What a balance sheet shows
The balance sheet, also called the statement of financial position, is a picture of the business on one date: on one side its assets, what it owns and is owed; on the other its liabilities, what it owes to others, and its equity, what belongs to its owners.
The accounting equation
Assets = Liabilities + Equity. Every entry keeps the equation true, because whatever the business has came from someone: a creditor or its owners. That is why both sides of a balance sheet always add up to the same total.
How to prepare it, step by step
- Start from a trial balance that balances.
- Prepare the income statement first: the period's profit or loss belongs to equity.
- List the asset balances, then the liabilities, then equity with the period's result.
- Check that total assets equal liabilities plus equity.
An example: the shop at the end of March
| Balance sheet at 31 March | Amount |
|---|---|
| Assets | |
| Cash | 5,800 |
| Accounts receivable | 800 |
| Equipment | 1,200 |
| Total assets | 7,800 |
| Liabilities | |
| Accounts payable | 400 |
| Equity | |
| Owner's capital | 5,000 |
| Profit for the period | 2,400 |
| Total liabilities and equity | 7,800 |
The profit of 2,400 comes from the income statement: 3,800 of sales less 1,000 of rent and 400 of electricity. Without it, equity would fall 2,400 short and the balance sheet would not balance.
How to read it
- Cash and receivables against payables: can the business pay what it owes soon?
- Equity against total assets: how much of the business belongs to its owners.
- The same balance sheet a month later: what grew and what shrank.
Balance sheet and income statement
The income statement covers a period and tells how the result was made; the balance sheet is one date and tells where the business stands. The result joins them: at year end it is closed into equity, as retained earnings.
A balance sheet up to date with every entry
Aconta Online prepares the balance sheet on the date you choose, with the result not yet closed shown in equity, and the income statement beside it. Both update with every entry and download as a spreadsheet. A closed period cannot be changed by accident, so the figures you reviewed stay as they were.
Questions
What is the difference between a balance sheet and a trial balance?
The trial balance lists every account to check the books; the balance sheet groups the asset, liability and equity balances to show where the business stands, with the period's result in equity.
Why does my balance sheet not balance?
Usually the period's profit or loss is missing from equity, or an account sits on the wrong side. Check first that the trial balance balances.
How often should a small business prepare a balance sheet?
At least once a year, at the close of the fiscal year. Monthly helps you see in time how the business is doing.