Balance sheet formula and definition

The concept of the balance sheet can be considered on the basis of two aspects: from a theoretical point of view – the balance sheet is interpreted as a relationship of characteristic features and ratios of indicators that are reflected in it as of a certain point in time. 

From the point of view of use in the practical activities of business entities – the balance sheet is understood as a reporting form that contains information about the financial position of the business entity.

You can use the balance sheet to determine the company’s “health status.” It’s like a blood test. Only it records not the level of sugar or cholesterol, but financial indicators. For example, the amount of money that the company has or the amount of debt owed to creditors.

If you compare the balance sheet for different dates, you can see how things are going. Maybe your business got into debt, or, on the contrary, the company’s accounts have excess money that can be profitable to invest?

How to calculate balance sheet 

A balance sheet formula is easy to use and remember. To conduct any economic activity, an economic entity must possess property, i.e., assets; raise funds for the acquisition of assets. If the sources of financing the organization’s property are the company’s funds or its owners, then we are talking about equity. If the economic entity attracts sources of funds from the outside, then we are talking about obligations or liabilities. 

The model described above is the main formula of the balance sheet, which can be represented as the following equation: Assets = Equity + Liabilities. Usually, the balance sheet is a table with two columns – Assets and Liabilities. 

The totals for each column must be equal to each other. This is due to the fact that from the point of view of accounting, it is not considered a fundamental difference for an economic entity to whom it has financial obligations: to the owners of the company or its partners and the state. In this regard, the above formula can be converted as follows: Assets (A) = Liabilities (L). 

Thus, the balance sheet formula discussed above is the basis for conducting a financial analysis of such indicators as solvency, financial stability, probability, and creditworthiness. Now, you know how to calculate the balance sheet. 

How to make a balance sheet: recommendations

For any company, the state of its assets is important. Usually, the following items are analyzed: the composition of assets, their structure, and efficiency of use.

The analysis compares the growth rate of current assets with the growth rate of non-current assets. If, for example, current assets grow faster than non-current assets, this means that a more mobile asset structure is being formed.

At the same time, the growth of accounts receivable indicates that the company’s funds are diverted from the turnover to credit buyers of products.

The efficiency of current assets is determined through the profitability indicators and the turnover coefficient.

When drawing up a balance, keep in mind that assets in the balance sheet are recorded at cost. Information in the balance sheet is divided by article. The amount for the date of the report is placed opposite each item, and the item value of the property for the two previous reporting dates is indicated in two adjacent columns.

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