What is Balance Sheet Formula?
Balance Sheet Formula is a fundamental accounting equation which mentions that, for a business, the sum of its owner’s equity & the total liabilities equal to its total assets, i.e., Assets = Equity + Liabilities. It is based on double-entry system of accounting.
Understanding Balance Sheet Equation
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For eg:
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 is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits.read more, there is an equal and opposite credit and the sum of all the assets is always equal to the total of all its liabilities and equity.
The balance sheet formula state that the sum of liabilities and owner’s equity is equal to a total asset of the company.
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
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.
i.e. Total Asset = 1500 + 2000
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.
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:
The asset is equal to the sum to all assets, i.e., cash, accounts receivableAccounts ReceivableAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet.read more, prepaid expense, and inventory, i.e., $305,483 for the year 2018.
Similarly, if we want to see the assets of company 5 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:
The asset is equal to the sum to all assets, i.e., cash, accounts receivable, prepaid expense, and inventory, i.e., $234,762 for the year 2014.
By using the above calculation, one can calculate the total asset of a company at any point in time.
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