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Understand the meaning of assets, liabilities, and equity, and how this report is different from the profit and loss.

Quick reference

Balance Sheets

The balance sheet is a fundamental financial report that reflects a company's financial balances. Essentially, it's like a snapshot of the company's financial standing, similar to checking your bank and credit card statements. It details what the company owns and owes and what's left for the owners once all debts are settled.

Understanding the balance sheet involves breaking down its three core components:

Assets: These are resources owned by the business, including current assets (cash or anything that can be converted into cash within a year), fixed assets (long-term resources like buildings and equipment), and other assets (intangible items like patents and goodwill).

Liabilities: These are the obligations or debts the company is responsible for paying, such as loans, accounts payable, payroll taxes, and other payables.

Equity: This is the owner’s stake in the company, represented by the funds that would remain if all liabilities were settled using the company's assets.

The balance sheet operates under a simple principle: Assets must always equal Liabilities plus Equity. This is known as the accounting equation, and it ensures that the financial records are balanced. In modern accounting, software automates this process to maintain consistency and accuracy.

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  • 00:04 The balance sheet, breaking down the essentials.
  • 00:08 This report is a running log of the company's financial balances,
  • 00:13 the checking account, the inventory, the credit card, the loans.
  • 00:18 Really, the company's financial balances, the balance sheet has three components.
  • 00:23 They're assets, this is what the business owns.
  • 00:27 There are liabilities, this is what the business owes, and there's equity.
  • 00:32 Equity is the difference between assets and liabilities.
  • 00:36 A different way to look at this would be to think about after all of
  • 00:40 the liabilities, or after all the money the company owes
  • 00:44 is paid off from the assets, the equity is what's left over.
  • 00:49 I'll begin with assets.
  • 00:51 There are three different types of assets.
  • 00:54 There are current assets, fixed assets and other assets.
  • 01:00 The difference between current and
  • 01:02 fixed is how easily they can be converted to cash.
  • 01:06 Other assets are things that are not tangible.
  • 01:09 They include stuff like patents and goodwill.
  • 01:12 Examples of assets, the checking account,
  • 01:16 accounts receivable, also known as the money, the clients or
  • 01:20 the business, inventory, vehicles, buildings and equipment.
  • 01:26 When an asset increases, the asset is debited.
  • 01:31 The asset could be the checking account, could be accounts receivable,
  • 01:35 could be inventory, you get the idea.
  • 01:38 The credit could be something such as sales, or maybe it's a loan from the bank.
  • 01:43 I'll now explain liabilities.
  • 01:46 Liabilities are the funds that are owned to another company or agency.
  • 01:51 Liability examples include accounts payable,
  • 01:56 credit card balances, loans, payroll garnishments,
  • 02:01 payroll taxes, sales taxes or tips.
  • 02:05 When a liability increases, an account is debited and
  • 02:09 the liability account is credited.
  • 02:11 I'll now go over equity.
  • 02:14 Equity is defined as what the business owners own in a company.
  • 02:18 After all the debts are paid off, equity is what's left over.
  • 02:22 Examples of equity include owner's investment and contribution,
  • 02:27 net income, and retained earnings.
  • 02:30 Just like in the example of liabilities, when equity increases,
  • 02:35 that account is credited and a different account is debited.
  • 02:39 The accounting equation says, assets are equal to liabilities plus equity.
  • 02:46 A different way to think about it is as if there was a scale,
  • 02:49 and the scale is always in balance.
  • 02:52 The assets are always exactly the same as the liabilities and the equity combined.
  • 02:58 When using accounting software, you don't need to do anything to make this happen.
  • 03:03 The accounting software takes care of that for you.

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