[MUSIC]
Last time we introduced the idea of accounting and
the three types of accounting.
In this video, we will talk about the balance sheet and
define it's three main parts.
We will also briefly discuss why the balance sheet is called so.
The first financial statement, we will look at is called the balance sheet.
It captures the financial position of a company as of for
particular date either the end of a quarter or end of a year.
It comes of three parts assets, liabilities, and shareholder's equity.
These parts show what the company owns, what it owes and
how much shareholders have invested in the company.
Assets represent the resources owned by a company and are used to generate
future economic benefits in the form of either higher cash inflows or
lower cash outflows.
Examples of assets are cash and equivalents, inventory, property,
plant and equipment, and intangible assets like patents and trademarks.
Assets are further classified into current and non-current assets.
Current assets are those assets that are expected to be converted to cash.
Sold or consumed within the next one year.
Any asset that is expected to be converted to cash, sold or
consumed after one year, is categorized as a non-current asset.
Liabilities represent the company's economic obligations to outsiders.
These outsiders have claims against the company's assets.
Examples of liabilities are accounts payable, short-term borrowing, and
long-term debt.
Similar to assets, liabilities are also classified into current and
non-current liabilities.
Current liabilities are those that are expected to be paid within one year,
while any expected to be paid after one year is a non-current liability.
The last part of a balance sheet is the shareholder's equity.
This represents the company owners' claims on the company's total assets.
It consists of owners' investment in the company
as well as aggregate undistributed profits called retained earnings.
The balance sheet get its name as it has to balance sold at all times,
that is assets must equal liabilities plus shareholder's equity.
Assets represent how the company uses its resources but it's liabilities and
shareholder's equity represent where the company gets its resources from.
These must equal each other at all times.
One of the important things to remember about the balance sheet is that
all items are recorded at historical cost.
They are never updated to current market values or prices.
In a balance sheet, assets typically appear on the left side or at the top.
And liabilities and shareholders equity appear on the right side or at the bottom.
However, this may vary from country to country,
depending on local accounting roads.
In some countries the order may be reversed.
Next time, we will start looking at the balance sheet in greater detail,
starting with the assets side of the balance sheet.
[MUSIC]