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We’ve covered several commonly used accounting terms here on our blog, including cost of goods sold (COGS), fixed expenses and variable expenses. A term that we’ve yet to discuss, however, is balance sheet. So, what exactly is a balance sheet and how is it used in the world of accounting?

As explained on Wikipedia, a balance sheet is essentially an equation of a person or business’s assets plus liabilities and equity. All balance sheets — whether for personal or business use — must contain these three elements.

A balance sheet is a break down of a person or business’s assets, cash, equity and liabilities. There are two primary types of balance sheets: a personal balance sheet, which is intended for use by individuals, and a small business balance sheet, which is intended for use by SMBs. A personal balance sheet contains an itemized list of a person’s assets, including cash, checking accounts, savings accounts, stocks, bonds, real estate, etc., as well as liabilities like mortgage debt, credit card debt, loans, etc. It’s important to note that securities and real estate assets are included at their current fair market value in a personal balance sheet and not the historical cost.

Although similar in terms of function, a small business balance sheet contains a few nuances when compared to its personal balance sheet counterpart. A typical small business balance sheet contains an itemized list of assets in the form of accountants receivable, inventory, real estate, equipment and even patents, as well as liabilities like accounts payable, debt, loans and accrued expenses.

If you’re wondering how exactly to calculate your business’s equity, here’s a simple formula: take your total assets and divide that number by your total liabilities. This gives your business’s equity for use in a small business balance sheet or other bookkeeping documents.

You may also come across the term “Balance Sheet Substantiation” when performing accounting and bookkeeping work. Basically, Balance Sheet Substantiation is the process of confirming the balances in a business’s accounting record are properly reconciled with the totals listed in the balance and transaction records. It typically involves multiple steps, including reconciliation of the business’s account, as well as a review of the reconciliation documentation.

Hopefully, this will give you a better understanding of balance sheets and how they are used.

Have anything else that you would like to add? Let us know in the comments section below!