facebook   twitter   mail  

General accounting

From adjusted Trial balance to Balance Sheet

Video

Text

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.

income statement
trial balance

 

Now in this adjusted Trial balance we replace all the Revenue accounts with just one line: the bottom line of the IS.

trial balance

This document is the Balance Sheet.

It just needs to be rearranged into the usual presentation.

 

It is customary to present the Balance Sheet listing first all the assets (adjusted for amortizations and provisions) and then all the liabilities.

balance sheet one page

We shall comment on the liabilities ("Why capital is there?", "Why the profit or loss is there?") in a moment.

 

Usually the Balance Sheet is presented in two pages (or two tables), one for the Assets and the other for the Liabilities.

balance sheet two pages

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.

 

In our example, which does not purport to illustrate good management, the first accounting cycle ends up with a loss, though this is frequent.

The 1st year we need to tune the operations, and then grow them.

Accounting provides a "dashboard" of the firm.

dashboard
accounting provides a dashboard of the firm

 

A word on the liability side of the BS:

liability side

 

We can see right away what would be the impact of higher sales on the IS and BS.

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:

impact of price increase on IS

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:

impact of price increase on BS

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€.

 

Managing a firm is a long sequence of decisions taken by the managing team to allocate resources:

It is a sequence of choices.

 

Of course the human aspect is fundamental:

 

Aside from this human aspect, managing a firm is as we said a series of choices. Choices about:

To manage a firm is great fun!

When we make profits we feel very intelligent, and when we make losses we feel very unlucky :-)

Course table of contents

Contact