The Basics of The Balance Sheet (Financial Position)

Using the accounting equation and applying that to the balance sheet, you will prove mathematical accuracy in your financial data. The very basic principle is outlined below, though in a more realistic business determination you would find separate pages for accounts receivable, accounts payable, property, loans, etc.

Regardless whether manual or computer generated tools are utilised, the balance sheet is the combination of all these accounts and must balance to prove true financial account accuracy. If it did not balance it means you have an error elsewhere. The basic balance sheet using the accounting equation is illustrated below.

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A different way of achieving the same outcome is called the narrative form which utilises the accounting equation as OE = A - L instead of the above account form that utilised A = L + OE. The accounts form is above, the narrative form illustrated below:

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A balance sheet would realistically change daily with financial transactions made. The majority of business utilise computer tools such as MYOB to account transactions. These tools produce a balance sheet on request, generating an instant snapshot based on the information you entered. Same rule, if the balance sheet fails to balance you have a problem elsewhere. That is an indicator to a problem, not one you can simply hide or mask, instead use problem solving skills to fault find by rechecking every transaction entered up till the last balance proved.