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ONLY 20 mins FULL BALANCE SHEET Prep | Dr. Anil Lamba — Transcript

by Dr. Anil Lamba · 3,141 words · 443 segments · language en · Watch on YouTube

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0:00In my opinion, everybody must learn how
0:03to read balance sheets. There cannot be
0:06a founder, a managing director who can
0:09afford to say, I don't need to know how
0:12to read balance sheets and financial
0:14statements. In fact, not only the
0:16business owners down the line, everybody
0:20must learn how to read balance sheets.
0:22But very often what comes in the way is
0:25people think because I don't know how to
0:28make these statements I will also not be
0:32able to understand how to read them.
0:34That's not true. You know learning how
0:36to make and learning how to read are two
0:39different skill sets. But if that comes
0:41in the way, I always say, you know, I
0:44will teach you how to make a balance
0:46sheet in a jiffy. So that you no longer
0:48have an excuse because I don't know how
0:51to make I will not learn how to read. A
0:54normal perception is it takes years to
0:56learn how to make balance sheets. But
0:58guys, I can give you a shortcut. Even if
1:01you don't know anything about
1:03accounting, you will be able to learn
1:05how to make a balance sheet. When I say
1:08balance sheet guys, I use it loosely
1:11sometimes to mean both P&L and a balance
1:14sheet. So if you wish to learn how to
1:16make these statements without any
1:18knowledge of accounting, you know, all
1:20you need to understand is a profit and
1:24loss account reveals expenses and
1:26incomes. A balance sheet shows
1:28liabilities and assets. And what do
1:31these statements between them reveal?
1:33They show everything that has happened
1:35in an organization over a certain
1:37period. Whatever happens in an
1:39organization from a finance perspective,
1:43every financial transaction that takes
1:45place, you know, gets recorded in a set
1:48of books called accounts. And whatever
1:51gets recorded every once in a while, it
1:54gets summarized. And the summarized
1:56picture of accounts is presented in the
2:00form of two financial statements, a P&L
2:02and a balance sheet. And what do these
2:05two financial statements reveal between
2:07them? They show expenses and incomes and
2:10liabilities and assets. This will tell
2:12you that if everything that happened got
2:16recorded, whatever got recorded
2:18eventually has to appear here. And what
2:21appears on these statements are only
2:23four types of transactions. This will
2:25tell you therefore in an organization
2:29nothing can happen which is not
2:32ultimately going to result either in an
2:34expense or an income or a liability or
2:37an asset. And I think this is all you
2:40need to understand if you wish to learn
2:42how to make a P&L and a balance sheet.
2:45Now you might say Anil just because I
2:46understand this how can I make a balance
2:48sheet? My answer often is I've said it
2:52in one of the earlier videos also.
2:54Imagine from tomorrow you decide we will
2:56not write anything in books of accounts.
2:58Instead of that what we'll do we'll keep
3:00a little cardboard carton in one corner
3:02of the office and every time a financial
3:05transaction takes place instead of
3:07writing it in books of accounts I
3:09suggest you write on a piece of paper
3:11and drop it into the box. And now at the
3:13end of a period if I bring this box to
3:15you, this box might now contain god
3:18knows how many pieces of paper,
3:19thousands of pieces of paper. And I hand
3:22over the box to you and I say, "Can you
3:23prepare a profit loss and balance
3:25sheet?" I think you can. How will you do
3:28it? Put your hand in the box. Take out
3:31one one piece of paper after another.
3:33Read what is written on that. I am
3:35trying to tell you you are going to
3:38discover whatever is written on that
3:40piece of paper will either be an
3:41expense. If yes, it goes to the P&L
3:44expenses side. If it is not an expense,
3:47it might be an income. Then you show it
3:49on the income side. If it is not an
3:51income, it might be a liability. And if
3:53it is neither of these three, you can
3:55blindly put it as an asset because there
3:58isn't a fifth option. Let's imagine our
4:01friend Carl over here sets up a
4:03furniture manufacturing enterprise.
4:06Let's visualize a few transactions and
4:09prepare a P&L balance sheet for him.
4:11Let's say he starts a business and calls
4:13it KL Furnitureures. Now guys, what's
4:16the first step in a business? It needs
4:18money. Who needs money? Does Mr. KHL
4:21need money or does KL Furnitureures need
4:24money? KF, let's call it KF. Does KF
4:26need money? Answer is KF needs money.
