Accounting / Bookkeeping Basics: Understanding Balance Sheets

Understanding Balance Sheets
The Balance Sheet shows you what the balances in your accounts are at a specific moment in time. The easiest part of this report is that it’s set up exactly like the accounting equation! 

Assets = Liabilities + Equity.

Below is an example of what Karen’s balance sheet looks like before we started helping her. It records all of the information from the beginning of time to the date listed at the top (September 30, 2019.)

Balance Sheet As of September 30, 2019
ASSETS
Checking Account 1234	4,921.23
Savings Account 0000	10,468.24
Cash on Hand	550.00
Accounts Receivable	0.00
Total Assets	$15,939.47
LIABILITIES
Credit Card	399.88
Accounts Payable	0.00
Total Liabilities	$399.88
EQUITY
Opening Balance Equity	2,561.72
Owner’s Investment	1,661.44
Owner’s Pay	-5,260.15
Retained Earnings	10,520.30
Net Income	6,056.28
Total Equity	$15,539.59
Total Liabilities + Equity	$15,939.47

As you can see here, the Assets = Liabilities + Equity

You may notice that there is an account on here that isn’t in our chart of accounts--Net Income.
Net Income isn’t an account on it’s own. Net Income is the amount the business owner gets when they subtract their expenses from their income. The net income in this report will cover from January 1, 2019 to October 31, 2019. (The net income from all previous years gets lumped together in Retained Earnings.) Each month, the net income will change (brought over from the Profit and Loss report) until the end of the year, when it is moved to Retained Earnings as well. (Don’t worry, the main bookkeeping softwares do this for you automatically.)

Let’s pretend that we run the Balance Sheet for October 31, 2019 (after we have categorized all of Karen’s transactions.) This is what would change, with explanations:

Balance Sheet As of October 31, 2019
ASSETS
Checking Account 1234	4,921.23 + 547.32 = 5,468.55 (We add the positive difference from the transaction list.)
Savings Account 0000	10,468.24 + 750 = 11,218.24 (We add the money she put in savings.)
Cash on Hand	550.00
Accounts Receivable	0.00
Total Assets	5,468.55 + 11,218.24 + 550 = $17,236.79
LIABILITIES
Credit Card	399.88 - 134 = 265.88 (We subtract her credit card payment.)
Accounts Payable	0.00
Total Liabilities	$265.88
EQUITY
Opening Balance Equity	2,561.72
Owner’s Investment	1,661.44 + 1,486.49 = 3,147.93 (We add the personal money she put into the business.)
Owner’s Pay	-5,260.15 - 1,200 - 1,200 - 116.34 = -7,776.49 (We subtract the two times she paid herself, and also when she bought groceries on accident.)
Retained Earnings	10,520.30
Net Income	6,056.28 + 2,461.17 = 8,517.45 (We add the Net Income from the Profit and Loss report.)
Total Equity	2,561.72 + 3,147.93 +10,520.30 + 8,517.45 - 7776.49 = $16,970.91
Total Liabilities + Equity	265.88 + 16,970.91 = $17,236.79