What is in the Balance sheet? (knowing the position of the organisation)

Though you may have not the responsibility for determining the balance sheet of the organisation, you should know the basics.

Each organisation will have assets, items of value the business owns and liabilities, money the business owes to other people as a result of past events. The owner will have equity, ownership, in their business.

The accounting equation is the basis for presenting accounting information. The equation involves three components, assets, liabilities and equity. Remember these are defined as:

  • Assets Items which offer future value such as tools, cash, spare parts, and buildings which can be used to support the future activities of an organisation

  • Liabilities is money that is owed as a result such of past activities such as accounts payable – money owed but not as yet paid to your suppliers or repayment of a loan .

  • Equity, which is the money put in by the owners of an organisation (plus any surpluses that have been made and left in the organisation.

The Balance sheet shows what is owned, what is owed and what is left over for the owners. It is based on the accounting equation reads as follows

Assets = Liabilities plus Equity

Think about your house for a moment. Your house is an asset, but rarely does anyone have enough money to pay cash for a house. We have to borrow money to purchase the house. Our loan is a liability. Our share of house might look something like this when we first buy the house

Your House is An Asset

An asset A

This much is owned by me

Your Equity is small

An asset

Of the value of my asset this much is owed to the bank

Your loan, your liability is large

Over time you pay off some of your debt so the relationship between debt and equity changes

Your House. An Asset

An asset

This much is owned by you

Your Equity is large

An asset

Of the value of my asset this much is owed to the bank

Your loan, your liability is small

The accounting process plots the changes in the position of an organisation. The changes result from the activities a business undertakes.

If, Assets = Liabilities plus Equity is true then it is also true that Assets - Liabilities = Equity

It is also true that Assets - Equity = Liabilities

The information in the accounting equation is recorded in the Balance Sheet of the business.  As the name indicates the Balance Sheet always balances.

Your house is only one part of your personal Balance Sheet.
 

TRY THIS

Think about your assets, items of future value – House? Superannuation? Cash in the Bank? Any family jewels? Furniture? Your car etc.

Make a list – What is it all worth?

Think about your liabilities – mortgage? Credit card balances? Store accounts? Other Loans

Make a list – How much do you owe?

Now deduct your total liabilities from your assets – which will give you your personal equity – YOUR WEALTH

Are your Richer than you thought?