Balance Sheet Formula

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is Balance Sheet Formula?

The Balance Sheet Formula is a fundamental accounting equation that mentions that, for a business, the sum of its owner’s equity & the total liabilities is equal to its total assets, i.e., Assets = Equity + Liabilities. It is based on a double-entry system of accounting.

Key Takeaways

  • The balance sheet formula is Assets = Liabilities + Shareholders’ Equity.
  • The formula reflects the fundamental accounting principle that the total value of a company’s assets equals the sum of its liabilities and shareholders’ equity.
  • The balance sheet formula provides a structure for organizing and presenting financial information on a company’s balance sheet.
  • Using the balance sheet formula, stakeholders can assess a company’s financial position, solvency, and overall health.

Understanding Balance Sheet Equation

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Source: Balance Sheet Formula (wallstreetmojo.com)

The balance sheet equation is the foundation of the dual entry system of accountingDual Entry System Of AccountingDouble Entry Accounting System is an accounting approach which states that each & every business transaction is recorded in at least 2 accounts, i.e., a Debit & a Credit. Furthermore, the number of transactions entered as the debits must be equivalent to that of the credits. read more. It shows that for every debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more, It shows that there is an equal and opposite credit for every debit, and the sum of all the assets is always equal to the total of all its liabilities and equity.

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The balance sheet formula states that the sum of liabilities and owner’s equity is equal to the company’s total assets.

Total Assets = Liabilities + Owner’s Equity

Where,

  • Liabilities = It is a claim on the asset of the company by other firms, banks, or people.
  • Owner’s Equity = It is s money contribution done by a shareholder of a company for an ownership stake.
  • Total Asset = a total asset of a company including equity and liabilities, i.e., asset owe by company and money against the same has to repay back.

Examples

You can download this Balance Sheet Formula Excel Template here – Balance Sheet Formula Excel Template

Example #1

Suppose a proprietor company has a liability of $1500, and owner equity is $2000. Calculation of Balance sheet, i.e., Total asset of a company will sum of liability and equity.

In the below-given figure, we have shown the calculation of the balance sheet.

balance sheet example 1.1

i.e. Total Asset = 1500 + 2000

balance sheet example 1.2

The total asset of a company is $3,500.

Example #2

A manufacturing company named EON manufacturer Pvt. Ltd has below balance sheet for 5 years, i.e., from the year 2014 to 2018.

Balance sheet formula example-1

Taking the value of the 2018 year,

Sum of total liabilities = $45,203

Sum of shareholder’s equity = $260,280, i.e., the sum of equity capital and retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more.

Therefore, the total assetsTotal AssetsTotal Assets is the sum of a company's current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equityread more will be:

Balance sheet formula example 1

The asset equals the sum to all assets, i.e., cash, accounts receivableAccounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more, prepaid expensePrepaid ExpensePrepaid expenses refer to advance payments made by a firm whose benefits are acquired in the future. Payment for the goods is made in the current accounting period, but the delivery is received in the upcoming accounting period.read more, and inventory, i.e., $305,483 for the year 2018.

Similarly, if we want to see the assets of the company five years back, i.e., in 2014 calculation will be as follows:-

Taking the value of the 2014 year,

Sum of total liabilities = $62,288

Sum of shareholder’s equity = $172,474, i.e., a sum of equity capital and retained earnings.

Therefore, the total assetsTotal AssetsTotal Assets is the sum of a company's current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equityread more will be:

Balance sheet formula example 1-1

The asset equals the sum of all assets, i.e., cash, accounts receivable, prepaid expense, and inventory, i.e., $234,762 for 2014.

By using the above calculation, one can calculate the total asset of a company at any point in time.

Balance Sheet Explained in Video

 

Frequently Asked Questions (FAQs)

What does the balance sheet formula represent?

The balance sheet formula represents the fundamental accounting equation, which states that liabilities or shareholders’ equity must finance a company’s assets. It provides a clear framework for organizing and understanding a company’s financial position.

Can the balance sheet formula change over time?

The balance sheet formula remains constant, reflecting the accounting equation that assets must always equal the sum of liabilities and shareholders’ equity. However, the values of individual items within the formula can change as a company’s financial position evolves.

How is the balance sheet valuable formula for financial analysis?

The balance sheet formula is a foundation for various financial ratios and analyses. For example, the debt-to-equity ratio can be calculated using the balance sheet formula to assess a company’s leverage and financial risk.

Are there any limitations to the balance sheet formula?

While the balance sheet formula provides a helpful framework, it has limitations. For instance, it does not capture the fair value of certain assets or liabilities, as they may be recorded at historical cost. Additionally, the formula may only partially reflect off-balance sheet items or contingent liabilities, requiring additional analysis and disclosure.

Recommended Articles

This has been a guide to the Balance sheet formula and its definition. Here we discuss components of the Balance Sheet Equation along with practical examples. You can learn more about accounting from the following articles –

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Comments

  1. Nikhil SR says

    Thank you so much it help lot for me

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