Let's move on and take a look at the balance sheet. The balance sheet is a little trickier to complete, because when compared to the p&l, the profit and loss statement is if there's some kind of balancing involved and it's also good, it's really a good check point to ensure that everything has been accounted for. Because if you miss something, the two sides of the balance sheet are not going to balance. So the balance sheet in essence details all of the company's assets, which are the things that it owns all the company's liabilities, which are all the things that owes to others. And the equity which is essentially what's left after all the assets have been sold, outstanding money's collected and all debts paid off. Obviously, this is kind of worst case scenario.

And it's important to break the balance sheet down. Apologies it's it's not important to break the Don't you down on a monthly basis, but it should be projected forward for at least four years. Let's take a look at the components of the balance sheet. Firstly, there are current assets. These are any type of assets that are either cash or things that are easily converted to cash. So for the purposes of business planning, current assets will generally be any money that's held as cash on hand.

So like petty cash, money you have in the bank or accounts receivable, which is the money your customers, your debtors or you, it's important to consider whether or not you'll be providing credit to customers and carrying this credit for a newly established company, because this can be challenging, but again, we spoken about this isn't in an earlier example. This is particularly the case when dealing with larger organizations, especially retailers who expect up to 60 days of credit when purchasing your products and services. Ideally, you'll want to minimize the amount of credit sales in favor of cash sales, but of course, this is another possible. Just remember the key difference between profitability and cash flow. And again, this is where we contrast the differences between the income statement or profit loss statement and the balance sheet. Next is fixed assets.

And so, these are also assets. But the difference is here that they are less easy to convert into cash. And these are things like property and land, motor vehicles, manufacturing equipment and computers. Each as a top has got a limited lifetime. And this means that the asset value should reduce over time. This is indicated by depreciation and the accumulated depreciation should be subtracted from the asset purchase price to indicate the current value of the assets as presented on the balance sheet.

So, when starting up a business, it's advisable to keep the fixed assets component to a minimum because this ultimately means that you're going to have a big cash outflow to pay for assets and the more assets you have the bigger expense you're going to have on your your profit and loss statement in the terms of in terms of depreciation expenses. So, do avoid unnecessary offered office equipment and gadgets. Total Assets. This is simply the total of your current assets as we've spoken about and the fixed assets together. And these are this is presented in a single line on the balance sheet. This non competes one side of the balance sheet, and in the next section, we'll deal with how we get to the other side of the balance sheet.

In effect, the previous section describes the assets that you plan to have for use in the business. And the next section will describe how those assets are going to be used in the business. So looking at the other side of the balance sheet, this starts off with current liabilities. These are typically liabilities, things that you owe others, that the organization will be obliged to pay off in the short term and things like bank overdrafts accounts payable More money you owe suppliers. dividends payable, which has many shareholders and payroll liabilities. So things like your upcoming month in payroll or money that you're putting aside to pay for paid leave.

Some of these current liabilities might be applicable, but it's important to consider them for planning purposes. Next, let's look at long term liabilities. And these are liabilities that the organization will be obliged to pay off either over the longer term, or the more distant time in the future. And these are things like mortgages or bonds on property, long term bank loans and longer term product warranties. So for instance, if you're selling a house, if you bought a house and there's a 10 year warranty on it, he gonna need to put some money aside to cover any kind of claims against, you know, poor building quality and those sorts of things. Next is the total liabilities line and this is simply the sum of the current and long term liabilities.

Next on the balance sheet comms retained earnings, and you'll remember that when we talked about net profit in the previous section, we spoke about either distributing the profit to shareholders in the form of dividends, or the secondary option was retaining this as an amount to fund the business. So any net profit that you're planning on retaining from a current year should be carried forward from the profit and loss statement and added to any retained earnings from previous years and stated in this land on the balance sheet. Next comes common stock or owner's equity. And when starting a business, the shareholders will no doubt contributed an amount of money to the business to get it up and running. And this is the same as a loan but it indicates the owners investment in the business. And this amount should be listed here.

That might not only be the founder of the business, but it might be also shareholders that contribute money and this is where you can list this. Find the equity or total shareholders equity, and this is what is left when you subtract the total liabilities from the total assets at above zero means the organization will be solvent, which is good. And anything below zero is bad because this means the organization will be technically insolvent and unable to pay all of its bills. So calculating the equity is done simply by adding the retained earnings to the equity. Finally, then total liabilities and equity is just as it says this is the total liabilities added to the equity. So, once these two sides have been completed, the total assets should equal the total liabilities and equity.

Always, if this is not the case, then there's a miscalculation somewhere along the line. And the best place to start reconciling This is by ensuring that the retained earnings figure that you've carried forward from the profit loss statement is indeed correct. So you need to make sure, ultimately, that your revenue and your expenses are correct. And what's left at the end of the p&l statement, the bit that's carried forward. This is probably the bit that's incorrect. So I think this is going to become a little bit more clear when we look at the example.

So here we go. Again, we've got a balance sheet for the year ending 31, March 2016. And at the high level, we've got our assets listed. So we've talked about current assets are cash on hand. And our accounts receivable This is the money that customers is. This gives us total current assets of 374,000.

Next, we add on our computers. So in this example, we've paid 49,000 pounds of dollars for our computers. And over the last few years, as we've depreciated these assets, they're reduced in value by 16,000. The same holds true for office furniture and we've got a figure of 249,000 and accumulated depreciation of 49,000 pounds or dollars and Typically looks like a figure of around 20%, which means we will over a period of five years, depreciate this value to zero and this will ultimately increase. So our total fixed assets, which is the computers, minus the accumulated depreciation, plus the office furniture, minus this accumulated depreciation gives us the figure of 232,000. We then add this to the total current assets, and this gives us total assets of 607,000.

And this forms the one side of the balance sheet. Now, let's look at the other side. On the other side, we start off with the liabilities. And first we consider our current liabilities. We list out accounts payable, which is the money we owe to our suppliers with aside any other liabilities and this might be money we owe to the bank for an interest payment, or it could be money we owe to the local municipality for utilities. adding these two together give us a current liability figure of $16,000 or pounds.

Next we consider our long term liabilities. So in this instance, this might be a mortgage or a longer term loan that's payable over five or 10 years. This is 20,000. In this example, we add this to the 16,000. And this gives us a total liabilities of 36,000 pounds and $56,000. Finally, we look at the equity section.

And here we have retained earnings. And this retained earnings will be the number that's carried over from the the profit and loss statement or income statement in the previous section. And then we have a number which details the owner's equity. And this will either be the initial investment that the owners are made in the company, or that might be any profit that's retained from previous years, or it might be a combination of the two. adding these two together gives us a total equity figure out 570,000 pounds of dollars to this, then we add our total liabilities. And this gives us 607,000 pounds of dollars.

Now, this number over here, the total liabilities and equity must always equal to this total assets figure here. If it doesn't, as you said, there's a problem somewhere along line. It's typically in these numbers where these are carried forward from the profit and loss statement. And that's the first place to start looking. This is usually less of an issue when you're planning because the numbers are all of your creation. It becomes more complex when you run your business on a day to day basis, and you having to account for the actual occurrences in your business.

And this is where some way like an accountant or someone like an accountant, or accountant can help you solve these sorts of issues that this is just from a planning perspective and it's typically fairly easy to plan out