Financial Intelligence for Entrepreneurs: 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 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. Net worth has to equal what he owns minus what he owes because that’s the way we define the term. The formulation of the equation for an individual, presented in ...