Balance Sheet

What is a Balance Sheet?

A balance sheet is a financial report showing how much the business owns versus what it owes.

To understand the balance sheet, it helps if you see what it was used for historically.



How it Works

In the days of manual accounting systems, you prepared an income statement at the end of the accounting period.

While doing this manually, it was easy to make mistakes

​This meant the reported profit would be incorrect. 

To make sure the income statement was correct,  you prepared a balance sheet.

When preparing the balance sheet, you transferred net profit to the equity area of the balance sheet.

After this, you checked to see if the balance sheet balanced.

If it balanced, it proved that the calculated profit was correct.

Role of the Balance Sheet Today

With computerized accounting systems, this check is no longer necessary.​

The computer will ensure everything is in balance at all times.

So the income statement and the profit it contains will always be correct.

Despite this, the balance sheet is still in use today.

​It is used to keep tally of what the business owns versus what it owes.

© R.J (Bob) Hickman 2020