Balance Sheet Secrets REVEALED with a Fun Demo

Balance Sheet Secrets REVEALED with a Fun Demo

In this video, we’re
going to cover the basics of the balance sheet. It’s also called the statement
of financial position. This is where many people get confused. I’m going to be honest with you. It confused me for many years. I’m going to explain it with a fun demo. You’re going to see what I mean, but before we get to the fun part, let’s just cover the theory first. The balance sheet is one of the three main financial statements. The other two are: income
statement and cash flow. It’s critical to know how
to read a balance sheet. If you want to understand the
financial health of a business, that’s the place to start. So, let’s get into it. (relaxed instrumental pop music) The balance sheet looks like this. (laser swoosh) Its purpose is to provide an idea about the company’s financial position at a certain point in time. It doesn’t show the flows into and out of the
accounts during that period. That’s important to remember. A balance sheet always
only shows you information at a particular point in time. That’s usually the end
of the financial year, or for listed companies, it’s also the end of a
quarter or half year. Now, in the case of
Microsoft in our example, it’s as of June 30th, 2018. It shows you which
assets the company owns, the liabilities it owes to others, and the equity that belongs to the owners. In the first Accounting
(laser swoosh) Basics video in the series, I’m going
to add the link to it in the description of this video. We showed the balance
sheet at a T-account. It looked like this. Now, Microsoft’s balance sheet isn’t structured like a T-account but in a list type of form. It could also be shown like a T, and you can see that both
sides are in balance. In this form, it’s just easier to read. Now that we cleared that up,
let’s use a very simple example to see how these components work together. I learned this from a fellow
teacher and colleague of mine from the controller institute, and I really like the explanation. So, let’s start with the
fun part. (finger snap) (laser swoosh) Let’s say
we create a new company. What do we need for that? Cash, right? Where do we get it from? Well, one way is that as
the owners of the company, we’re going to put in our own
private money into this company. That’s called the equity. We’re going to show this
with a glass of water. I marked the current level of
equity with a green line here, but here’s the thing. For most startups, its
own equity is not enough. We need additional funds and
we’re going to get a bank loan. In our example, this glass of orange juice represents our bank loan. I marked the current
level with a red line. Now currently, we only have
balances on the credit side of the balance sheet. The balance sheet doesn’t
balance, so what’s missing? Credits represent the source, meaning where the money’s coming from. We are missing the debits. Debits represent a destination, meaning where does the money go to? Or, what is it spent on? In our case, we didn’t
spend it on anything yet. All the money went to the cash account. (relaxed instrumental jazz music) (liquid pouring) The cash account consists
of the money we got from the owners and from the bank. So, by just looking at the cash account, we can’t distinguish what came from where. So, how much is our own funds and how much is externally financed? It’s just cash, (tapping
glass) orange juice with water. What does the company do with its cash? It’s probably going to invest. Maybe it’s going to buy machinery. Now, how does that
affect the balance sheet? We take money out from the cash account and we put it into equipment. (relaxed instrumental jazz music) (liquid pouring) The total amount of assets
doesn’t change by that. We have less money in
the bank but in exchange, we have the value of the equipment. Now, if you start using the machine, it’s going to lose its value
because we’re using it. In accounting, this is
reflected by depreciation. Also, the company incurs expenses like personnel costs for its employees, because we have to pay salaries and wages, and these are taken out
of the cash account. In both cases, the financial
value of the company decreases. At the same time, our customers are happy and they pay for the products
and services they got from us. So we get money from them (liquid pouring) in our cash account. Now, we want to know if
in total we increased the financial value of the
company since we started. What do we need to do? We need to add up the value of the assets available at this point. So which assets do we have? We have the current
value of the machinery, which is what we initially paid
for, minus the depreciation, so which is the decrease in
value because of wear and tear, plus what we currently have in the bank. (relaxed instrumental jazz music) (liquid pouring) That’s the total assets of the company. Now, from this total, we need to deduct the debt of the company. We can see this with the
red marker on the glass. (liquid pouring) Now, if the value of the remaining assets is higher than the original
equity the owners paid in, the company made a profit and
increased its financial value. (liquid pouring) Let’s check. If it’s less, we made a loss. Now in our case, it’s
higher than the green line, so we made a profit and increased
the value of the company. The important part of this
exercise is that (laser swoosh) the glass with the
equity was always empty. It stood right there. That’s because equity on its
own doesn’t really exist. What exists are the assets
of the company and its debt. Equity is just a calculation
of total assets minus debt. It exists only on paper. The more assets a company
has and the smaller its debt, the bigger equity will be. So let that sink in. (laser swoosh) It all comes back to the main accounting equation: assets equal liabilities plus equity. If we rearrange this, equity equals assets minus liabilities. The higher value for assets and
lower value for liabilities, equals higher equity. I hope this fun demo was
helpful to understand the mechanics of the balance sheet. And I also hope you’re
enjoying our finance series. Let me know in the comments below if you want me to cover a specific topic. If you enjoyed this video,
give it a thumbs up, (pop) and if you want to improve your skills, consider subscribing, (clicking) and don’t forget to hit
(bell ding) that bell so you don’t miss any new videos. Thank you for watching. See you in the next video. (relaxed instrumental jazz music)

100 thoughts on “Balance Sheet Secrets REVEALED with a Fun Demo

  1. Great explanation! Using the visual of orange juice is a perfect way to demonstrate the function of the balance sheet. Love your videos, thanks for producing them.

