In accounting, understanding the balance sheet equation is one the necessary things. Because by knowing these principles, good finances can be prepared in the form of good accounting reports. However, unfortunately, there are still many who are confused if they have to arrange a balance sheet properly. Especially if you have to apply the equation.
Therefore, this article will discuss the balance sheet equation in detail. Starting from the understanding, of the theory of the equation, to what are the factors that influence this calculation. For more details, see the information listed in the following paragraphs.
About Balance Sheet
In understanding what a balance sheet equation looks like, first understand what a balance sheet looks like. This is a basic theory that is important to understand before heading towards more detailed calculations. To make it easier to apply the balance sheet equation earlier in accounting applications.
The financial position report (balance sheet or statement of financial position), commonly known as a balance sheet, is a part of the financial statements of a company or business entity. It produces during an accounting period where it shows the position of the company’s finances at the end of the accounting period which can be the basis for making business decisions.
Many also interpret the balance sheet as one of the components of financial statements that describe a financial position of a reporting entity on a date. What is meant by financial position is the position of assets, liabilities, and also equity of funds. So the balance sheet is the main factor in the preparation of the company’s financial statements.
Theory on Balance Sheet Equation
After knowing what the meaning of balance sheets is like, then next is to know the theory of balance sheet equations. Drawing up a good balance sheet for a company requires proper equations. So the balance sheet equation is quite necessary to apply.
In theory, the calculation of the balance sheet uses the basic formula where assets are equal to liabilities plus equity. So from here, the amount on the company’s balance sheet can be obtained following the equation.
The above balance sheet equation is a mathematical relationship. In addition, it is easy to understand and apply in the calculation of the company’s financial statements. With this basic principle, various important benefits will be created in the company’s financial statements that are made.
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The Benefits of Balance Sheet Equation
Applying the balance sheet equation will provide various types of benefits. Especially, in this case, it is related to its benefits on the preparation of financial statements of the enterprise. Where is it generally a priority to find whether the company has a healthy financial condition? Some of the benefits of having a proper balance sheet calculation are as follows.
- Increase accountability for managers to regional heads and local government officials when they become responsible not only to cash in and out but also for the assets and debts they manage.
- Increase transparency of government activities. Governments generally have very significant amounts of assets and debt, and the disclosure of this information is an element of fiscal transparency and accountability.
- The balance sheet equation can help to facilitate an assessment of financial position by showing all resources and obligations.
- The balance sheet also can help to provide a broader range of information needed for decision making.
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Factors Affecting Balance Sheet Equation
Not only knowing the benefits from the balance sheet equation but necessary to understand the factors that can affect the value. As said earlier balance sheet is related to the liabilities as well as the equity of the company. Therefore, it can be concluded that the following are necessary factors that can affect the results of the balance sheet calculation.
- Current assets or what many people often understand related to balance sheets that cover cash and sources that are expected to be converted into cash. It is where this conversion process takes place during the normal operating cycle of a company or within a year or more.
- Current liabilities or also known as bonds are expected to be paid using current assets or by creating other current liabilities. It can also be bonds that are expected to be paid within 12 months (or for 1 operating cycle, or longer), but some are excluded for example short-term bonds.
- Contributed capital is capital stock which shows the number of shares issued multiplied by par value or stated value per share.
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Closing and Conclusions
Those are some important information that should be known related to the balance sheet equation. Starting from understanding the meaning of understanding the balance sheet first, to knowing what the equation theory looks like that supports a good balance sheet report. So that later in the application the equation does not experience fatal errors.
With the information listed above, it is quite clear what it looks like to calculate to find out the factors that can affect the results of the balance sheet equation. With this information, the company can at least find out which balance sheet is healthy and good and which is not good or requires special attention.
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