From adjusted Trial balance to Balance Sheet
We are reaching the final step of the beginning of accounting.
We saw the Trial balance. We adjusted it. And we extracted all the "Revenue" accounts to form the Income Statement.
This document is the Balance Sheet.
It just needs to be rearranged into the usual presentation.
We shall comment on the liabilities ("Why capital is there?", "Why the profit or loss is there?") in a moment.
Notice that on the Asset side, the total debit minus the total credit = 15280€.
And on the Liability side, the total credit minus the total debit is also equal the 15280€.
It must always be so by construction.
(Despite what we may read in some textbooks, it is not because of this equality that it is called the "balance sheet", but because it is a list of balances.)
The IS and BS at the end of an accounting period are documents belonging to the accounting system. The accounting system is itself one of the various management information systems (MIS) to run the firm.
The IS and BS may be seen as the two most fundamental documents presenting synthetic information about the firm.
The 1st year we need to tune the operations, and then grow them.
Accounting provides a "dashboard" of the firm.
- the IS shows Sales, Costs and P&L (Profit or Loss) of the accounting cycle
- the BS shows, at the end of the accounting cycle, what the firm owns (its assets) and what it owes (its liabilities)
- the long term (LT) loan and the IOU's to suppliers are clearly liabilities
- the capital is viewed as a liability to the owners. Even though this sum is not due, it has a status comparable to money received from lenders
- and the profit or loss (P&L, usually written, curiously, with an "&" which means "and") is on the liability side too: to understand this, think it were a profit, in credit, it would indeed represent more value belonging to the owners.
Suppose, instead of selling our goods at 100€ apiece, we sold them at 130€ apiece. Then the sales figure would be 9100€.
And suppose the charges corresponding to these sales did not change. Then the IS would become this:
The accounting period would end up with a profit instead of a loss.
And if all the extra value coming in from sales went into client credit (= client paper = IOU from clients) the BS would look like this:
On the asset side, the Debtors account (= Client account = Receivables) would increase to 2600€, and on the liability side, the Net profit or loss would become a profit (i.e. a credit) of 130€.
- money resources
- work resources
It is a sequence of choices.
- management of the workforce (= managing "human resources"= HR)
- management of the relationships with
- clients (CRM = customer relationship management)
- bankers and other lenders
- which products to manufacture
- product technology
- production technology
- advertizing, marketing
- and many more...
To manage a firm is great fun!
When we make profits we feel very intelligent, and when we make losses we feel very unlucky :-)