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Home » Accounting Tutorials » Balance Sheet Tutorials » Balance Sheet Formula

Balance Sheet Formula

By Madhuri ThakurMadhuri Thakur | Reviewed By Dheeraj VaidyaDheeraj Vaidya, CFA, FRM

Formula to Calculate Balance Sheet

Balance sheet formula which states that sum of the total liabilities and the owner’s capital is equal to the company’s total assets is one of the most fundamental parts of the accounting on which the whole double entry system of accounting is based.

Balance sheet formula is the most basic part of the fundamental of accounting. It is very useful, and it helps to know the actual assets of the company. It is base on an entire double-entry accounting system. The balance sheet equation 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.

Balance Sheet Formula

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 earnings.

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Therefore, the total assets will be:

Balance sheet formula example 1

The asset is equal to 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 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:

Balance sheet formula example 1-1

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.

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 of the Analysis of Balance Sheet

Now, let’s see an example to calculate the above formulas.

Let’s assume a company with sales of $15,000 in the year 2018 total liability of the company is $43,223, the 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 the above formulas.

Balance sheet formula example-1-1

Working Capital

Example 3.2

  • Working Capital = Current Asset – Current Liabilities
  • = 29,194 – 26,449
  • = $2,745

Working Capital Per Dollar of Sales

Example 3.7

  • Working Capital per Dollar of sales = Working Capital / Total Sales
  • = 2,745 / 15,000
  • =0.18

Current Ratio

Example 3.4

  • Current Ratio = Current Asset / Current Liabilities
  • = 29,194 / 26,449
  • = 1.1

Acid Test

balance sheet example 3.5

 

  • Acid Test = (Current Asset – Inventory) / Current Liabilities
  • = (29,194 – 4,460) / 26,449
  • = 0.94

Debt to Equity Ratio

Example 3.6

  • Debt to Equity Ratio = Total Liabilities (Debt) / Shareholder’s Equity
  • = 26,449 / 22,606
  • = 1.91

Balance Sheet Calculator

You can use the following balance sheet calculator-

Liabilities
Owner's Equity
Total Assets Formula =
 

Total Assets Formula = Liabilities + Owner's Equity
0 + 0 = 0

Relevance and Uses

  • In the case of normal balance debt, an asset of the 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.
  • It is used to know the financial position of a company.
  • It 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.
  • It helps in the analysis of the business to get details about equity share in assets and how much liabilities the company owe though that is part of the 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.
  • Balance sheet formula is further used to do more analysis and make decisions in a company. And also used by an investor to make a decision of investment in a company.

Recommended Articles

This has been a guide to the Balance sheet formula and its definition. Here we learn how the balance sheet formula helps to know the financial position of the company with practical examples and downloadable excel template. You can learn more about financial analysis from the following articles –

  • Examples of Balance Sheet
  • Classified Balance Sheet
  • Balance Sheet Purpose
  • Banks Balance Sheet – Explain
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