The Balance Sheet Equation | Whatever Balance Sheet should have

The Balance Sheet Equation | Whatever Balance Sheet should have

Three elements which consist of perfect Balance Sheet


 Balance Sheet Equation definitions


In the balance sheet, assets, liabilities and owners equity are the three main elements of the balance sheet. In my above presentation I concise the three elements of the balance sheet. if you want to clear concepts about accounting equation then go to accounting cycle and learn the how it plays important role in accounting.

In modern accounting, every transaction has two effects in accounts and they are equal on both sides. now we can explain these three elements.

(1)    Assets:

An asset is own what you have in the business. Assets always represents the data what you own in liquid and fixed assets. And also determine that, the ability of pay of liability. An asset has two types one is tangible such as equipment another is intangible such as patent, trademark and so on.

Assets Example:

An asset uses for various expense meetup. For example, a bill paid by supplier then the balance sheet assets side will be decreased for the payment made to the supplier. On the other hand, some expense meetup in an advance, such as prepaid rent which is related to advance payment of accounts payable. Prepaid rent goes to assets side deducted by the rent.

Similarly, depreciation is one of the expenditures and its related to the assets side. When purchasing an equipment, it will be depreciated in every month. So that the depreciation is deducted from the equipment and show the remaining balance.

An asset has three parts which are explained below;

  • Current assets:

The current assets which have to stay in an operating period such as cash in hand, supplies, inventory, advance on service or expenses and so on. on the other hand, current assets meet up the needs of the operating expenses such as prepaid rent. In concise, assets supported a year operating expenses.

  • Fixed assets:

The fixed assets which is necessary for long-term investment and represents entity strength such as long-term investment which is one year above, premises. The fixed assets which have stayed in the long-term period of accounting years such as investment, furniture, fixture, machinery and other long-term assets.

  • Others assets:

Other assets are consists of tangible and intangible assets such as patent, trademark, goodwill and so on.

(2)    Liabilities:

The liabilities which the company owe or payment on a due amount. The liability of the entity lend for the business needed. It has two types one is current liability which is for one year another is long-term liabilities which is lending for more than one year such as debenture. The liabilities consists of two elements which have discuss below;

  • Current liabilities:

When the liabilities transaction for the operating year in an accounting period that is called current liabilities. Current liabilities lend for one year such as accounts payable, short-term loan, accrual amount and so on.

  • Long-term liabilities:

When the liabilities transactions for more than one year in the accounting period than its called long-term liabilities and it’s such as a loan, mortgage loan, debenture and so on.

(3)    Owners equity:

Owners equity is the equity of the company when all assets of the company what is owed and the due amount which is deducted from the assets results from net worth or net profit is called owners equity.

Every transaction has two side effects and it is equal to both side. the elements of balance sheet may considerable for the snapshot of the financial statement of the business firm. The interested person of the business like as entity owner, Accounts payable or supplier and stockholders all are looking forward to see the business position.


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