A balance sheet, also known as statements of financial position, represents a company’s financial situation during a particular time (usually at the end of the fiscal year). Financial analysts and stockholders use this document to determine a company’s value, as well as knowing how its state of operations are running. Because a company’s equity is determined by that document, balance sheets must be accurate and their discrepancies corrected to properly assess the organization.
What you need:
- Balance sheet
- Financial software or spreadsheet program
1. Remember the basics
Determining a company’s Equity is done through this formula, which is a balance sheet’s mathematical structure: Assets – Liabilities = Equity.
- Assets are the economic resources that the company or corporation owns. Assets can be classified into two categories: tangible and intangible. Either way, they are items of value that can readily be converted to money. Assets include cash and cash equivalents, accounts receivable, property and equipment, and the like.
- Liabilities are obligations the company or corporation has to pay, and which results in the use of assets and providing service to customers or stakeholders. These include accounts payable, minority interest, and bank indebtedness such as amounts that the company owes to trade creditors.
- Equity, also known as shareholder equity, is the remaining interest in a company’s or corporation’s assets that is spread among shareholders. Shareholder equity must be equal to the amount after liabilities are deducted from the assets. Equity includes par value of shares, treasury shares, shares reserved for issuance, and the like.
2. Analyze transaction information
To balance the balance sheet, the transaction information recorded during the accounting cycle must be properly recorded. Once again, the following information about these transactions are still basics so be sure to keep them in mind during the process.
- When recording transactions that affect assets, use debits when assets increase and credits when assets decrease.
- When recording transactions that affect liabilities, use credits when liabilities increase and use debits when liabilities decrease.
- To determine equity, use the same process used for recording transactions that affect liabilities.
Before continuing, be sure that your balance sheet is balanced before correcting the actual discrepancies. That means that the totals of both credits and debits must be equalled. To do this, simply enter the amount of which your balance sheet result is off until the sheet is balanced.
3. Find the discrepancy
If the amounts are not equal, search which part of the year the discrepancy is located until you have narrowed down to at most a 7-day period. This will make it easier for you to find the error. This phase can be done easier if you are using a balance sheet software.
4. Fix the discrepancy
Find the error and fix it. Common bookkeeping errors include.
- Transactions where asset increases are recorded as credits, and not as debits
- Transactions where liability increases are recorded as debits, not as credits
- Transactions where asset decreases are recorded as debits, not as credits
Mistakes and miscalculations in balance sheets can usually occur, so it is best that you check and double check whether your results are indeed correct. A company’s value and financial standing is determined by this document, so accuracy in calculating its variables is necessary.