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's the difference between a trial balance and a balance sheet?

    Discover what is included in a trial balance and a balance sheet, and learn about what sets these two accounting reports ... Read Answer >>
  2. What is the difference between a balance sheet and a cash flow statement?

    Understand the difference between a balance sheet and an income statement. Learn the three components of each of the financial ... Read Answer >>
  3. How are accounts payable listed on a company's balance sheet?

    Find out how accounts payable is listed on a company's balance sheet, why it is considered a current liability, and how it ... Read Answer >>
  4. What is the difference between a P&L statement and a balance sheet?

    Take a deeper look at the differences between the profit and loss statement and the balance sheet, two of the most important ... Read Answer >>
  5. What items on the balance sheet are most important in fundamental analysis?

    Read about which balance sheet items are considered most important for fundamental analysis, including cash, current liabilities ... Read Answer >>
Related Articles
  1. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  2. Investing

    5 Tips For Reading A Balance Sheet

    If you know how to read it, the balance sheet provides valuable information on a potential investment.
  3. Investing

    Retained Earnings

    Learn more about this calculation and why companies include it on the balance sheet.
  4. Investing

    Outstanding Shares

    Learn more about this important number found on a company's balance sheet.
  5. Investing

    Comparing the P&L Statement and the Balance Sheet

    Basically, the balance sheet shows how much a company is worth, while the P&L statement reveals if a company is profitable or not.
  6. Investing

    An Introduction To The Balance Sheet

    The balance sheet is a basic accounting tool used by individuals, business owners and even large corporations to track net worth. Discover its main components and how they work together.
  7. Investing

    How To Evaluate A Company's Balance Sheet

    Asset performance shows how what a company owes and owns affects its investment quality.
  8. Investing

    Evaluating A Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
  9. Investing

    Common Size Balance Sheet

    Investopedia explains: A common size balance sheet is a valuable tool for tracking and analyzing the changes and performance of a business over multiple time periods.
RELATED TERMS
  1. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
  2. Off Balance Sheet - OBS

    An asset or debt that does not appear on a company's balance ...
  3. Common Size Balance Sheet

    A balance sheet that displays both the numeric value of all entries, ...
  4. Clean Balance Sheet

    A company's financial statement that summarizes its assets, liabilities ...
  5. Balance Sheet Reserves

    An amount expressed as a liability on the insurance company's ...
  6. Average Balance

    The balance on a loan or depositary account. A simple average ...
Hot Definitions
  1. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  2. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  3. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  4. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  5. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  6. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
Trading Center