  2. Dear Leila, this is fantastic demo video, it goes straight to the head. But a Million dollar question is, how do we make use of such information to identify a company which has higher probability to make profit in the future, so that we can invest now for future profit.
    My recommendation, please make a video explaining in depth how to encash such information to make money.
    Thank you so much for creating such a wonderful video, with nice presentation and perfect colourful graphics adds the value of understanding

  3. Thank u so much..u explained it well so tat anyone can understand it easily… And u look sooo beautiful ๐Ÿ˜Š

  4. You were the only one enjoying yourself, you made us watch you drinking the juice, without sharing some with us. Jokes apart, thanks for the "Fun Demo."

  5. Good morning. Can you link the equation to e1 SUM(D5:D20) according to the variables in b1, b2, which are related to the values in a1, a2?
    That is, if you change the value from 100 to 30 and from 25 to 10 in column A, the equation in E1 becomes SUM (D2: D6).
    Please report on this issue and thank you very much

  6. This series is great! Congrats. One question I've always had is: why do assets increase by debit? The only answer I could find was "that's just the way it is", or "because the double entry system requires there to be a credit and a debit, and the liabilities are credits, so..". But I still can't understand the underlying reason. It is counterintuituve that assets (cash for example) increase by debits.
    If you could explain this, it would be extremely helpful! Thanks!

  7. You are detail clever

    if you make videos for NEW short sell
    I will take you in my hedge fund !

    muddy waters(carson block)
    asencio .com
    crispin odey
    simon cawkwell
    andrew left

  8. make spreadsheet that blink in red
    (intangibles+goodwill) > long term assets

    cash < short term debt

    cash <payables

    debt for 1 year = +20%

    goodwill for 1 year = +30%

    recivables = +20%

    payables > recivables

  9. Your new video series is great for viewers but made happy other excel tutorial channels and worried accounting tutorial channels…
    BTW my request – can you make a video on how balance sheets are manipulated?

  10. Easy to understand, nice explanation with practical, I am waiting more videos like this,
    Looking pretty so beautiful

  11. fantastic video! I was lacking a basic understanding of accounting and balance sheets. this really cleared things up. Thank you!

  12. Quick question .. can you please stop with the sexual suggestive thumbnails? You are an educational channel not a teen vlog channel ffs .. all these indians in comments are drooling over you "professionally" .. just STAHP

  13. Hi what I would like to ask you is if you could include topics such as prepaid expenses prepaid income (treatment in Balance Sheet) and topics such as treatment of PDC's in balance sheet

  14. I liked a lot the part when you drank the value of depreciation and salaries, it is true, it evaporates every month from company assets. A really suggestive explanation of the balance sheet. Great understanding comes from simple things, explained beautifully. Once again, dear Leila, a splendid work. Keep going, your audience thirst for knowledge will never vanish.

  15. Great explanation, thanks.Now I got a question for you pretty lady. Is it possible to make dynamic Excel database, where one have several mutual funds gaining or loosing market or book values with a pivot table? I just know very basic Excel.

  16. Hi Leila..Since you share so many excel tutorials..just wanted to know if there are some ways to reduce excel file sizes since I work with very heavy excel models and sometimes it becomes very difficult to work in excel due to heavy sizes..

  17. Nice and easily explained, Thanks. In a future video can you go over depreciation to assets with the relation to taxes/balance sheet. I was in business (construction) for many years, I'm retired now but depreciation of equipment and replacement of same actually saved me on taxes once I understood it. Again Thanks.

  18. In my line of work, I really don't need true accounting; yet I learned something new in a very exciting way today.
    On another hand, I work in the best Medical Center in the middle east (AUBMC) and I am encouraging my colleagues to subscribe and follow you.
    Thank you for your effort.

  19. I am a CMA and I see u explains splendidly. Maybe if I explain the topic half ppl will not understand. Good Job LG. Keep up the spirit and the next topic should be Cash Flows.

  20. Greta Video as the first one Leila. What i always miss …. how is the equity now translated back to spendable money into shareholders pockets? Selling the equity only ? Dividends ? But dont take dividends hundreds of years to get the money back?

  21. Thank you Leila for sharing. I know we can insert watermark into excel sheet, but can we insert different watermark to different excel tables?

  22. Help on the purpose of so many accounts in the General Ledger would be great. In computer programming we are always moving money into various GL accounts, and when new lines of business, the get new account numbers. I want to know why?

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