Hi and welcome to another lecture in discourse, and today we will talk about a very exciting topic
called the balance sheet.
But before we do that, let's remind ourselves with what we covered so far.
So we started by talking about the differences between bookkeeping, accounting and finance.
And we said bookkeeping is the recording of financial transactions.
Accounting is the bookkeeping and the preparation of financial statements.
And finance is how to manage the accounts within these financial statements.
And we covered last session the first financial statement, which is the income statement.
Today we will talk about the balance sheet.
So let's just remind ourselves of what is the business objective that we covered last session.
We said any business will have an objective of making profits so the business will try to make or produce
a good or service, sell it and make some profits.
Something really important for businesses to have is what we call assets.
So these businesses will need resources in order to be able to make the products or services.
So if we think together of a pizza restaurant, what they try to provide pizzas now?
Can they provide pizzas without even without the mixer to do the dough, without having a shop, without
having a van to deliver these pizzas?
The answer is no.
So all of these resources that the business need to own, all of these objects, the business owners
are called assets on the balance sheet.
We try to look at these assets and how they were financed.
So a balance sheet is just a report that is prepared by the company to show what of the assets the company
owned and how these assets are financed.
So are they financed through liabilities or equity?
And this is what we will discuss.
So in the income statement, we were looking at accounts like revenue expenses in the balance sheet.
We will look at accounts like assets, liabilities and equity.
The income statement, if you remember, we said it's more like a video where you record all the transactions
for the period.
Now the balance sheet, it's more like a picture where you record the the value of these assets at the
day of repairing the balance sheet.
So we call it as of that day, what was the value of the assets, the value of the liabilities and equity?
One important fundamental equation in accounting, it is called the accounting equation, states that
total assets must equal total liabilities on equity, so assets from one side must equal both liability
and equity from the other side.
And this is the name for the balance sheet because there's that's why it's called the balance sheet.
There is always a balance between assets from one side liabilities and equity from the other side.
So let's focus more on the assets.
And we said these are economic resources owned by the business and they have some benefits.
They must have some benefit in the future to bring to the business.
Now we have two main types of assets.
The first one is what we call the noncurrent asset, long term asset, fixed assets, three different
names for exactly the same thing.
And the second type is what we call the current assets now in accounting and finance.
Wherever you see current noncurrent, most of the time the current means something has one year expiry
or one year's duration and long.
That means it runs or has a date that is more than one year.
When we talk about assets, the long term assets of those assets that the business can use for more
than one year.
So a noncurrent assets are resources, items, objects the business and can benefit from for longer
than.
And you have this list of examples now, the current assets, all of the resources that the business
will benefit from in the short term, which is something less than a year or so of the date of repairing
your balance sheet, you will look at each of these accounts and think from this date of preparing the
balance sheet, is this account going to last?
Am I going to benefit from this account for more than the upcoming year?
Or this account will be utilized, consumed within the year.
And based on that, you classify that account, whether it is a long term noncurrent or on assets,
obviously cash, accounts receivable and inventory of the most popular types of accounts under the current
assets, cash.
We know what cash is.
Accounts receivable is how much money your customers or you.
So you know, you some businesses will sell on credit, not on cash.
So these customers where we sold our services or product to on credit, the total value of the money
owed by the customers to us at the date of preparing the balance sheet will appear on the account receivables
and inventory is just the value of the stocks we have in our warehouse of the day of preparing the balance
sheet.
So these are the main types now.
Liabilities on the other side is the obligations.
These are amounts owed by the business.
So these are obligations that the business has to pay to other parties.
Again, the same logic we have current liabilities, noncurrent liabilities, current liabilities of
those liabilities that will due within the next 12 months off the date of preparing good balance sheet.
And these are just examples, payables.
That's anything that is an expense you should have paid for, but you did not.
So if you receive the, let's say, electricity bill for your business for the month of January, four
hundred pound and for one reason or another, you did not pay it.
Now, in February, if you prepare a balance sheet, you need to recognize this hundred pound as a payable
to the electricity company.
So this is an obligation.
You have to pay it, but you still did not pay that overdraft is a facility from the bank.
I think it's is tax liability is again, tax amounts.
You have to pay to the authority, local authority.
But you still did not pay it.
Tried payables is the amount that you owed to your suppliers.
So some businesses are able to buy stocks and raw materials on credit from their suppliers.
So the total amount of the money owed by you as a business to these suppliers will come under trade
payables.
Now, long term or noncurrent liabilities, any liability that will due after the year.
So this will include long term loans and not payables, mainly bonds.
So equity, the third type of accounts and the balance sheet is any money or goods invested by the owners
in the business.
So any investment from the owner will come under equity and sometimes we call it the capital.
So if we go back to Jack drinks from last session and if we know this information about Jack at thirty
first of January, so we know that Jack bought two fridges, for example, we know Jack keeps five hundred
cans and stock and all these details.
We can move on to prepare a balance sheet for Jack.
So the structure of the balance sheet again, you'll start with the name of the business, then the
name of the statement.
So in this case, it's a balance sheet.
And you mentioned the date as of.
So remember, the income statement was income statement for the period.
So for a month now, this is as of.
So as of Thursday, the 1st of January, this is the value of the assets of jack drinks and the value
of the liabilities and equity as well.
Remember, total assets must equal the total liabilities on equity and thus why we call it a balance
sheet.
So.
I really hope that you did enjoy this session next session.
We will talk about the cash flow statement, so I will see you then.
Thank you very much.
Goodbye.