The Balance Sheet Structure

The Balance Sheet logic is completely consistent with the two basic rules (the rules of debit/credit) that were demonstrated at the beginning of the tutorial.

  1. Debit Side- Describes either assets that belong to the business (property, a real account, according to Rule No. 2 an asset is always a debit) or debts owed by customers to us. Customers according to Rule No. 1 - are a personal account that must be a debit (the accounting entity must have a "debt" to the business).
  2. Credit Side- Describes the obligations of the business to either of two factors as follows:
    1. External agencies (suppliers, lenders and so forth).
    2. The owner of the business (Capital Account or accumulated profits).
      In either case, according to Rule 1 either the external agencies or the owner of the business are eligible to be "credited" with money from the business and therefore they are in credit.

Why does the Balance Sheet balance?

In principle, there are two explanations for why the Balance Sheet must balance.

1. A Logical Explanation.

The Balance Sheet is in fact made up of two parts while:

The total assets of the business (the debit side) = The total obligations to external agencies (the credit side) + the total obligations to the owner of the business.

2. An accounting explanation

The Balance Sheet is made up directly from the Trial Balance (Balances) which is itself a Balance Sheet.
It is clear, therefore, that if we went from a Trial Balance to a Balance Sheet, then the final result (a Balance Sheet), that also takes account of the balance in the Profit and Loss Statement, will be balanced.


In a graphic format, the accounting system looks like this

Survey of The Accounting System (Locating Irregularities)

At this stage, now that the subject of the Profit and Loss Statement and the is quite clear, during the year, you can easily survey the Nominal Ledger and locate balances which would appear to be unreasonable.
The logical test will be carried out according to the model in the following chart:

Below is an example of unreasonable balances that need to be clarified with the bookkeepers:
Personal Account Debit Credit
Loan received +  
Loan granted   +
Goods purchases   +
Goods sold +  
....Expenses   +
....Receipts +  
Vehicles   +
Real Estate   +
Customers   +
Suppliers +  

The Development of Bookkeeping The debit & credit rules Journal Entries Nominal Ledger Trial Balance Annual Statements (Profit & Loss/Balance Sheet) The Balance Sheet
Bank Reconciliation Salaries Tax Deduction at Source Value added tax


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