The Balance Sheet and the Accounting Equation
The statement of financial position (or) balance sheet is a detailed expression of the accounting equation.
Assets = Liabilities + Owner’s Equity
This agreement (or balance) of total assets with the total of liabilities and owner’s equity is the reason for calling this financial statement a balance sheet. They are always equal because these two sides are two views of the same business. Everything that a business owns has been supplied to it either by the creditors or by the owners.
The balance sheet represents an expansion of the accounting equation and explains the various categories of assets, liabilities, and owner’s equity. The balance sheet is a report of the balances in the permanent accounts at the end of a specific period, and is prepared from the balance sheet part of the worksheet and from the statement of changes in Owner’s Equity. It may be handwritten, typed or prepared by a computer.