Three core financial statements
Balance Sheet and Income Statement Relationship Balance Sheet and Income Statement Relationship
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- Let's see if we can use our example
- to understand the 3 types of income statements
- and hopefully understanding those income statements
- will also help us understand this example.
- So I'm gonna start of, we're gonna focus on month 2
- and what I've done is I've rewritten some of this
- accrual income statement down here
- so it really looks like a statement
- so this right here is the income statement for month 2
- on an accrual basis. And that month, we said we had
- $400 of revenue, $200 of expense,
- $400 minus $200 gives us $200 of income.
- And income statement tells us what happened
- over a period of time, what was the activity?
- How much revenue, how much expenses, and other things
- this is just a super simplified one, without taxes
- without interest, without other types of expenses over here.
- I also have drawn the balance sheet at the end of month 1
- and the balance sheet at the end of month 2.
- Or you could also view this balance sheet here
- as the balance sheet at the beginning of month 2.
- And the main thing to realize is the income statement tells you
- what happens over a time period,
- while balance sheets are snapshots, or they're pictures
- at a given moment.
- Snapshots. So this tells us essentially,
- what did I have?
- The assets are the things that can give me
- future benefits. So what do I have,
- and the liabilities are things that I have to give
- future benefit to, or things that I owe
- so this is what I have, this is what I owe,
- and then the equity is really what I have to my name
- if I net out the liabilities from the assets.
- So the beginning of month 2, which is the end of month 1,
- I had $100 of cash, no accounts receiveables,
- I didn't owe anyone anything,
- I didn't owe them money, I didn't owe them services
- So $100 minus 0, means I had $100,
- that's kind of what the owners of the company
- can say they have of value at the beginning of the month.
- You fast forward, now at the end of the month 2
- I now owe the bank $100,
- So I just put this as negative $100 here,
- it normally wouldn't be accounted that way
- on an actual company's balance sheet, but just to simplify it,
- But I have an accounts receivable of $400,
- so my total assets now are $300 of assets,
- remember, accounts receivables aren't assets,
- because someone owes me something,
- someone owes me cash in the future.
- I still have no liabilities
- So you take all of your assets,
- minus all of your liabilities,
- and now I have $300 in equity.
- So you can see
- the snapshot at the beginning of the month: $100 in equity
- snapshot at the end of the month: $300 in equity.
- And so to go from one point to the other,
- to go from $100 to $300,
- I must have grown in equity by $200,
- I must have gotten $200 worth of value from someplace
- and that's what the income statement describes.
- It describes it right over here
- the change in equity,
- sometime the change in retained earnings,
- or just change in equity,
- that is going to be the $200 in net income
- that the company got over that time period.
- Now there's one thing that you're probably confused by right now
- well you know, how do we reconcile everything with the cash
- we know that over this period we got $200 in income
- on an accrual basis.
- But when you look at the cash, we went from $100
- positive cash, to negative $100 in cash.
- It looks like we lost $200.
- So how can we reconcile the fact that we got $200 income?
- How can we reconcile that with the fact that
- we lost $200 in cash?
- And that reconciliation is going to be done
- on the cash flow statement, and I'll do that in the next video.
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