Now you know what a balance sheet is. But how does it actually work? Day 1, you have just created your own graphic design firm. On the first day, you deposit $5,000 into the business bank account. Later that day, $50 is withdrawn and deposited into petty cash. On the balance sheet, the amount in the bank account is listed as $4,950 and the amount in petty cash is listed as $50, which makes the current assets and equity $5,000. Day 2. On the next day, you buy $2,000 worth of posters to sell. You now have $2,950 left in your bank account and $2,000 in inventory. Day 3. The following day, you take $500 in posters and sell these posters at a local concert for $650 making a profit of $150. Afterward, you deposit these funds. Your bank account increases to $3,600, the amount in your inventory decreases to $1,500, and your current earnings increase to $150. Day 4. On the fourth day, you decide to buy a van to get to concerts more easily. You're able to take out a loan and buy the van for $4,500, which will be paid over three years. On your balance sheet, the vehicle value of $4,500 is listed under fixed assets and $4,500 is also added to long-term liability since it will take longer than 12 months to pay off. Day 5. On this day, you buy a graphic printer for $1,800. You were able to open an account with the company, so you don't have to pay for it all right away. But you do have to pay in full by the end of the month. This increases your fixed assets by $1,800, but also adds $1,800 to your current liabilities since it will need to be paid off within 12 months. Using the equation, assets equal liabilities plus equity, we can see that your sheet is balanced with a total of $11,450 on both sides. This actually shows up on the balance sheet, and I'll just go ahead and open a balance sheet. I'm going to open the Reports center. I'm right-clicking to open it in a new browser tab so I don't have to leave my chart of accounts up here. I saw the chart of accounts open on this tab and now I'm going to open the Reports center and I'll just show you that the order of the chart of accounts actually mirrors on the balance sheet over here. Bank account's at the top, current assets here, totaling, it's giving me sub totals now. Now, if I added up all my cash, everything the company owns, they've got 251 grand in stuff they own. As soon as we get past fixed assets, we start showing the debt, which is liabilities on the balance sheet. We've got accounts payable, credit cards, other loans like the PPP loan let's say. Total liabilities is 625. If you think about it, this is more than what they own, so they have a lot of debt at this company. The difference being their equity in the company. They liquidated today, sold all their assets, and paid off everything, they'd still be in debt. If you look, total equity is a negative 373,000. This is showing the value of the business if it was going to be liquidated today. Not good. The chart of accounts actually mirrors here. One other thing I should mention, the next part of the chart of accounts, after the equity accounts are income, you seen them here, cost of goods sold, expenses. What financial statement is that? Well, let's open the tab again. New Tab, I'm going here, and we're going to open the Profit and Loss statement. Same order. Let me get down there. Profit and Loss is going to show income costs and its subtotal. Cost of goods sold, I got a subtotal there, and then all the expenses down here. That's a lot of expenses. Here we go. Basically, you take income, you subtract cost of goods sold and expenses, you're going to get this, net income. The bottom line, this company during this period that we're looking at, are losing money. Basically, the chart of accounts is the balance sheet at the top and the profit and loss statement at the bottom, and as you are entering transactions, you are changing these numbers. Let's say I write a check. I'll just do one really quick. I'm going to write a check out of the checking account. You choose the source bank accounts, so this is going to come out a company checking, and pull a payee in here. Let's say I'm paying the supply store. I do have bills or a purchase order. I'm not going to acknowledge that right now. I'm going to put this to office supplies, and we're going to buy $1,500 worth of something and book it to office supplies. Basically, I'm taking $1,500 out of this checking account. QuickBooks is showing me the balance. If I go to the balance sheet, this is as of last year, let's through today. I'll just do all dates. This is 68,996 on the balance sheet. On my check, I'm getting the same number, and I'm about to take $1,500 out of there and I'm moving it to this category, office supplies. I'm going to hit "Save and Close". It says I'm duplicating a check number. I'm not going to worry about that. Now my bank balance, all dates, run that report, and I'll scroll down to office supplies, which is right here. Click on the number, and here's my $1,500 check. I took money off the balance sheet in the cash account, reduce cash available, spend it on office supplies, which then hit the profit and loss, and the chart of accounts ties all of them together. Now you know why it's in the order it's in and how we're moving money up and down this list of accounts to get those final numbers.
