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Basic Accounting: Balance sheets

by Andy Lymer and Nishat Azmat

The purpose of the balance sheet is to set out the financial position of a business at a particular moment in time. It identifies the different forms in which the wealth of the business is held. The assets of the business are often listed first followed by the liabilities (i.e. financial obligations) of the business.

Examples of the sort of items that often appear as assets in the balance sheet are:

freehold premises
machinery and equipment
inventory
debtors
cash at bank.

The balance sheet reflects the accounting equation and there are several ways to write the accounting equation, which means there are several ways to present the balance sheet, you must take this into account and be flexible when you see different financial statements.

The accounting equation A = C + L applies to the balance sheet, where:

A represents the total assets of the business (i.e. the fixed assets + the current assets)
C the proprietary capital (owner’s equity) and (owner’s equity + profit – drawings)
L the external debts and liabilities of the business (long-term liabilities + current liabilities)

Another form of the accounting equation focuses on the owner’s equity where:

Assets – liabilities = owners equity OR A – L = C

The balance sheet is much more informative than a simple list of assets and liabilities from which it is prepared as it is usually arranged in a helpful format.






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