Markets · 6 pages · 12 min
How a balance sheet balances
A balance sheet balances because every resource is claimed by a creditor or by the owners, by double entry.
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From the opening
A balance sheet lists assets, the resources the firm controls, and lists liabilities and equity, the claims on those resources. It balances because double-entry bookkeeping records each event as equal and opposite effects, so the total of assets stays equal to the total of claims. The opening covers assets equal the claims, each entry has two sides, and equity absorbs the residual.
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Inside
- Assets equal the claims
- Each entry has two sides
- Equity absorbs the residual
- Balance is not health
- Where the idea stops applying
- A distinction worth keeping
Sources
- Double-entry bookkeeping identity
- Accounting equation