Introduction to the Balance Sheet
is an indication of a business' financial strength. Financial position is
determined by the company's assets, liabilities, and equity, which are all included on its
balance sheet. A balance sheet shows what the business owns and owes on a particular
The Fundamental Accounting Equation
To determine the
of an individual or business, you must:
calculate its total
– things that it owns that have a dollar value
calculate its total
– total debts
calculate the difference between total assets and total liabilities to determine
(otherwise known as capital or net worth)
Capital or owner's equity is the owner's worth in his/her business' assets.
The most important law in accounting that always holds true is the fundamental
accounting equation which is stated as:
A = L + OE (Assets = Liabilities + Owner's Equity)
You will see that we can rearrange the equation in order to calculate owner's equity (as
we did above). So, another way of writing the fundamental accounting equation is:
A - L = OE (Assets – Liabilities = Owner's Equity)
As we can see from the above equation, owner's equity is determined by subtracting
liabilities from assets. In other words, all of the assets of a business will either be
financed by debt, or by the owner's personal investment in them. Therefore, total assets,
less the debts incurred to purchase the assets, gives us the owner's investment in his/her
assets, or owner's equity.
For example, say you purchase a house worth $300,000. You make a down payment of
$50,000 and take out a mortgage, from the bank, for the remainder. According to the
fundamental accounting equation, your equity in the house is $50,000 and the bank has a
claim on your house of $250,000 ($300,000 = $250,000 + $50,000).
Let's do an example together.
Dr. M. Lafarge owns and operates a medical clinic in Winnipeg, Manitoba. Following is
a list of assets and liabilities for his practice.
Loan from suppliers