What is the Balance Sheet Equation?

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

Example:

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.

Balance Sheet

In the above example, the total liabilities are equivalent to the total assets + owner’s equity.

The above mentioned is the concept, that is elucidated in detail about ‘What is the Balance Sheet Equation?’ for the Commerce students. To know more, stay tuned to BYJU’S.

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