Balance Sheet

Quick reference

• 00:04 The second of our three financial statement types is the balance sheet,
• 00:08 from the artist formally known as Prince.
• 00:11 Sorry, the net worth statement.
• 00:13 This shows what we're worth at a point in time.
• 00:17 As I said, it's the second of the three financial statement types.
• 00:22 Sandwiched between the income statement we talked about last time out and
• 00:26 cash flow statement we'll talk about next time.
• 00:29 Now there are different presentations of the balance sheet.
• 00:32 But the whole point is, it's gotta balance like the graphic display is.
• 00:37 You've got what's called the total assets section of the balance sheet,
• 00:42 which is split between current and non-current.
• 00:45 This doesn't mean I'm talking about electricity companies.
• 00:48 This is actually about items that have value within the next year,
• 00:52 being current, or greater than one year, non-current, or held for
• 00:57 continuing use, or defined for that reason, like deferred tax.
• 01:01 And if you don't understand what I'm talking about there, don't worry.
• 01:04 We're going to talk about tax to the nth degree later on.
• 01:09 So we have in current assets things that can be readily got rid of, and
• 01:13 readily got rid of is in inverted commas or
• 01:16 speech marks because it might not be as easy to get rid of as you might think.
• 01:20 We've got cash, well, that's pretty easy to get rid of,
• 01:23 just look at my bank account every month.
• 01:26 Account or accounts receivable,
• 01:28 that's going to be what's owed to you, so supposedly cash in the future,
• 01:33 and other current assets you might have in there like inventory.
• 01:37 Non-current assets will be assets held for continuing use in the business or
• 01:41 with a life of greater than one year, or both, such as PPE.
• 01:45 That is not politics, philosophy, and education.
• 01:48 That is property, plant, and equipment.
• 01:50 And other non-current assets are other things that might be in there
• 01:54 like vehicles or intangible assets like patents,
• 01:57 copyrights, those sorts of things.
• 01:59 Added together, that gives us our total economic benefit.
• 02:03 These are assets.
• 02:04 Now we don't have to own these, we only have to be able to control them.
• 02:12 What we do then is we offset this against current liabilities.
• 02:17 So we have bills due, like accounts payable, so that's the bills we owe.
• 02:21 And then the other current liabilities that might fall due,
• 02:25 such as dividends we actually have to pay, tax and so on.
• 02:29 Again, current means within the next 12 months.
• 02:32 Non-current, well, if there's debt that's going to take longer than a year to pay
• 02:36 off, that's been there, and any other non-current liabilities.
• 02:39 Now what happens is, to confuse matters, is typically assets and
• 02:43 liabilities are both shown as positive numbers on the balance sheet,
• 02:47 consistent with the modeling idea that you should always try and
• 02:50 have everything as a positive number so you can follow it.
• 02:53 That's fine.
• 02:55 Just be aware though that sometimes alternative presentations will actually
• 03:00 have the liabilities as negative.
• 03:03 Then we have the third section, the equity.
• 03:05 This is what used to be said as finance but confused people,
• 03:09 because they thought well, why is it debt down there?
• 03:12 So we've got our ordinary equity,
• 03:14 how much money has been paid in to get this business going.
• 03:17 What's our net profit after tax, that's for the current period,
• 03:20 and any retained profits from previous periods.
• 03:22 There can be other types of reserves in there as well, such as revaluations.
• 03:26 So if assets get valued after being purchased upwards,
• 03:29 then to balance that off you would actually show it in the equity section.
• 03:33 So if property, plant, and equipment doubled in value,
• 03:35 you'd actually show it going up in total assets and the increase would also be
• 03:39 shown in the equity section as a reserve called the asset revaluation reserve.
• 03:43 The big question here is, are you still awake?
• 03:47 Now, there's two key presentations for this.
• 03:49 The one I've shown you here is what's done under what's called IFRS,
• 03:54 International Financial Reporting Standards,
• 03:56 where you offset assets against liabilities to show your net assets.
• 03:59 And the whole idea of this is you've got to make that a non-negative number.
• 04:04 If that goes negative, that means you owe more than you've actually got and
• 04:08 you've become what's called insolvent and
• 04:11 you're not supposed to continue trading when that happens.
• 04:15 All of this, the assets and liabilities are what you control,
• 04:17 whereas the equity side is showing you what you own.
• 04:20 It shows the ownership structure.
• 04:22 Now American accountants tend to use what's called US generally accepted
• 04:26 accounting principles, US GAAP for short.
• 04:29 And they have positives on one side, being the assets, and they lump liabilities and
• 04:33 equity together.
• 04:34 And that's fine too, you know what, doesn't matter.
• 04:37 Whichever way you show it,
• 04:38 you're actually having what's called the accounting equation here of assets,
• 04:42 liabilities, and equities, and the whole thing's got to balance.
• 04:45 That's what it's about.
• 04:47 It reports a financial position for a point in time.
• 04:50 It shows you what a business is worth.
• 04:53 The net assets reflects control.
• 04:55 Total equity reflects ownership, even if it's not displayed under US GAAP.
• 05:00 And it's got to balance.
• 05:02 The end.
• 05:03 Now, what was the third one?

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