Balance sheet

Balance sheet (also known as the statement of financial position) is a financial statement that shows the assets, liabilities and owner’s equity of a business at a particular date. The main purpose of preparing a balance sheet is to disclose the financial position of a business enterprise at a given date. While the balance sheet can be prepared at any time, it is mostly prepared at the end of the accounting period.

Most of the information about assets, liabilities and owners equity items are obtained from the adjusted trial balance of the company. However, retained earnings, a part of owners’ equity section, is provided by the statement of retained earnings.

Sections of the balance sheet

We can broadly divide a balance sheet into three sections – assets section, liabilities section and owners equity section. Each of these sections is briefly discussed below:

Assets section

In this section all the resources (i.e., assets) of the business are listed. In balance sheet, assets having similar characteristics are grouped together. The mostly adopted approach is to divide assets into current assets and non-current assets. Current assets include cash and all assets that can be converted into cash or are expected to be consumed within a short period of time – usually one year. Examples of current assets include cash, cash equivalents, accounts receivables, prepaid expenses or advance payments, short-term investments and inventories.

All assets that are not listed as current assets, are grouped as non-current assets. A common characteristic of such assets is that they continue providing benefit for a long period of time – usually more than one year. Examples of such assets include long-term investments, equipment, plant and machinery, land and buildings, and intangible assets.

When balance sheet is prepared, the current assets are listed first and non-current assets are listed later.

Liabilities section

Liabilities are obligations to parties other than owners of the business. They are grouped as current liabilities and long-term liabilities in the balance sheet. Current liabilities are the obligations that are expected to be met within a period of one year by using current assets of the business or by the provision of goods or services. All liabilities that are not current liabilities are considered long term liabilities.

Owner’s equity section

Owner’s equity is the obligation of the business to its owners. The term owners’ equity is mostly used in the balance sheet of sole proprietorship and partnership form of business. In a company’s balance sheet the term “owner’s equity” is often replaced by the term “stockholders equity”.

When balance sheet is prepared, the liabilities section is presented first and owners’ equity section is presented later.

Format of the balance sheet

There are two formats of presenting assets, liabilities and owners’ equity in the balance sheet – account format and report format. In account format, the balance sheet is divided into left and right sides like a T account. The assets are listed on the left hand side whereas both liabilities and owners’ equity are listed on the right hand side of the balance sheet. If all the elements of the balance sheet are correctly listed, the total of asset side (i.e., left side) must be equal to the total of liabilities and owners’ equity side (i.e., right side).

In report format, the balance sheet elements are presented vertically i.e., assets section is presented at the top and liabilities and owners equity sections are presented below the assets section.

The example given below shows both the formats.


Using the information from adjusted trial balance given on this page and statement of retained earnings given on this page, we can prepare the balance sheet of Business Consulting Company as follows:

Account format:


Report format:


Usefulness of balance sheet

As described at the start of this article, balance sheet is prepared to disclose the financial position of the company at a particular point in time. This information is of great importance for all concerned parties. For example, investors and creditors use it to evaluate the capital structure, liquidity and solvency position of the business. On the basis of such evaluation, they anticipate the future performance of the company in terms of profitability and cash flows and make much important economic decisions.

Limitations of balance sheet

  1. Many items have great financial value and may be important for the users of financial statements in making reliable decisions but are not reported in the balance sheet because they cannot be objectively measured. Examples of such items include the skill and knowledge of an IT company, a sound customer base and high reputation etc.
  2. The current fair value of various assets and liabilities may be important for some decision makers but the balance sheet does not disclose it because assets and liabilities are mostly reported at their historical costs.
  3. The value of some items is reported in the balance sheet on the basis of judgments and estimates. For example the depreciation is usually calculated on the basis of estimated life of the assets. The book value reported in the balance sheet is therefore also an estimated value. Another example is the accounts receivable that are reported at their estimated net realizable value.
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63 Comments on Balance sheet

  1. KALIMBA James

    Excellent explanations

  2. karabelo

    Excellent explanations was helpful for my class test

  3. cla

    I didn’t have what I need

    1. Cleo

      wat else do u need


    A well defined explanations, I wish u success all the time

    1. Prakash Terang

      Very clear explanation

      1. Prakash Terang

        Sir please show me a simple way of balance sheet


    Pl show & guide me how to segregate the different head of accounts in the groupling like-CURRENT ASSET,CURRENT LIABILITIES,INDIRECT EXPENSES,DIRECT EXPENSES,DIRECT INCOMES,INDIRECT INCOMES ETC.

