The balance sheet equation also understood as accounting equation is the basic element of the balance sheet and the primary principle of accounting. It helps the company to prepare a balance sheet and see if the entire enterprise’s asset is equal to its liabilities and stockholder equity. It is the base of the double-entry accounting system.
Double-entry accounting is a system that ensures that accounting and transaction equation should be equal as it affects both sides. Any change in the asset account, there should be a change in related liability and stockholder’s equity account. While performing journal entries accounting equation should be kept in mind.
Balance Sheet Equation:
Assets = Equity+Liabilities
However, it can also be calculated as,
Shareholder’s Equity = Assets – Liabilities or Liabilities = Assets – Shareholder’s Equity
Key Points of Balance Sheet Equation:
Though Balance sheet equation gives the investors and shareholders a rough idea about the financial status of the company. Few things that should be kept in mind are stated below:
- The report of the Balance Sheet does not always give the true and exact status of the company’s finance
- Each transaction recorded in the financial statements should be mentioned in the Balance sheet
- If one aspect of the Balance sheet is impacted the other aspect should also be influenced
Related link: Balance Sheet vs Cash Flow Statement
ABC starts the food truck. He puts ₹ 50,000 as a capital fund. He further loans ₹ 25,000 from a local credit vendor. Now, he has a total of ₹ 75,000, he then purchases a fully furnished truck for ₹ 45,000.
Below is the ABC balance sheet for December 2017.
In the above example, the total liabilities are equivalent to the total assets + owner’s equity.
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