11.3 - Balance Sheet (logic and flow)

-The balance sheet is a financial document that is very commonly used for high level financials, I.e. banks loans, investors, taxes, etc. The balance sheet has 3 main categories that the details get divided into. They are assets, liability, and equity accounts. Sometimes people will use the acronym “ALE” to quickly remember those 3 categories.

-Assets are things that you own. Monies in the bank, inventory on hand, and other things that have a significant value that you need to track. It could also include monies owed to you for good and services previously invoices (accounts receivables). There are chapters and chapters of all the things that could possibly be assets, this is just a quick list for an idea.

-Liabilities are things that you still owe or may owe on. This could be things like loans, taxes, coupons, loyalty points, gift cards that you have already collected on, accounts payable, bills that are still due, etc. Once again this is just a short list to give a general idea.

-Equity or owner’s equity is more of earnings over time, investments, your net profit that comes from your P&L, distributions, all kinds of long term holding accounts. Equity usually derives some sort of value that has accumulated over time.

-The balance sheet is a "Snap Shot" in time and only applies to a single day. Basically, it is a roll call of who was where and what happened at that exact time (according to the system).

-Both the income statement (P&L or profit and loss statement) and the balance sheet usually end up being quite in-depth in real life and may contain multiple layers in order to tell the real story of what is going on or what has been done.

-The P&L is a time based report of buying and selling and basic operating expenses. By time based we mean that there is a date range associated with it. It could be a day, a week, a month, a quarter, a fiscal year, etc.

-The connection between the two is what is called the "Net Profit" or "Bottom Line". This value is first figured on the P&L and then passed to the equity portion of the balance sheet. The ending date range on the P&L is the balance sheet look-back date or balance sheet date.

-One of the hardest things for people to figure out is what goes on the income statement and what goes one the balance sheet. There are chapters and chapters that cover the in and outs of both reports. For basic purposes, the P&L is the day to day buying and selling of items and services. It also includes basic expenses that are required to run your business. The balance sheet deals more with who owes who, and how things get classified or grouped. Do we own it (or trying to own it), these are the assets. Do we owe for it (or trying to pay for it), these are the liabilities. The last piece of the puzzle is the equity or distribution of wealth (who are the players and what is their piece of the pie).