ZIMSEC O Level Principles of Accounts Notes: Introduction to Balance Sheets
It is also known as the Statement of Financial Position
It is a statement of the assets, liabilities, and capital of a business at a particular point in time
It is a financial snap shot of the business at a given point in time
It based on the accounting equation
The Accounting equation states that Assets are equal to Liabilities and Capital used to finance these Assets
In Mathematical terms this is shown as Assets=Capital+Liabilities
The two sides of the equation are equal
The items and amounts to be entered in the balance sheet are found in the accounting books.
These amounts are usually made up of accounts with balances that were not included in
the trading and profit and loss account during the same period
In other words a Balance Sheet compares the credit and debit balance that remain at the end of the period after a Trading and Profit and Loss Account has been prepared
Accounts that continue to have credit balances are treated as liabilities or Capital in the Balance Sheet
Accounts that continue to have debit balances are treated as assets in the Balance Sheet
Balance Sheets are not part of the double entry system
Much like a Trial Balance a Balance Sheet is a list of all the credit and debit balances in the business’s books
Even after a Balance Sheet is prepared the accounts used to create the Balance Sheet remain open at the end of the Trading Period
When a Trading and Profit and Loss Account is prepared some accounts are closed off
For example at the end of the Trading Period the Rent expense account is credited with the amount of rent expense for the current trading period and the Profit and Loss Account is debited with the amount of rent for the period
This usually closes the rent account (except in the event of prepayments and accruals)
The exact set of line items included in a balance sheet will depend upon the types of business transactions with which an organization is involved.
The total amount of assets listed on the balance sheet should always equal the total of all liabilities and equity accounts listed on the balance sheet.
If this is not the case, a balance sheet is considered to be unbalanced and the underlying accounting error causing the imbalance has been located and corrected.