Characteristics of the balance sheet

Every balance sheet is a snapshot which gives you an overview of

  • Liabilities: How was the company financed on the balance sheet date? Where did the money come from at that moment?
  • Assets: How was the company using its resources on the balance sheet date? Where did the money go to at that same moment.
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We use the words at that moment because a balance sheet is always on the move, some items change really frequently. Some examples will make it clear:

Cash goes up and down all the time, with every (receiving or outgoing) payment.
The inventory changes with every purchase or sale.
Payables on the liabilities go up every time a supplier sends an invoice. When the invoice is paid, payables goes down.
Of course, not all items on the balance sheet are so volatile. Buildings for example, or capital only changes once in a time.
The balance sheet is a snapshot of all the entries on the balance on the day that the balance is made up. This usually is the 31st of December.

Do you remember from topic 1 that the assets always equal the liabilities?
Assets = Liabilities
It’s logic, because you can only spend money you got from somewhere. An overview of all your spending, and the remaining cash are on the left hand side of the balance sheet. The origin of the financial resources you find on the right hand side.

As assets always equal liabilities, a change on one of the sides always leads to an equivalent change on the other side. We say that one side is credited and the other debited. We use credit for the liabilities, for where the money comes from. And debit for the assets, for where the money is going to. An easy way to remember this:

  • Credit =    Coming from
  • Debit =    Destination

Examples

Transaction 1: A company is started up, a shareholder invests 50,000 EUR.

  • Credit: the money comes from the shareholder, capital
  • Debit: the money goes to the bank account

Transaction 2: The company buys office furniture for 10,000 EUR and computers for 5,000 EUR. Both will be used for several years.

  • Credit: the money comes from the bank account
  • Debit: the money is spend on fixed assets