Elements of a balance sheet

Lesson Details:

Video Transcription: Now I want to give you a balance sheet introduction and this can sound like oh my god we're getting into complicated finance is complicated accounting don't worry this is only going to be an introduction really if you have a bigger company you have an accounting department that does it for you and if you have a smaller company you may not need to do this or it might be actually really really simple simpler than you ever thought so in a balance sheet there are three things kind of you can look at them at three big parts your assets your liabilities and your equity assets are things that your company has liabilities I think that it doesn't have like it things you owe me money coming out of the business and the third item your equity is essentially assets minus liabilities let's take a look at them in a little more detail when it comes to assets there are two types of assets the first type is your current assets it's basically like cash and stocks you own things that you actually own and something called accounts receivable that's an accounting term basically meaning money that's owed to you you didn't get it yet but it sold to you or any kind of advance payment you made let's say you made a payment for some service for the next five years well that can count toward your assets because you're gonna get something for the next five years now there's also fixed assets these are things like property or equipment or supplies that you own so let's say you own a truck well you own a truck and it's worth let's say ten thousand dollars well that's your fixed asset you own that and you can add this in an Excel spreadsheet you can just put this create a column assets and itemize this and list all the things you own.

So you'll have your assets and before we move on there's another kind of acid many businesses don't have this especially startups but intangible assets like intellectual property so you can itemize all these and then move on to liabilities the same thing you would just do this in an Excel spreadsheet and create a list of what are your liabilities and again there's current liabilities and fix lie abilities current liabilities are ongoing payments for example this can be payroll to employees or payments to vendors or service providers that you use those are your current liabilities and there's accounts payable which is an accounting term meaning money that you need to pay somewhere you haven't paid it yet but you need to pay and of course there's the fixed liabilities these are things like bonds or loans that you owe maybe you have like employee pension plans or a mortgage that you have to pay off and you have that those are your fixed liabilities and your equity is calculated very simply is just whatever number you came up with the assets minus your liabilities and it basically gives you a financial snapshot of your business if your business is going well but like you have a lot of loans well it's not that great right because you if you have to keep taking loans to finance your business that's a problem and this can uncover issues that maybe on a day-to-day basis like you kind of ignore when you go assets minus liabilities if you get a negative number that's a problem if you get a positive number that's good and the more positive it is the better of course hopefully it's not negative so do you have to do this well not really you can actually avoid this because like I mentioned if it's a company that you're just starting out you don't have many assets you don't have many liabilities and if you have a bigger company somebody else has to do this like an accountant and usually you have one on hand who works on this so if you are an entrepreneur if you're just planning your business you might think like oh I need a balance sheet but really in most cases for students in this course it's not that helpful.