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Balance Sheet Explained in Simple Terms - Accounting Balance Sheet Tutorial in Excel

welcome to the balance sheet explained

in simple terms in this video I'm gonna

explain our accounting report the

balance sheet and I'm gonna explain it

in simple terms quickly and simply as

usual on this channel which reminds me

Amanda here you're watching the business

finance coach where I simplify business

if you're new here consider subscribing

while still watching this video if you

aren't aware I give away the free

business spreadsheet template which I am

showing me in this video you can get

that for free to organize your

accounting in taxes as a small LLC or

self-employed business owner but the

balance sheet template is only in my

small business MBA course do download

that spreadsheet if you want to learn

more there's a whole video eCourse that

goes along with it for now back to the

balance sheet explained in simple terms

we're gonna start out with a few basic

concepts about accounting in business so

accounting is to business what a

languages to communication accounting

records keep track of every transaction

that affects value or something that has

monetary value money in a business and

then a business owner or owners or

investors or any interested parties can

understand that business by looking at

the accounting reports now there are

tons of accounting reports but the two

main accounting reports that are the

biggest picture reports that are

required if you want to buy or sell a

business get a loan to do anything

having to do with monetary value of a

business you are going to look at the

income statement and the balance sheet

and honestly these two reports are

reports that business owners should be

looking at on a regular basis at least

monthly so while we are talking about

the balance sheet in this video I do

need to say that the income statement

and the balance sheet cover the entire

picture of a business and they work in

tandem with each other

the balance sheet represents value while

the income statement reports

profitability think about your bank

account for a second does your bank

account tell you how profitable you are

what is the value of your bank account

so you could only look at the value of

your bank account on any given day you

have to actually look at your bank

account balance value at a certain

moment in time in order to know what the

value of your bank account is in order

to know how profitable you are you would

need to look over a period of time and

see how many deposits of income came

through I'm going to come back to this

individual example once we go over the

link between the balance sheet and the

income statement because that's critical

to understand to understand how all of

accounting works and how the value of

the business is represented in these

reports for now let's jump into the

balance sheet so you can see reports are

always structured the same the name of

the business goes first the name of the

statement second and for a balance sheet

we would insert the date that this

balance sheet is for here as of XYZ date

now the balance sheet has three sections

assets things we own equal liabilities

things we owe plus owner's equity so you

can see that down here total assets are

a hundred and forty thousand two to

eight total liabilities and owner's

equity one forty two to eight this

statement represents the accounting

equation assets equals liabilities plus

owner's equity and what this means is

everything I own is equal to everything

I owe plus my owners equity in the

business and this owner's equity this is

where the link comes in to the income

statement this is how the income

statement and the profitability of the

business affects the business value so

first let's take a closer look

at these accounts now one concept you

need to be aware of is short term and

long term something is short term if it

has to do with less than a year and

things are long term if they're more

than a year so with assets we have

current assets we start with bank

balance that's something we own right

your bank balance has a value as of a

certain day and it's something new own

now your current assets are listed in

order of liquidity and liquidity means

how quickly it could turn to cash so

obviously a bank balances first because

it is cash accounts receivable

represents money receivable customers

that are going to pay you money they owe

you money you've already recorded the

work that you've done for them as

revenue on your income statement and

you've done everything you needed to do

to earn that money you're just waiting

for them to pay you then we have our

prepaid expenses what happened here was

we paid money from our bank account on

expenses but we can't deduct those

expenses yet on our income statement so

instead we record it here until it will

be moved to our income statement because

we still have that value technically in

our business that other company didn't

earn our prepaid expenses that we paid

yet they would have to give us that

money back if they don't fulfill their

promise lastly there's inventory so as

you can see inventory would take the

longest time to turn into cash we'd have

to sell it for sales in our business and

here we have our total current assets

next we have fixed assets assets means

anything that we own that's used in the

business and fixed assets represents any

asset that has a life of more than a

year and we plan to use it for more than

a year things like a building office

furniture equipment of any kind and with

fixed assets they remain on our books at

our purchase cost basis we get to take

depreciation expense

over time so our balance sheet always

shows the value of our assets and then

the value of total depreciation expense

having been taken in the business to

date which is represented with

accumulated depreciation account and

this amount offsets all of our assets so

the net amount goes here seventy nine

thousand two hundred so eventually our

accumulated depreciation could be the

total amount of all of our assets and

this amount would be zero but we can

still see the value of all those assets

on our balance sheet which can be really

helpful for people looking at the value

of the business then we have our total

assets down here summing this subtotal

column next we have the liabilities and

owner's equity section first with

liabilities we have current so unearned

revenue these are amounts that customers

paid us in advance so in this case we

have a liability to perform whatever we

do to earn that money accounts payable

that could be expenses or services that

we owe to another business in general

longer-term do liabilities things that

you owe such as an SBA loan or a

mortgage will show up in this section

and our total liabilities are summing

over here now even something like a

credit card would go in the liabilities

section owner's equity here we have

retained earnings and our owner capital

accounts so any money that the owner

puts into the business and any money

that the owner takes out of the business

that's tracked in a contributions

account and a draw account with the

total amount represented under owners

capital now you need to have an account

for each owner or for each types of

stockholders it depends on the type of

business as far as what the owner

accounts will be now last but not least

we have retained earnings retained

earnings reflects earnings that the

company has made to date this is how the

income statement gets to the balance

sheet so the income statement

is revenue total sales minus expenses

equals net income or lost and I have a

real income statement over here in the

template total revenue by month expenses

by month and that equals our net

business income or loss if expenses are

more than income there's a loss and that

amount is going to go into retained

earnings at the end of each period now

there is a major accounting concept that

makes all of this work in accounting

there's no negative numbers and instead

the balance sheet all of these accounts

seen here are called permanent accounts

they are running total since the

business began and they all start at

zero on the other hand our income

statement accounts revenue and expenses

these are temporary accounts at the end

of each period often a year for most

businesses these accounts start over at

zero and run for the period to track

income in expenses so that we have our

net income and then that amount gets

transferred into our retained earnings

so that these accounts can start over at

zero for the next period and track what

profitability alright guys that's all

for the balance sheet explained in

simple terms do let me know if you have

more questions if you are interested in

my business spreadsheet template check

out the link to my website below if

you're interested in the balance sheet

template specifically do check out the

small business MBA do let me know if you

have questions in the comments below

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bye