A balance sheet is like a financial image of a company at a specific moment. It shows what a company owns (assets), what it owes (liabilities), and the owners’ stake (equity).
We can divide it into two sides: assets on the left, and financing (liabilities and equity) on the right. The formula is simple: assets = liabilities + equity.
The balance sheet is crucial for assessing a company’s health and is one of three key financial statements. It helps investors understand returns and assesses a company’s ability to meet its short-term obligations.
How does the balance sheet work
When you do accounting, you use what is called double-entry bookkeeping. This means that you record each transaction as a plus in one place in the accounting and a minus in another.
Since the balance sheet is a statement of everything you have recorded, it should always balance to zero when you have completed the fiscal year.
Use the balance sheet to check the accounting
The balance sheet is great for getting a quick overview of your entire accounting. You can see all the accounts and quickly get an overview of what has sold best in your business, or where you have the highest expenses.
You can also use the balance sheet to check if the accounting is correct. If the balance sheet does not balance to zero, you have most likely forgotten to record something twice. It is easy to find out which account the entry belongs to and find the correct transaction.
The balance sheet can also be used for reconciliation – that is, to check if the numbers in the accounting are correct. For example, you can check that the amount you have in the bank account matches what you have recorded in the accounting.