A:

Yes, a balance sheet should always balance. The name "balance sheet" is based on the fact that assets will equal liabilities and equity every time.

The assets on the balance sheet consist of things of value that the company owns or will receive in the future and which are measurable. Liabilities are what the company owes, such as taxes, payables, salaries and debt. The equity sections displays the company's retained earnings and the capital that has been contributed by shareholders.

The balance between assets, liability and equity makes sense when applied to a simpler example, such as buying a car for $10,000. In this case, you might use a $5,000 loan (debt), and $5,000 cash (equity) to purchase it. Your assets are worth $10,000 total, while your debt is $5,000 and equity is $5,000. In this simple example, assets equal debt plus equity.

The major reason that a balance sheet balances is the accounting principle of double entry. This accounting system records all transactions in at least two different accounts, and therefore also acts as a check to make sure the entries are consistent. Building on the previous example, suppose you decided to sell your car for $10,000. In this case, your asset account will decrease by $10,000 while your cash account, or account receivable, will increase by $10,000 so that everything continues to balance. (This is a very simple example. If you wish to learn more, check out Reading The Balance Sheet and Breaking Down The Balance Sheet.)

If the balance sheet you're working on does not balance, this should be a red flag that there is likely a problem with one or more entries. Even a small discrepancy can occur as a result of several errors that offset each other.

RELATED FAQS
  1. What is a good debt ratio, and what is a bad debt ratio?

    Learn about the factors that influence how investors and lenders evaluate the debt ratio for a company and why the answer ... Read Answer >>
  2. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  3. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Answer >>
  4. What items are considered liquid assets?

    Learn what a liquid asset is, some examples of liquid assets, what a non-liquid asset is and what determines whether as asset ... Read Answer >>
  5. What is the formula for calculating EBITDA?

    Learn about EBITDA and how companies can manipulate this calculation to look more profitable. Read Answer >>
  6. What is the formula for calculating the debt-to-equity ratio?

    Find out how to use this fundamental financial ratio to help assess a company's performance. Read Answer >>
Related Articles
  1. Fundamental Analysis

    Apple Stock: An Earnings Case Study (AAPL)

    Discover an earnings case study on Apple, and learn about its EPS and revenue growth rates, and what analysts are projecting for Apple in 2016 and 2017.
  2. Term

    What Is Stockholders' Equity?

    Stockholders’ equity represents the equity that shareholders own in a company.
  3. Fundamental Analysis

    4 Challenges China Faces According to PIMCO

    Get the latest thoughts from Luke Spajic, executive vice president and portfolio manager in Singapore for PIMCO, on challenges facing China's economy.
  4. Markets

    Re-Emerging Markets?

    If you're wondering when will the emerging markets comeback be? Read on because is still young, but encouraging.
  5. Fundamental Analysis

    Alcoa vs. BHP Billiton: Which Is Better for My Portfolio?

    Obtain an up-to-date overview of BHP Billiton and Alcoa, Inc., two key players for investors seeking exposure to the aluminum market to consider.
  6. Sectors

    The Debt Report: The Telecom Sector

    Discover how America's telecommunications providers have been piling on debt since the Great Recession, and how part of the sector seems vulnerable.
  7. Fundamental Analysis

    Value Investing: 5 Tips to Consider in 2016

    Read five tips for value investors to consider in 2016, including how to look beyond traditional metrics and when to expand outside of the value zone.
  8. Stock Analysis

    4 Oil Companies Swimming in Debt to Avoid (HK, SWN)

    Discover which oil and natural gas companies American investors should avoid in 2016, and why the industry is awash with debt and liquidity problems.
  9. Sectors

    Global Financials: 3 Key Industry Players (IDCBY, AXAHY)

    Take a look at three of the largest and most influential global companies that are leaders in the important financial services sector.
  10. Economics

    Understanding Game Theory

    Game theory is a model for making decisions that weighs the benefits of a choice along with the interaction between participants.
RELATED TERMS
  1. Kurtosis

    A statistical measure used to describe the distribution of observed ...
  2. Marginal Profit

    Marginal profit is the profit earned by a firm or individual ...
  3. Adjusted EBITDA

    Adjusted EBITDA is a measure computed for a company that looks ...
  4. Illiquid

    The state of a security or other asset that cannot easily be ...
  5. Market Efficiency

    The degree to which stock prices reflect all available, relevant ...
  6. Liability

    A company's legal debts or obligations that arise during the ...

You May Also Like

Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center