4:29Where will KF get the money from? The
4:32first person it will go to is Mr. Khal.
4:35Khal, give us some money. KHL says, "How
4:38much do you want?" This business says,
4:40"I want 10." Let's say 10 lakhs. KHL
4:43says, "You know, I'm not interested in
4:45giving you 10, but I don't mind giving
4:47you four." What is four called now? Four
4:51will be called KHL's capital
4:53contribution. But the business required
4:5510. So for the remaining six they'll go
4:58to a bank or somebody. First obstacle
5:00has been overcome. This company wanted
5:0310 lakhs. They got 10 lakhs. Now what
5:05will they do with this money? They want
5:07to make furniture. So a sizable
5:10proportion of money will go into
5:12purchasing the infrastructure to
5:15manufacture furniture. So KF will now
5:17buy land and building and machinery
5:20let's say worth seven lakhs. Now that
5:22they have infrastructure, they will go
5:25and buy raw materials. They purchase raw
5:27materials worth two lakhs against cash
5:30payment and they go to a vendor called
5:32Shria and buy raw materials worth 2.5
5:35lakhs from her and say you know we'll
5:38pay you a month 2 months later. So cash
5:40transaction has taken place. A credit
5:42transaction has taken place. Now that
5:44they got the raw materials and they have
5:46the machinery, they will now hire
5:48people, spend money on wages, spend
5:52money on overhead, spend money on
5:54various kinds of manufacturing expenses.
5:57Another 0.5. Now the product is ready.
6:00So they go and sell it. They sell it for
6:02about three lakhs against cash. They
6:06sell to a customer called Shoubam worth
6:094.5 lakhs who says I'll pay you a month,
6:12two months later. They've taken a loan
6:13from the bank. Banker says I want 10%
6:16interest
6:18and guys just to complete the set of
6:20transactions they have purchased from
6:22Shria and not paid her. So sooner or
6:25later they will pay her and they have
6:26sold to Shoubam who has not paid them.
6:29Sooner or later Shubam will pay them.
6:31Imagine this is the box that I spoke
6:33about. I bring this box to you and I say
6:35guys can you prepare a profit loss
6:37account and balance sheet? How will you
6:39do it? Keep two templates in front of
6:41you. One called profit loss account.
6:44Second called balance sheet. A profit
6:46loss account having incomes on one side
6:49and expenses on the other side. Balance
6:51sheet showing assets and liabilities on
6:53the two sides. Everything that happens
6:55in an organization has only four
6:57options. It will either be an expense or
7:00an income or a liability or an asset.
7:03Now accountants have the tendency of
7:06putting a label against every
7:09transaction and that label will read
7:11debit or credit. So guys nature- wise
7:14there are four options from a debit
7:16credit point of view there are only two
7:18options. So that tells you out of these
7:21four two must be debits and two must be
7:24credits. Now take my word for it since I
7:26haven't explained how to reach this
7:27conclusion. Folks, expenses in the P&L
7:31are debits by nature, incomes are
7:34credits. In a balance sheet, liabilities
7:37are credits and assets are debits. And
7:41now folks, look at each item after
7:44another. You can look at that item and
7:47choose whether it is an expense or an
7:49income or a liability or an asset. Let
7:51me remind you one more thing which I had
7:53mentioned in one of the earlier videos.
7:55It is not only as simple as
7:57understanding there are four options
7:59that for anything that happens but these
8:02four options can be subdivided into two
8:05groups because all transaction that take
8:09place in an organization can be broken
8:11up into those that bring money in and
8:14those that take money out. Guys, if
8:17money has come in, you don't have to
8:19choose out of four. Money coming in will
8:21either be an income or a liability and
8:25if money has gone out it will either be
8:27an expense or an asset. So either you
8:30look at each item one by one and look at
8:33the item and choose order four or you
8:36look at each item and first figure out
8:38has this transaction brought money in or
8:40taken money out. If money has gone out
8:43you got to choose between expense and
8:45asset. If money has come in, you got to
8:47choose between income and liability. But
8:50folks, you need to also understand one
8:53more aspect of accounting.
8:55Almost all over the world, we follow a
8:59system of accounting called double entry
9:02system of bookkeeping. What is double
9:04entry system of bookkeeping? It says for
9:07every transaction that takes place, it
9:10will have to be recorded twice. Why?
