BALANCE SHEET

EQUATION
Accounting and Finance for Business:
Statement of Financial Position

Greg Jamieson
TOPIC INTENDED LEARNING OUTCOMES

 Explain the nature and purpose of the statement of financial

position.
 Describe and classify the key elements of a statement of
financial position.
 Describe and apply the double-entry bookkeeping system
and the balance sheet equation.
 Prepare a statement of financial position from a listing of
accounts.
 Calculate and interpret common statement of financial
position ratios.

La Trobe Business School Balance Sheet Equation 2

READING

 Hancock, P. et al, (2016), Accounting and Finance for

Business, (2nd edition), Cengage, pp 175 - 180.

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BALANCE SHEET EQUATION
THE EQUATION

Assets = Liabilities + Equity

The Assets of the entity are funded from:
 funds sourced externally which create Liabilities owed by
the entity, and;
 funds sourced internally from the owners (shareholders) of
the entity, or retained from profit generated by the entity,
which define the Equity of the entity.

La Trobe Business School Balance Sheet Equation 4

BALANCE SHEET EQUATION
THE EQUATION

Assets – Liabilities = Equity

 The equation may be rearranged.
 This form of the Balance Sheet Equation highlights the
residual nature of Equity.

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BALANCE SHEET EQUATION
EXAMPLES

Note how Assets = Liabilities + Equity for each company.

This is Balance Sheet Equation, which gives the Balance Sheet
its name.

Amcor JB Newcrest Comm Bank

Assets 9,083 2,452 11,583 976,374
Liabilities 8,192 1,599 4,049 912,658
Equity 892 854 7,534 63,716
Liabilities + Equity 9,083 2,452 11,583 976,374

La Trobe Business School Balance Sheet Equation 6

BALANCE SHEET EQUATION
PRINCIPLE OF DUALITY
 Remember, that the balance sheet is a measure of the value
of assets, liabilities and equity at a point in time.
 Over a period of time transactions cause the value of assets,
liabilities and equity to change, yet all the while the balance
sheet must remain balanced as the balance sheet equation
must continue to hold true.
 The process of creating a set of accounts invokes a
“Principle of Duality” to achieve this end.
 This is also called “Double-entry book keeping.”

La Trobe Business School Balance Sheet Equation 7

BALANCE SHEET EQUATION
PRINCIPLE OF DUALITY

 “The principle of duality is the basis of the double-

entry transaction-recording system on which
accounting is based is most countries.
 It states that every transaction has two opposite and
equal components.”

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PRINCIPLE OF DUALITY
SAMPLE BALANCE SHEET
Let’s see an example of the Principle of Duality.
 Transaction 1: Joe invests $10,000 of his own money into a
company he has created to import Japanese magazines to
Australia. The investment of $10,000 is recorded as an
increase in Equity of $10,000, and the bank deposit is
recorded as an increase in Cash (an Asset) of $10,000.
Assets of $10,000 equal L+E or $10,000.

 Transaction 2: The company borrows $10,000 from a lender

and the cash is deposited into their bank account. This
increases Borrowings (a Liability) by $10,000; and increases
Cash (an Asset), by $10,000. Assets of $10,000 equal L+E
or $10,000.

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PRINCIPLE OF DUALITY
SAMPLE BALANCE SHEET
 Transaction 3: The company withdraws $5,000 from the
bank to pay for the stock. This reduces Cash (an Asset), by
$5,000, and increases Stock (an Asset) by $5,000. The
reduction in Cash is exactly offset by the increase in Stock
so Assets remain unchanged and Assets still equal L+E.

 Transaction 4: The company decides it does not need as

much in borrowings so repays $4,000 of the borrowings.
This reduces Cash (an Asset) by $4,000 and reduces
Borrowings (a Liability) by $4,000. A $4,000 reduction in
Assets equals a $4,000 reduction in L+E.

La Trobe Business School Balance Sheet Equation 10

PRINCIPLE OF DUALITY
SAMPLE BALANCE SHEET

 Each transaction creates two offsetting entries in the

balance sheet so that it always remains in balance.
 At the end of the period note how Assets of $16,000
equals L+E of $16,000.

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 KEY
POINTS

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KEY POINTS

 Assets = Liabilities + Equity

 Equity = Assets – Liabilities

 The principle of duality is the basis of the double-entry

transaction-recording system on which accounting is based
is most countries. It states that every transaction has two
opposite and equal components.

La Trobe Business School Balance Sheet Ratios 13

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