What Are Accounting / Bookkeeping Balance Sheets?

In accounting terms, a balance sheet (or statement of financial position) is a summary of an organization’s (or person's) financial balances.

Assets, liabilities and ownership equity are listed for a specific date, typically the end of the financial year. A balance sheet is often described as a snapshot of a company’s financial condition. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time.

A company balance sheet has three parts:

  • assets,
  • liabilities and
  • ownership equity.

The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as equity (or the net assets or the net worth) of the company and according to the accounting equation, equity must equal assets minus liabilities.

If you think about your house, if you have a mortgage on it, the amount of equity you have tied up in the property is the difference between what the house is worth and the size of the mortgage you have on the property. For example, if your house is worth £500,000 and your mortgage is £200,000, then the amount of equity you have tied up in the property is £300,000.

Another way to look at the same equation is that assets equals liabilities plus owner’s equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner’s money (owner’s equity). Balance sheets are usually presented with assets in one section and liabilities and equity in the other section with the two sections "balancing".

Records of the values of each account or line in the balance sheet are usually maintained using a system of accounting known as the double-entry bookkeeping system, and are normally maintained using an accounting / bookkeeping software package.

A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they cannot, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities.

If you are a contractor or a sole trader, look at the end of year accounts produced by your accountant to see what assets and liabilities your business has.

Go back to MyBookkeepingManager User Guides home page