9:13Because each transaction that takes
9:15place will impact two account heads
9:19simultaneously and incidentally
9:22once it will appear on the debit side
9:24and again it will appear on the credit
9:26side. Guys you don't need to understand
9:27what debit credit mean. All you need to
9:30understand is each transaction will
9:33impact two account heads and once it
9:35will get recorded on the debits again
9:37it'll get recorded on the credit side.
9:39You don't have to do debit credit it'll
9:41happen. Let me illustrate. Let's imagine
9:44a transaction took place and you
9:46recorded a 100 rupees on the expenses
9:50side. Where have you recorded it? Debit
9:52side. When will double entry be
9:53satisfied? When the same 100 appears
9:56also on the credit side. How many
9:58options do you have for that guys? In a
10:00P&L, expenses are debits and incomes are
10:03credits. In a balance sheet, liabilities
10:06are credits and assets are debits.
10:09You've recorded a 100 on the expenses
10:11side which is on the debit side. For
10:13double entry to be satisfied the same
10:15100 should now appear on the credit
10:17side. How many options do you have? It
10:20can either appear on the income side or
10:22it can appear on the liability side. Is
10:26there a third option?
10:28There is. Which is the third option
10:30guys? This 100 may also appear on the
10:33asset side but then it should be a minus
10:35100. What I'm trying to tell you folks
10:37is a negative figure on the debit side
10:40tantamounts to credit. A negative on the
10:43credit side is equivalent to debit. So
10:45folks, you've got to look at each
10:48transaction.
10:49Identify the two account heads affected.
10:52Logically record them. Don't worry about
10:54debit credit. Having recorded, double
10:56check. If you find you recorded a
10:59positive 100 on the expenses side and
11:02this positive 100 is accompanied by
11:05either a positive 100 on the income side
11:08or a positive 100 on the liability side
11:11or a negative 100 on the asset side or a
11:15negative on the expenses side itself.
11:18Double entry has happened correctly. And
11:20guys this will happen on its own. You
11:22don't need to do it. Let's watch it now.
11:24Imagine this is the box that I bring to
11:26you. You put your hand in the box. The
11:28first piece of paper that comes out says
11:30capital. I said you can either choose
11:32out of four or you can apply your mind
11:35and figure out has money come in or has
11:38money gone out. Guys, Khal introduced
11:41capital. So money has come in. If money
11:44comes in, your options are it will
11:46either be an income or a liability. This
11:49is certainly not income because KL
11:51Furnitureures has not earned this money.
11:54So by default it must be a liability. So
11:56let's put capital on the liability side.
11:59But folks this is single entry. Double
12:01entry says examine the same transaction
12:04and you'll discover another dimension.
12:07So tell me what is the second effect of
12:09this transaction? In what form did KHL
12:12bring this capital? He must have brought
12:14it in cash. And where is this cash
12:18today? Carl Furniturees right now is in
12:22possession of 400,000 cash. So, it's an
12:25asset. Guys, did you notice while
12:27recording I didn't even bother about
12:29debit and credit. I simply applied good
12:31logic. But because my logic was sound,
12:34this item has appeared once on the debit
12:36side and again on the credit side. Debit
12:38credit I won't have to do. It'll happen.
12:41Next piece of paper that comes out of
12:43the box says loan. Again, money has come
12:46in. Again the choice is income or
12:48liability. This is also a liability.
12:52And what about the double entry? Now the
12:54cash available with KL furnitureures has
12:58become 10 lakhs. Next item says they
13:01purchase land building machine. This
13:03time money has gone out. Choices either
13:06an expense or an asset. Land building
13:09machine look like assets. Single entry.
13:12What about double entry? In case you are
13:15saying this should be shown as an
13:16expense. I must remind you that money
13:19going out is either an expense or an
13:22asset. You already chosen the asset
13:23option. It cannot be an expense. And if
13:26you record it as an expense when you
13:28double check, you'll find it is
13:30appearing twice on the debit side.
13:31That's a hint you're making a mistake.
13:33So what is the double entry of this
13:35folks? They no longer have 10 lakhs with
13:37them. They spend seven on building. So
13:40cash goes down to three.
13:43How did you record a debit? You recorded
13:45a debit when you showed seven lakhs on
13:47the asset side. How did you record a
13:50credit? When you deducted seven lakhs on
13:53the asset side, there's a positive
13:54figure on the asset side playing the
13:56role of debit. There's a negative figure
13:58on the asset side playing the role of
14:00credit, but it's happening on its own.
