Accounting Balance Sheet Guide

Want to know what an Accounting Balance Sheet can tell you about your business?

Here is some basic balance sheet information where you will learn what the definition of a balance sheet is, what details are in it, view a free sample and have access to a template.

A balance sheet provides a quick view of a company's financial condition and is important for establishing the sources of funds the business uses (equity and liabilities) and to what uses the funds have been put (assets).

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A balance sheet is a detailed presentation of the Accounting Equation. This report gets its name because it needs to balance according to the accounting equation.

It lists, in the following order, the values of:-

  • the assets owned by the business
  • the liabilities owed by the business (current* and non current**)
  • the equity i.e. the owner's financial interest in the business.

*Current simply means assets that can be turned into cash within 12 months (such as accounts receivable) or liabilities that can be paid off within 12 months (such as accounts payable).

If we take current liabilities away from current assets we get the working capital which is an important measure of the short term solvency of a business. If the business is unable to meet its short term commitments then it is likely to fail.

**Non-current are things like long term loans that will take years to pay off, or assets being used by the business such as a building that will not be sold any time soon and will last for years.

When taking all liabilities away from all assets we can establish the owner's financial interest (equity) in the business. Another important report is the Statement of Movements in Equity, which shows how the owner's financial interest in the business has changed through the year. It is made up of :-

  1. the funds introduced by the owner,
  2. the profit or loss from the statement of financial performance, and
  3. the funds withdrawn by the owner for personal use.

Unlike a profit and loss report, which details the totals of the income and expenses from a time range like May 1 to May 31, the accounting balance sheet presents the accumulated values of the assets, liabilities and equity at a moment of time such as May 31. These values have accumulated since the date the business started, whether five years ago or one year ago and show the result of all the business activities throughout that time.

The balance sheet is usually prepared at the end of a financial year when the accountant produces financial statements to calculate income tax.

The accountant will ensure the financial reports are in agreement with generally accepted accounting practices (GAAP) and with tax legislation and will make the necessary adjustments to do so.

The accountant will pass on these adjustments (known as end of year alignment journals) to the bookkeeper to update the bookkeeping system. This ensures the information in the bookkeeping system continues on accurately from year to year as the business goes on with trading activities which affect the assets, liabilities and equity.

Large businesses and corporations tend to naturally have more complicated balance sheets whereas small businesses have simple, less complicated ones.

The balance sheet for either can be as detailed or as summarised as the business requires. It could simply show a total for each heading (assets, liabilities and equity), or it can show a listing of each item that makes up the headings.

Another name for an accounting balance sheet is the statement of financial position.

Click image below for a free sample balance sheet plus a free 6 day tutorial

I also highly recommend you check out this in-depth, information packed article by Lake Kenway from Bookkeeping-Essentials. Lake is a certified professional Canadian bookkeeper with a tonne of knowledge and experience under her belt, with a love for tea!

Lake provides a great step by step view of the balance sheet and discusses the format, accounting standards, ratio analysis, and you can even test your knowledge!

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Accounting Balance Sheet

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