see that we have to have this liabilities 70,000 plus the owner capital 46 100 equal the Ending number total liabilities plus equity therefore. We are in balance by total assets Equaling total liabilities plus equity note that is the accounting equation assets Equal liabilities plus equity the balance sheet is the double entry accounting system the balance sheet is the accounting equation The components of the accounting equation are represented completely and entirely on the balance sheet Next at a later point we'll talk about how the income statement and the statement of equity then relate to the balance sheet Given the fact that the balance sheet is the whole double entry accounting system in that it represents the entire accounting equation So the question we'll have later is well if that's the case if the balance sheet represents the accounting equation Then how does the income statement fit into the picture of the double entry accounting system? How does the statement of equity fit into the picture when it seems like the picture is complete with just the balance sheet? So keep that in mind as we go forward and move to the other statements including the income statement and the statement of equity Objectives we are now able to describe the balance sheet List the components of the balance sheet define and explain each component of the balance sheet