See: Balance Sheet
Balance Sheet Definition
The balance sheet is a financial statement that shows a company’s financial position at a point in time. The balance sheet format comes in the following three sections:
- Assets
- Liabilities
- Owners’ equity
The assets represent what the company owns. Then, the liabilities represent what the company owes. Finally, the owners’ equity represents shareholder interests in the company. The value of the company’s assets must equal the value of the company’s liabilities plus the value of the owners’ equity.
This balance sheet formula forms the basis of the statement, also known as the accounting equation.
Assets = Liabilities + Owners’ Equity
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Balancing the Balance Sheet
The “balance” in balance sheet indicates the 2 sides have to balance every time. Therefore, the company‘s assets always have to equal liabilities plus owners’ equity. Now, let’s walk through the steps needed in order to know how to start balancing the balance sheet.
Balancing the Balance Sheet Steps
First, start by putting all the company‘s assets on the left side of the sheet. Let’s start with the current assets. For example:
ASSETS Current Assets Cash $ 2,000 Accounts receivable 20,000 Inventory 10,000 Supplies 3,000 TOTAL CURRENT ASSETS: $ 35,000
Now let’s add the other types of assets. These are “Property, Plant & Equipment” and “Intangible Assets“.
Property, Plant & Equipment Land $ 5,000 Buildings 160,000 Equipment 200,000 Less: acum depreciation (30,000) NET PROP, PLANT & EQUIP 335,000
Intangible assets Goodwill 100,000 Trade names 200,000 TOTAL INTANGIBLE ASSETS 300,000
TOTAL ASSETS: $ 670,000
Now that we have added all the assets together, go to the right side of the balance sheet. Record the liabilities – current and long-term.
LIABILITIES Current Liabilities Notes Payable $ 5,000 Accounts Payable 35,000 Wages Payable 10,000 Interest Payable 5,000 TOTAL CURRENT LIABILITIES 55,000 Long-Term Liabilities Notes Payable 50,000 Bonds Payable 500,000 TOTAL LONG-TERM LIABILITIES 550,000 TOTAL LIABILITIES $ 605,000
After you have your liabilities, add the final portion of the balance sheet – Owner’s Equity.
Owner's Equity Common Stock $ 50,000 Retained Earnings 50,000 Less: Treasury Stock (35,000) TOTAL OWNER'S EQUITY $ 65,000 TOTAL LIABILITIES and OWNER'S EQUITY $ 670,000
Finally, you have added everything up. Now, verify if everything holds true to the accounting formula.
Assets = Liabilities + Owner's equity
$ 670,00 = $ 605,000 + $ 65,000 $ 670,000 = $ 670,000
Everything is balanced now, as it should be. If for whatever reason it does not end up balancing, then look back at all your numbers and make sure they are all correct. If you need help shaping your economics, then click here to download your free Know Your Economics guide.
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