Let's talk now about the balance sheet. Perhaps the most important financial statement that the company prepares. Here is an example of a balance sheet. It's a balance sheet that was prepared by PepsiCo that was included in their annual report. You can look at just about any balance sheet and you will notice a few things. There will be a section that shows a listing of assets. A section that shows a listing of liabilities and equity items. You will be able to notice that total assets, and total liabilities, plus owners equity are exactly the same number. That's not an accident. In fact, that's a pretty cool part of accounting that we'll learn about. You might even see that there's some current assets and then some assets that aren't listed in that section and likewise, there's some current liabilities and liabilities that aren't listed in that section. So you see a lot of things, but they're all relatively common regardless of what company's balance sheet you're looking at. Now if you've never seen a balance sheet before or if all of those terms I was just throwing at you sounded unfamiliar, then you're in the right place. That's what we'll be talking about here when we're talking about balance sheet. Let's look in more detail. Importantly the balance sheet shows the company's financial position at a specific point in time. Very important, specific point in time. It's cumulative in nature. So what that means is it's going to summarize the financial history of the organization from its inception all the way until the date sitting on the balance sheet, or that specific point in time. The balance sheet will have a section that lists assets. It will have a section that lists liabilities. it will have a section that lists owner's equity items. What are assets? Assets are resources that are expected to provide future economic benefit. I like to say, in layman's terms, it's stuff. It's stuff that the company owns that's going to be beneficial to it at some point in time. Some examples of assets are cash, inventory, buildings and the list goes on and on. The liabilities and owner's equity section tell us where the company got the funds to invest in those resources that are sitting on the asset side of the balance sheet. Some examples of liabilities would be the amount that a company owes to its suppliers if it purchased something and hasn't yet paid, or loans that it's obtained from a bank. Examples of owner's equity items will be capital stock and retained earnings. In fact, the company can get equity from two different sources. The first is the owners give it some funds, and that would be the capital stocks section. The equity obtained directly from owners and then retained earnings, the company generates some earnings, retains the equity in its own business instead of paying it out to shareholders in dividends. You might notice that this gives us an indication of the resources that the company has. And then the two types of claims on these resources. The creditors have the first claim and their owners get what's leftover. At the end of assets section, the balancing into the assets accounts will be totaled to give as an indication of the total amount of resources that the company owns. And at the end of the liabilities and owner's equity section, the liabilities and owner's equity items would be totaled to give us an idea of the amount of resources that the company has obtained. The amount of funds that the company has obtained to invest in those resources. Notice that the assets section gives us a peek into the investment decisions that a company makes, tells us what resources the company has invested in. And the liabilities and owner's equity section of the balance sheet give us a peek into the company's financing decisions. In other words, how the company has chosen to finance the investment it's made in those resources. So investment decisions and financing decisions are two very important pieces of information we can glean from looking at the balance sheet. Now importantly, The funds that the company has obtained through liabilities and equity must equal the amount of resources it's chosen to invest in. That seems pretty simple, but is extremely important. This relationship is called the balance sheet equation, and it's an extremely important equation. Sometimes it's so important that we might even call it the accounting equation. But we'll stick with the balance sheet equation for now. The balance sheet equation tells us that assets always has to equal liabilities plus owner's equity, or the funds the company has obtained always has to be equal to the resources in which it has invested. As long as that relation holds true, you'll notice throughout our course how happy we will be.
