The Balance Sheet

The balance sheet (statement of position) shows all the resources controlled by an entity and all the obligations due. The business entity principles asserts that transactions, assets and liabilities that relate to the entity are accounted separately, irrespective of whether the entity is recognised as a separate legal or taxable entity.

Liquidity refers to the ease which assets can be converted to cash in the normal course of business. Assets are a resource controlled by the entity from which future economic benefits are expected to flow. Sometimes accounting texts suggest that current assets are those which are part of an entity's operating cycle, the period between the acquisition of materials into a process and its realisation into cash or similar instrument. Australia uses a realisation period (one year) unless the operating cycle is longer. Non-current (sometimes 'fixed' assets) refers to all others.

Liabilities are a present obligation arising from past events, the settlement of which is expect to result in an outflow. A current liability is expected to be settled in the normal course of the entity's operating cycle or is primarily for trading. Non-current liabilities are all others.

Equity is the residual interest in the assets of an entity after deducting all liabilities.

Assets - Liabilities = Equity

The principle of duality in double-entry bookkeeping states that for every transaction there are two opposite and equal components.

Because a balance sheet represents a statement of position it is limited to that point in time.

The prime determinant of the content and format of a balance sheet depends on the structure of the company. An incorporated business is subject to certain rules and regulations whereas a partnership or sole proprietorship has no such restrictions. Other factors include the size and organisational goals.