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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