Financial Intelligence for IT Professionals: What You Really Need to Know About the Numbers

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Why the Balance Sheet Balances

If you learned in school about the fundamental accounting equation, the instructor probably said something like this: “It’s called the balance sheet because it balances. Assets always equal liabilities plus owners’ equity.” But even if you dutifully wrote down that answer on the exam, you may be less than 100 percent crystal clear on why the balance sheet balances. So here are three ways of understanding it.

REASONS FOR BALANCE

First, let’s go back to an individual. You can look at a company’s balance sheet in the same way you’d look at a person’s net worth. Based on how we define the term, net worth always equals what a person owns minus what she owes. The formulation of the equation for an individual, presented ...