14:02We are not doing it. Next item says they
14:05have purchased raw materials. Raw
14:07materials going out seems to be an
14:09expense and we assuming they're all
14:11consumed. What about the double entry?
14:13When you purchase raw material were two
14:15lakhs, your money went out. So the cash
14:18of three now becomes one. Then they
14:21bought raw material from Shria. Guys,
14:23buying raw material is an expense.
14:25Whether you paid or not, that's part of
14:27the double entry. When you yesterday you
14:29bought two lakhs worth of raw material,
14:30it was shown as an expense. Today you
14:32purchased 2 and a half lakhs worth of
14:34raw material. So raw material on the
14:36expenses side of P&L becomes 4 and a
14:38half lakhs. But you did not pay Shria.
14:42So cash doesn't go down. So Shria then
14:46becomes a liability payable. In English
14:49she'll be called KF's creditor. Why is
14:52she called a citor? Because it appears
14:54the number appears on the credit side.
14:56Then you spend money on manufacturing
14:58expenses. Manufacturing expense is an
15:01expense and takes away money. So cash of
15:05one becomes 0.5. And then when you sell
15:08goods worth three lakhs on cash, it is
15:11income. And this income brings money. So
15:14your cash of 0.5 becomes 3.5. And then
15:17when you sold to Shoubam guys, sales is
15:21income. You sold three lakhs yesterday.
15:24You sold 4.5 lakhs today. So your total
15:27sales on the income side becomes 7 and a
15:29half. But shoubam did not pay. So no
15:32impact on cash. So, shubam becomes an
15:36asset receivable called a debtor. Then
15:39when you pay interest to the bank, it is
15:42an expense and this expense takes away
15:45money. So 3.5 becomes 2.9. Next item is
15:49you have paid Shia 2.25.
15:53Where does it appear? In case you say it
15:55is an expense, I must remind you it was
15:58an expense the day you purchased from
16:01Shria. You can't show the same item as
16:04expense when you buy and again you show
16:06it as an expense when you pay. Guys
16:08remember balance sheet is a statement of
16:10assets and liabilities as on a
16:12particular date. On the date of balance
16:14sheet how much money do you owe Shria?
16:17You purchase 2.5. You have paid her
16:202.25.
16:22Now you owe her only.25.
16:25And when you pay her 2.25 25 your cash
16:28goes down from 2.9 to 65 and when Shubam
16:33pays you four your cash of 65 becomes
16:374.65 65 and now Shubham owes you that
16:41much less. So 4.5 minus 4 the amount he
16:46owes you on the date of balance sheet
16:48is.5.
16:50That's it. Now let's find out has this
16:53organization made a profit or loss. To
16:56do that let's find out the total of both
16:59the sides of P&L. What is the total of
17:02the expenses side? It is 5.6. What is
17:05the total of the income side? 7.5.
17:09You know, write the heavier side figure
17:11on both the sides.
17:13And since the income is greater than
17:16expense, this organization has made a
17:19profit. They have made a profit of 1.9.
17:24This figure must now get transferred to
17:26the balance sheet. Where will profit
17:29appear in the balance sheet? Is it a
17:31liability or is it an asset?
17:34Folks, profit is a liability.
17:38Why is it a liability? That I'll tell
17:41you another day in another video. But
17:44right now, all I want to tell you is in
17:46a P&L account, the income was greater
17:49than expense. The credit side of the P&L
17:52was heavier than the debit side. So
17:54profit represents a net credit and a
17:58credit balance in the P&L can only
18:00appear on the credit side of balance
18:02sheet, which is the liability side. The
18:04common sense answer I'll give you some
18:06other day. So profit appears as a
18:08liability.
18:09And why is a balance sheet called a
18:11balance sheet? It's not called a balance
18:14sheet because the two sides balance.
18:16Incidentally, they do balance. But the
18:18word balance in a balance sheet has got
18:21nothing to do with a weighing scale kind
18:23of a balance. But does this balance
18:25sheet balance? Of course, it balances.
18:28Folks, I want you to observe. We have
18:30just now prepared a balanced balance
18:32sheet with the help of that twominut
18:35input that I gave you that everything
18:38that happens can will either be an
18:40expense or an income or a liability or
18:43an asset and each transaction that takes
18:46place will be recorded two times.

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