Intro to Financial Statements - The Balance Sheet
Our video series on Financial Statements kicks off today with an explanation of the Balance Sheet. We will explain the key accounting equation “Assets = Liabilities + Equity” and what each section of a Balance Sheet means. Send us any thoughts you have on topics you’d like us to cover in our videos. We’re here to help.
Fundamental takeaway - understanding this key accounting principle:
Assets = Liabilities + Equity -or-
equity = Assets - liabilities
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Hi, I'm Burton. I'm the founder and CEO of Sutro Li. We provide accounting for great causes. We're doing a video series to explain the financial statements and today's discussion is about the balance sheet. I noticed that a lot of our clients gravitate more towards the profit and loss report, also called the income statement. And they don't focus as much on the balance sheet.
So today's video is to encourage you to understand the balance sheet better and to know what the different numbers and the different areas of the balance sheet, what they mean. Let's have a look.
This is a sample balance sheet. I want you to notice a few things. Total assets is just over $21,000 and you'll see that same number at the bottom of the report, total liabilities and equity, same number.
That's why it's called a balance sheet because the top of the report will balance and match the bottom of the report. The top of the report is your assets, the bottom of the report is your liabilities and equity. And so that can be understood as the equation, assets equals liability plus equity. This is a key accounting equation. Accountants will also say A equals L plus E, I'll get back to that a little bit later.
So what is an asset? An asset as a resource with economic value that an individual, a corporation or a country owns or controls with the expectation that it will provide a future benefit? Some examples of assets would be cash investments, land buildings or equipment. So what's a liability? A liability is a debt, something a person or a company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods or services. Some examples of liabilities would be sales tax, payroll tax accounts payable, accrued liabilities or credit cards. These are all debts. They would show up on the liability section of your balance sheet.
And then what is equity? Equity is the amount of money that would be returned to the owners of that business if all the assets were liquidated and all of the company's debt was paid off in case of a liquidation, the equity section of a balance sheet will detail net income or current year earnings. This is the amount of year to date profit or loss and that number will tie to the income statement.
It's also important to note in equity for nonprofits, equity can be restricted for use within a certain amount of time or for a specific purpose. Here on the equity section of the balance sheet, current year earnings, this $1634. If we pulled an income statement for the same period of time, from the beginning of the year up through May, it would explain how this profit of $1600 was created.
And again to recap, this is the company's value at a single moment in time as of May 31st and it's the value of the assets and the liabilities and the equity, the top of the report will balance with the bottom of the report. Assets equals liability plus equity. I noticed that equity is one of the concepts that's a little trickier for our clients to understand. There's a way of rephrasing this accounting equation to understand what equity is.
So assets equals liabilities plus equity, you can take away liabilities from both sides of the equation to rephrase as equity equals assets minus liabilities. Sometimes that's a little easier to understand: Your equity is what you would have after you paid off all of your debts. So to recap, balance sheet is the company's value at a single moment in time. It's not a range of time. It's a single moment. The key accounting equation that is represented on the balance sheet is assets equals liabilities plus equity, which can also be understood as equity is your assets minus your debts, and the current year earnings or your net income will always match between the balance sheet and the income statement. That's it for today in our discussion of the balance sheet, we're here to help, let us know if you have any questions.