December 7, 2021

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Use Accounting Equation to Prepare Balance Sheet

Use Accounting Equation to Prepare Balance Sheet
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The balance sheet or the statement of financial position can be prepared using the accounting equation. I have discussed these two terms here and here. In this article, I explain how to prepare a simple balance sheet with the accounting equation. Before then, let’s define these terms.

Meaning of Accounting Equation

The accounting equation is the fundamental principle of accounting. It explains in simple terms business finances and how they are used. The equation is ASSETS = CAPITAL LIABILITIES.

Meaning of Balance Sheet

The balance sheet also referred to as a statement of financial position is a statement that explains the financial strength of a business. It is prepared at the end of the firm’s accounting period.

The Balance Sheet Format

You can prepare a balance sheet if you know its format. The screenshot below is a typical example of a statement of financial position.

Use Accounting Equation to Prepare Balance Sheet

From the format, you will see the accounting equation. The blue coloring shows that the total of assets is equal to the total of capital and liabilities. The value is 12,500,000.

A Balance Sheet Example

Below are the closing balances of Kudirat & Co. on December 31st, 2020. From the details, prepare a balance sheet for the business.

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Capital100,000
Land and building60,000
Furniture and fittings37,000
Goodwill12,000
Bank loan47,000
Account Receivables73,000
Account Payables56,000
Cash and bank balance81,000
Inventroies96,000
Net Profit21,000

With the above data, the balance sheet is as follows.

Balance Equation Solution for Kidirat & Co

Non Current Assets
Land and Building60,000
Furniture and Fittings37,000
Goodwill12,000
Current Assets
Inventories96,000
Account Recievables73,000
Cash and Bank balance81,000
Total Assets263,000
Financed By
Capital100,000
Net Profit21,000
Current Liabilities
Bank Loan45,000
Account Payables56,000
Tax Payable41,000
Capital and Liabilities263,000

As per the solution above, the total assets are the same value as the total of capital and liabilities. The value is 263,000.

Conclusion

The balance sheet can be solved, with a good knowledge of the accounting equation. All you need to do is, to sum up, all assets in one place. Then add up all capital and liabilities in another place. The total of assets will be equal to the total of capital and liabilities.

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