  6. Sania

    Too good explanation and you have covered all aspects of the topic in a very good manner. I wish you success all the time.

    1. makwana pinky

      which things are not include in balance sheet????

  7. shashi maurya

    Excellent explanations .


    With thanks or not balance sheet

  9. Bavdas Nagad

    very good explanation..

  10. gatjiak

    fantastic explanation
    I got the concept


    i want tohelpin making balance sheet of a business man or a proprietorship or acompany.
    plz help me someone

  12. saqib zamir

    very good explanation

  13. TABBY


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  14. TABBY

    thank you for responding

  15. Rakesh

    Please also mention in hindi language

  16. phionah

    nice lecture.thanks

  17. alimi hassan

    Good exactly in it aspect


    Thank you very much for you explanations was worth while

  19. Derby Agyei

    kindly give us the actual format. perfect explanation. i have really understood it.

  20. pratibha j mone

    very nice example


    Sir can you post the simple way of Balance Sheet immediately I have urgent need of this

  22. Monica Deng

    Excellent explanation I think am ready for my test.
    The person doing to mark it had better given me a straight A๐Ÿ˜Š๐Ÿ˜Š๐Ÿ˜Š๐Ÿ˜Š


    Thanks a lot it helped

  24. sam

    good conduct.I like it and understood the concepts exactly much thanks to staff members!!

  25. Adrian Lawrence

    Thanks helpful explanation for what are complex concepts.



  27. partab rai

    It is helpful for all

  28. satybir yadav

    Excellent explanation I think am ready for my test.
    The person doing to mark it had better given me a straight A

  29. Suraj

    Excellent Explanation
    It Is Helpful

  30. Mohammed Seid

    I like your Explanation about balance sheet statement but, as you know when prepared any financial statement based on their company because of business organization can be classified as manufacturing,merchandising and service. so each business organization doesn’t prepare the same financial statement.Anyways I want to ask sincerely to distinguish which financial statement in which business organization .

  31. peter

    well understood the concept

  32. RASHMI


  33. Galley

    please can you direct me to present Balance in a simple way?

  34. Aishi Archita Saha

    excellent explanination

  35. Ngaira Walter

    Really want to know whether its format changes whith different types of accounts for example agricultural accounts, bank accounts, insurarance accounts, pension schemes etc

  36. Ali Haji

    Big up,it is helpful

  37. Divya.M

    Ultimate Explanation.
    Thank you For Guidence

    1. Divya. M

      I want to learn about GST Registration and concept of Gst Returns

  38. wasi

    What about the companies capital,drawings and net profit too?


    well explain and very much understood on Balance sheet topic.

  40. Kabir Ali.

    Outstanding information.bundles of thanks.

  41. confydora

    nice explanation

  42. salim issah


  43. Tahir Hassan

    is it possible to add a file to an Excel file





  46. Nancy clottey

    well explained and well understood.thanks.

  47. Nsubuga shafic

    Me I wanted help with taxation
    Bt de xplainations are gud

  48. keeza, obeth.

    thax so much

  49. Raju Chandrashekar

    Supremely Amazing stuff

  50. Elizabeth

    Thanks I was able to complete my assignment.

  51. Link chemwei

    Mmmmmmh thanks the explanation is awesome though am still confused in calculating net asssets do you take current assets- current liabilities or take asssets – liabilities and thn how do you treat long time liabilities

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