Balance - What does balance mean in accounting? Read more here

Learn all about the concept of ‘balance’ in accounting and e-commerce. Get an introduction to how the balance sheet is used in accounting and see a practical example of the calculation

Get your business finances in order with an accurate balance sheet: A guide to assets, liabilities and equity

What does balance mean in accounting?

In accounting, "balance" refers to a statement that shows a company's assets, liabilities, and equity at a specific point in time. The balance sheet provides a snapshot of what the company owns (assets), what it owes (liabilities), and the owner's equity (equity).

The balance sheet is part of the financial reports, which also include the income statement and the cash flow statement. Together, these reports give a complete picture of the company's financial condition.

Balance in accounting

In accounting, the balance sheet is used to ensure that the company's books are "balanced." This means that the total assets must always equal the total of liabilities plus equity. If this is not the case, there are errors in the accounting that need to be corrected.

The balance sheet is divided into two main sections:

  • Assets: These are all the resources the company owns and can use to generate income. Assets include cash, receivables, inventory, buildings, equipment, etc.
  • Liabilities and Equity: Liabilities are the company's obligations or debts. Equity represents the owners' investment in the company and any retained earnings.

How is a balance sheet calculated in practice?

Let's take a simple example to illustrate how a balance sheet is calculated in practice.

Example:

Imagine you own a webshop, "WebShopXYZ," and you want to create a balance sheet for December 31. Here are some of your financial figures:

  • Assets:
  • Cash: 50,000 DKK
  • Inventory: 100,000 DKK
  • Equipment: 150,000 DKK
  • Liabilities:
  • Accounts Payable: 80,000 DKK
  • Bank Loan: 120,000 DKK
  • Equity:
  • Capital Invested: 50,000 DKK
  • Retained Earnings: 50,000 DKK

To ensure that the balance sheet matches, we need to verify that Assets = Liabilities + Equity:

Assets: 50,000 + 100,000 + 150,000 = 300,000 DKK

Liabilities + Equity: 80,000 + 120,000 + 50,000 + 50,000 = 300,000 DKK

Since 300,000 DKK = 300,000 DKK, the balance sheet is correct!

Why is the balance sheet important?

The balance sheet is important for several reasons. Firstly, it provides owners and managers with a clear picture of the company's financial situation. This makes it easier to make informed decisions about investments, expansions, or other financial strategies.

Secondly, the balance sheet is also crucial for investors and creditors. They use the balance sheet to assess the company's financial stability and its ability to repay loans.

Tips for keeping your balance sheet in top shape

Here are some tips to ensure that your company's balance sheet is always accurate and up-to-date:

  • Regular Updates: Make sure to update your balance sheet regularly, at least once a month.
  • Accurate Record-Keeping: Keep track of all financial transactions accurately to avoid errors in the balance sheet.
  • Professional Help: Consider hiring an accountant or bookkeeper to ensure your balance sheet is correct and complies with accounting standards.

Learn all about the concept of ‘balance’ in accounting and e-commerce. Get an introduction to how the balance sheet is used in accounting and see a practical example of the calculation