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What is Balance Sheet Formula?
Balance sheet formula is the most basic part of fundamental of accounting. It is base for an entire double entry accounting system. The balance sheet equation state that sum of liabilities and owner’s equity is equal to a total asset of the company.
Balance sheet equation can be expressed as:-
Where,
- Liabilities = It is a claim on the asset of the company by other firms, bank or people.
- Owner’s Equity =It is s money contribution done ba y 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 same has to repay back.
Balance sheet equation is very useful and it helps to know the actual assets of the company. Key points to remember with this formula are-
- In the case of normal balance debt, an asset of company increases with an increase in debt, which means assets, is directly proportional to liabilities.
- In normal balance scenario, liabilities and equity increase with credit.
Examples of Balance Sheet Formula (with Excel Template)
Let’s see some simple to advanced examples for the calculation of balance sheet equation to understand it better.
Balance Sheet Formula – 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
Total asset of a company is $3,500.
Balance Sheet Formula – 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 earnings.
Therefore, the total assets will be:
The asset is equal to sum to all asset i.e. cash, accounts receivable, prepaid expense and inventory i.e. $305,483 for the year 2018.
Similarly, if we want to see 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 assets will be:
The asset is equal to sum to all asset 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 of time.
Balance Sheet Analysis Formulas
There are some of the formulas which help in an analysis of the Balance sheet which is as follows –
- Working Capital = Current Asset – Current Liabilities
- Working Capital per Dollar of sales = Working Capital / Total Sales
- Current Ratio = Current Asset / Current Liabilities
- Acid Test = (Current Asset – Inventory) / Current Liabilities
- Debt to Equity Ratio = Total Debt / Shareholder’s Equity
Example for the Analysis of Balance Sheet
Now, let’s see an example to calculate above formulas.
Let’s assume a company with sales of $15,000 in the year 2018 total liability of the company is $43,223, total asset of $65,829 and owner’s equity of $22,606. Below is a balance sheet for the year 2018 of the company from which we will calculate above formulas.
Working Capital
- Working Capital = Current Asset – Current Liabilities
- = 29,194 – 26,449
- = $2,745
Working Capital per Dollar of Sales
- Working Capital per Dollar of sales = Working Capital / Total Sales
- = 2,745 / 15,000
- =0.18
Current Ratio
- Current Ratio = Current Asset / Current Liabilities
- = 29,194 / 26,449
- = 1.1
Acid Test
- Acid Test = (Current Asset – Inventory) / Current Liabilities
- = (29,194 – 4,460) / 26,449
- = 29,193.83
Debt to Equity Ratio
- Debt to Equity Ratio = Total Liabilities (Debt) / Shareholder’s Equity
- = 26,449 / 22,606
- = 1.91
Balance Sheet Formula Calculator
You can use the following balance sheet formula calculator-
| Liabilities | |
| Owner's Equity | |
| Total Assets Formula = | |
| Total Assets Formula = | Liabilities + Owner's Equity | |
| 0 + 0 = | 0 |
Relevance and Uses of Balance Sheet Formula
Relevance and Uses of Balance Sheet Formula are as follows:-
- It is used to know the financial position of a company.
- Helps to study the trend of the company.
- This formula tells about the amount and nature of liabilities.
- Provide a real value of assets.
- Provide details about Profit and loss of the company.
Balance sheet equation helps in analysis of business to get details about equity share in asset and how much liabilities company owe though that is part of assets of a company but have to repay back. It provides a real picture of assets, equities and liabilities of a company to investors and shareholders of the company. It is further used to do more analysis and take decisions in a company. And also used by an investor to take a decision of investment in a company.
You can download this Balance Sheet Formula Excel Template from here – Balance Sheet Formula Excel Template
Recommended Articles
This has been a guide to Balance sheet formula and its definition. Here we discuss how to calculate Balance sheet formula using practical examples and downloadable excel template. You can learn more about financial analysis from the following articles –
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