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Using a balance sheet
In QuickBooks Pro 2008 Essential Training (www.lynda.com), instructor Suzanne Robertson explores the many powerful features of QuickBooks Pro, the popular accounting software that can be used for everything from handling personal expenditures to creating professional business account records. Suzanne covers organizing inventory and non-inventory items and using the automated EasyStep interview. She also demonstrates how to create and edit accounts, collect and pay sales tax, and handle invoices, vendor payments, and client refunds. Exercise files accompany the tutorial.
Note: QuickBooks Pro 2008 is not currently available for the Mac. If you are a Mac user you will be unable to open the exercise files for this tutorial, however you will still be able to watch the movies.
* Working with the Chart of Accounts feature
* Setting up items
* Tracking inventory items
* Using the Customer Center
* Invoicing customers
* Making client sales receipts
* Applying discounts and credits
* Entering and paying vendor bills
Like the income statement the balance sheet is one of the most important financial reports an accounting system produces. The balance sheet summarizes your company's current value or net worth or at any given point in time.
Let me say that again.
A balance sheet summarizes your company's current value or net worth at any given point in time. Now some of you may be saying, "OK Suzanne, that's great, thanks, but what exactly does that mean?"
Well, I'm glad you asked. If you remember from the previous movie we saw, the income statement tracks revenue and expense accounts to let us know if we've made or lost money.
The balance sheet tracks everything else.
The balance sheet tracks everything that we own, everything that we owe, and the net value between the two. These accounts are called assets, liabilities, and equity.
And before you can understand what a balance sheet is, you first have to understand what assets, liabilities, and equity are.
An asset is something that the business owns. Some examples of assets you might find on a balance sheet are: cash you have in your checking account, accounts receivable which is the money that your customers owe you, an inventory of the products that you sell or equipment that you own.
Liabilities are monies that the business owes to other people. This can be a bank loan, accounts payable which are your vendor bills, or perhaps credit card debt.
Equity is a term whose meaning depends very much on the contacts. In general, think of equity as ownership in any asset after all debts associated with that asset are paid off.
Click Play or press spacebar to start video
To help give you a visual, let's put this concept into a mathematical formula:
assets - liabilities = equity.
A good example of this is let's say you own a building that is valued at $500,000 but you owe $200,000 to the bank. Since you can readily sell it for cash, the owner's equity or net value of the building is $300,000. If we look at this in our formula: assets, a $500,000 - our liability of $200,000 = our equity of $300,000.
Let's look at another example.
This time the owner puts $10,000 of his own personal money into the business for various business expenditures. On the company's books the transaction would be recorded as follows.
Equity is increased by $10,000. The cash or company business checking account is also increased by $10,000. And if we look at it in our formula: assets - liability, which in this case is zero = our equity.
Now that you know what assets, liabilities, and equity are, let's take a look at a simple balance sheet.
At the top is listed the company name, the type of report, and the point in time being recorded. For this balance sheet we're reporting on our company's net worth as of December 31, 2007.
Now remember, as we just talked about the balance sheet reports on the company's assets which are the things that we own, our liabilities which are the things that we owe to other people, and our equity which is the value or net worth of our company.
This balance sheet is an example of how you enter your beginning balances. It's dated December 31st of 2007 and our start date of our business or the day we're going to start operating is going to be January 1st of 2008.
We have $20,000 in assets; $10,000 came from a bank loan. And another $10,000 came from the owner putting money into the company. Net income is currently zero because our first day or start date will be January 1st, 2008, so we do not have any revenue or expense yet to report.
One of the most important things you need to know about a balance sheet is that it needs to balance, thus the name. To balance, the total assets must equal the total liabilities plus equity.
In looking at our example balance sheet, total assets shows $20,000. And remember from the previous slide that money came from a bank loan of $10,000, and our owner's equity of $10,000. Total liabilities in equity then show as $20,000 and our assets = our liabilities + equity. This is no coincidence. When you create your company in QuickBooks and enter your beginning balances, QuickBooks will automatically try to balance your balance sheet for you using a method of accounting called double entry accounting.
Double entry accounting is what keeps the balance sheet in balance. We're going to talk in detail about double entry accounting in the next movie and how to enter beginning balances in creating accounts in QuickBooks later in this title. Let's see what happens to a balance sheet after one month of doing business.
At the end of the following month, which is January 31st, 2008, we have an increase in our assets and an increase in our equity of $25,700. If we look at the income statement for the month of January, we see that we had a net profit of $5,700. This net profit flows onto the balance sheet into equity through the net income line. It also increases our assets by $5,700 which kept our balance sheet in balance.
I think the best way to think of a balance sheet is that it lets you know how solvent your company is.
If I closed my business today and paid off my entire debt, how much money would I have left? That's what the balance sheet tells you.
I would strongly recommend to review your balance sheet monthly. It should coincide with the end of the period for which your income statement was prepared. Understanding your company's financial statements will empower you when it comes time to negotiating with a lender for credit or if down the road you're looking to sell your business.
To find this report in QuickBooks go to the Menu bar, select Company and Financial, and then choose a Standard or Detailed balance sheet you'd like to see.
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As both an experienced artist and an accomplished professional in finance, Suzanne Robertson possesses a unique combination of creative and analytic talents. She utilizes her 20 years of business experience and 10 years of teaching experience, along with a distinct affinity for software, to teach complex subjects in a way that is both easy to understand and applicable to the real world.
Suzanne is happily married and lives in California, where she enjoys being a mother to two beautiful children. She works as a consultant, assisting small business owners in creating and maintaining successful financial practices.