[MUSIC] Last time we introduced the idea of accounting and the three types of accounting. In this video we will talk about the balance sheet and define its three main parts. We will also briefly discuss why the balance sheet is called so. The first financial statement we will look at is called the balance sheet. It captures the financial position of a company as of a particular date, either the end of a quarter or end of a year. It consists of three parts, assets, liabilities, and shareholder's equity. These parts show what the company owns, what it owes, and how much shareholders have invested in the company. Assets represent the resources owned by a company and are used to generate future economic benefits in the form of either higher cash inflows or lower cash outflows. Examples of assets are cash and equivalents, inventory, property, plant and equipment, and intangible assets like patents and trademarks. Assets are further classified into current and non-current assets. Current assets are those assets that are expected to be converted to cash, sold, or consumed within the next one year. Any asset that is expected to be converted to cash, sold, or consumed after one year is categorized as a non-current asset. Liabilities represent a company's economic obligations to outsiders. These outsiders have claims against the company's assets. Examples of liabilities are accounts payable, short-term borrowing, and long-term debt. Similar to assets, liabilities that are also classified into current and non-current liabilities. Current liabilities are those that are expected to be paid within one year while any expected to be paid after one year is a non-current liability. The last part of a balance sheet is the shareholder's equity. This represents the company owner's claims on the company's total assets. It consists of owners' investment in the company as well as aggregate undistributed profits, called retained earnings. The balance sheet gets its name as it has to balance out at all times. That is assets must equal liabilities plus shareholder's equity. Assets represent how the company uses its resources whereas liabilities and shareholders equity represent where the company gets its resources from. These must equal each other at all times. One of the important things to remember about the balance sheet is that all items are recorded at historical cost. They are never updated to current market values or prices. In a balance sheet, assets typically appear on the left side or at the top. And liabilities and shareholder's equity appear on the right side or at the bottom. However this may vary from country to country depending on local accounting rules. In some countries the order may be reversed. Next time, we will start looking at the balance sheet in greater detail, starting with the asset side of the balance sheet. [MUSIC]