What is a Balance Sheet?

The Balance Sheet attempts to show how much the business is worth. It does this by illustrating the value of the business’s net assets.

In order to do this, our balance sheet displays the difference between a business’s assets and liabilities. This difference is known as the business’s net assets and is considered to be the “value” of the business. Obviously, every successful business owner wants to amass the highest amount of net assets as possible!

To create our balance sheet, we’re going to need the remaining sections of our Trial Balance – Assets, Liabilities, Owners Equity, and Drawings. Take a quick look at those.

Assets Liabilities
Bank $21,650 Loan $9,000
Computer $1,500 John’s Car Shop $3,000
Car $3,000 Accumulated depreciation $400
iPhone $500 Taxation Payable $675
Oven $500  
Expenses Revenue
Cake mix $3,000 Sales $7,000
Interest expense $1,000  
Telephone expense $300  
Repairs expense $50  
Depreciation $400  
Tax Expense $675  
Drawings Owners’ Equity
Drawings $1,000 Owner’s Equity $15,000
Balance $34,400 Balance $34,400

Let’s take a look at these numbers:


  • Bank $24,150
  • Computer $1,500
  • Car $3,000


  • Loan $9,000
  • Johns Car Shop $3,000
  • Taxation Payable $675
  • Accumulated Depreciation $400

Owners’ Equity

  • Owners Equity $15,000
  • Drawings $1,000

We’ll also need to know our net profit for the year, which we know from our Profit and Loss statement, which is$1,575. Alright, that’s all the information we need. Let’s get started. The basic format of a Balance Sheet is:

Assets – Liabilities = Owners Equity (Net Assets)

Using the figures from our Trial Balance, simply fill in the blanks on the Balance Sheet below. Note that there are two formats, a “T” format and a list format. Both formats are commonly used, and are simply different methods of displaying the same information.

Assets     Liabilities    
Bank $21,650   Loan $9,000  
Computer $1,500   John’s Car Shop $3,000  
Oven $2,000   Taxation Payable $675  
iPhone $500        
Car less accumulated depreciation $2,600        
Total Assets   $28,250 Total Liabilities   $12,675
      Owner’s Equity    
      Owner’s Equity at start of year $15,000  
      Minus: Drawings $1,000  
      Plus: Net Profit After Tax $1,575  
      Owner’s Equity at year end   $15,575
Total   $28,250 Total   $28,250



Owner’s Equity    
Owner’s Equity at start of year $15,000  
Minus: Drawings $1,000  
Plus: Net Profit After Tax $1,575  
Owner’s Equity at year end   $15,575
Represented by:    
Bank $21,650  
Computer $1,500  
Oven $2,000  
iPhone $500  
Car less accumulated depreciation $2,600  
Total Assets   $28,250
Less: Liabilities    
Loan $9,000  
John’s Car Shop $3,000  
Taxation Payable $675  
Total Liabilities   $12,675
NET ASSETS (Total Assets minus Total Liabilities)   $15,575

GREAT! We’ve just completed our Balance Sheet.

How to Read a Balance Sheet

Let me point out a few interesting things about it.

1. Notice how the Owner’s Equity at the top of the statement balances with the Net Assets at the bottom of the statement. They’re both $15,575. This is where the term Balance Sheet comes from. If your Balance Sheet doesn’t balance, you’ve got a problem!

2. Notice how your Owner’s Equity changed. It’s now $15,575, even though you’ve only put $15,000 into the business, which was the original amount. This is because you made a profit. As the owner, this profit is yours! Each year, any profit you make will carry over to the Owner’s Equity section of the Balance Sheet. If you’ve been in business for ten years, then ten years of profit will have been accumulated in your Owner’s Equity. Think of Owner’s Equity as the amount the business owes to you, so whenever you make a profit, it’s yours! Oh, the joys of being a business owner!

3. Your Owner’s Equity only increased by $575, even though you made $1,575 in profit. Why is that? It’s because you took $1,000 of drawings during the year. That means although the $2,250 profit is yours, you already took $1,000 of it. Owners need to be careful not to withdraw so much in drawings that their Owner’s Equity falls below zero.


That’s it friends! We’ve started our business, recorded all our transactions, prepared a list of journal entries, entered them into our ledgers, taken our ledger balances into a trial balance, and finally produced a Profit and Loss Statement and a Balance Sheet!

This is the accounting process in action, and we now have two key reports that provide valuable information and will allow us to make good financial decisions.

We’ll talk a bit about that in a later tutorial.