## 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.

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### 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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For eg:

Source: Balance Sheet Formula (wallstreetmojo.com)

The balance sheet equation is the foundation of the dual entry system of accounting. It shows that for every debit, 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

#### 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 earnings.

Therefore, the total assets will be:

The asset equals the sum to all assets, i.e., cash, accounts receivable, prepaid expense, 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 assets will be:

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 –

Nikhil SR says

Thank you so much it help lot for me