Section 2: The Balance Sheet

The Balance Sheet lays out the assets, liabilities, and equity of an organization measured at a specific point of time. Assets include things like cash, receivables, inventory, equipment, and investments, while liabilities are amounts owed to vendors, employees, and creditors. The equity section represents the owners’ interest in the company.

The article below explains how the balance sheet and the accounting equation are very similar and work hand-in-hand. A detailed explanation with examples directly from the article is presented below:

The format of the balance sheet is similar to the accounting equation:

Assets = Liabilities + Stockholders' Equity

As a result of the double-entry system of accounting, the balance sheet and the accounting equation should always be in balance. Here are a few examples:

• When a corporation borrows money from its bank, 1) the corporation's assets will increase, and 2) the corporation's liabilities will increase.

• When the corporation uses its cash to purchase land for a new warehouse, 1) the asset land increases, and 2) the asset cash decreases.

• When a corporation earns $5,000 by providing consulting services, 1) the corporation's assets (such as cash or accounts receivable) will increase, and 2) its stockholders' equity (specifically retained earnings) will increase. Stockholders' equity is increasing because revenues will cause an increase in the amount of net income, and the increase in net income causes an increase in retained earnings.