The balance sheet is an extended representation of the standard accounting equation. It represents the financial position of the entity at any point in time. That is why; it is also called Statement of Financial Position.  The accounting equation is written as:

Assets = Equity + Liabilities

Following the equation in mind, the balance sheet is prepared where the sum of all items of equity and liabilities must equate to the sum of all assets of the entity.

It is one of the most important statements used by investors and accountants. It is used in conjunction with income statements to calculate various types of financial ratios to analyze the performance of an entity over the years using trend analysis. The balance sheet of competitors can also be used to conduct the entity’s own performance analysis with competitors. 


The header of the statement of financial position starts with the name of the entity along with the period of the statement as follows:

ABC Company

Balance Sheet

As of 31st December 2015

Components of Balance Sheet

Shareholder’s Equity

  • Common stock
  • Preferred stock
  • Retained earnings


  • Long term loans
  • Long term portion of finance lease
  • Notes Payable
  • Accounts Payable
  • Accrued Expenses


Non-current assets

  • Property, Plant & Equipments
  • Vehicles
  • Computers
  • Furniture & Fixture

Current Assets

  • Cash
  • Bank
  • Prepaid Expenses


Balance sheet can be prepared into formats. One is T account and the other is report format.

Specimen Balance Sheet

ABC Company

Blance Sheet

As on 31st Dec, 2015

AssetsLiabilities & Equity
Current Assets: Liabilities:  
    Cash in hand20,000     Notes Payable 10,000 
    Cash at bank25,000     Accounts Payable 12,000 
    Accounts Receivable5,000     Accrued Expenses 5,000 
    Prepaid insurance4,000     Unearned Income 9,000 
    Prepaid Office Rent5,000     Interest Payable 2,000 
Total Current Assets 49,000 Total Liabilities 38,000 
Non-current assets  Common Stock 44,000 
    Machinery 50,000 Retained Earnings 12,000 
    Accumulated Depreciation(5,000)   
Net non-current assets45,000   
Total Assets94,000 Total Equity & Liabilities 94,000 


ABC is a top classed construction company. It has undertaken various successful construction projects in the past and is one of the most trusted names in the industry. Now just that, it also expanded itself in international markets, especially in the MENA region. As a result, it has to incur heavy costs on account of investment to ease out the expansion phase. Following is the trail balance available for its recent financial year ended 31st Dec 2016:

AccountDebit $Credit $
Paid up capital 30,000
Plant & Machinery20,000 
Accounts payables 10,000
Sales 20,000
Cost of goods sold16,000 
Accounts receivable4,000 
Operating expenses5,000 
Admin & selling expenses5,000 


Prepare a balance sheet from the trial balance given above for the period ended 31st December 2016.


From the trial balance given above, we can make the balance sheet as follows:

Paid up capital30,000Vehicle10,000
Accumulated profit/ (loss)(6,000)Plant & Machinery20,000
Liabilities Accounts receivable4,000
Accounts payables10,000  
 34,000 34,000

From the information presented in the balance sheet above, it is quite clear that ABC is incurring losses of $ 6,000. In order to improve its profitability, ABC has to increase its sales revenue, reduce expenses and improve recoveries from its debtors. This is to ensure a very low portion of receivables turns into bad debts.

One of the reasons ABC is incurring losses might be that ABC is expanding its operations in the MENA region. So, it would be incurring heavy investment over assets as well. So, that could be the reason for losses in the initial periods. A comprehensive analysis of financial statements with background information could help the management accountant in driving the right reasons.