Does the Balance Sheet Always Balance?

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By JOSEPH NGUYEN
 Updated Dec 8, 2019
A balance sheet should always balance. The name "balance sheet" is based on
the fact that assets will equal liabilities and shareholders' equity every time.

Understanding Balance Sheets

The assets on the balance sheet consist of what a company owns or will receive
in the future and which are measurable. Liabilities are what a company owes,
such as taxes, payables, salaries, and debt. The shareholders' equity
section displays the company's retained earnings and the capital that has been
contributed by shareholders. For the balance sheet to balance, total assets
should equal the total of liabilities and shareholders' equity. 

The balance between assets, liability, and equity makes sense when applied to a

more straightforward example, such as buying a car for $10,000. In this case,
you might use a $5,000 loan (debt), and $5,000 cash (equity) to purchase it. Your
assets are worth $10,000 total, while your debt is $5,000 and equity is $5,000. In
this example, assets equal debt plus equity.

Why a Balance Sheet Balances

The major reason that a balance sheet balances are the accounting principle
of double entry. This accounting system records all transactions in at least two
different accounts, and therefore also acts as a check to make sure the entries
are consistent.

Building on the previous example, suppose you decided to sell your car for
$10,000. In this case, your asset account will decrease by $10,000 while
your cash account, or account receivable, will increase by $10,000 so that
everything continues to balance.

Assets
Assets are the first of three major categories on the balance sheet. Current
assets represent the value of all assets that can reasonably expect to be
converted into cash within one year and are used to fund ongoing operations and
pay current expenses. Some examples of current assets include 
  Cash and cash equivalents
 Accounts receivable
 Prepaid expenses
 Inventory
 Marketable securities

Noncurrent assets are a company’s long-term investments or any asset not

classified as current. Both fixed assets, like plant and equipment, and intangible
assets, like trademarks fall under noncurrent assets. Some examples of
noncurrent assets are:

 Land
 Property, plant, and equipment
 Trademarks
 Long-term investments and even goodwill

Liabilities
Current liabilities are short-term liabilities that are due within one year and
include: 

 Accounts payable are a short-term debt owed to suppliers.

 Accrued expenses are expenses that have yet to be paid, but have a high
probability of being paid.

Noncurrent liabilities are also listed on the balance sheet and are included in the
calculation of a company's total liabilities. Noncurrent liabilities are long-term
debts or obligations and unlike current liabilities, a company does not expect to
repay its non-current liabilities within a year. Some examples of noncurrent
liabilities include:

 Long-term lease obligations
 Long-term debt like bonds payable

For example, a company's long-term lease that lasts more than one fiscal year is
listed on the balance sheet. The rental arrangement is listed as an asset on the
balance sheet, and the lease obligation is listed as a liability. Since the lease
lasts longer than one fiscal year, it is a noncurrent liability.

Shareholders' Equity
'Retained earnings' is money held by a company to either reinvest in the
business or pay down debt. 'Retained earnings' are also earnings that have not
been paid to shareholders via dividends. 
Shareholders' equity is the net of a company's total assets and its total liabilities.
Shareholders' equity represents the net worth of a company and helps to
determine its financial health. Shareholders' equity is the amount of money that
would be left over if the company paid off all liabilities such as debt in the event
of a liquidation. 

Balance Sheet Example 

Below is Apple's balance sheet, as of the end of their fiscal year for 2017, from
their annual 10K statement. We can see how the balance sheet balances by the
following:

 Total assets were $375 billion.

 Total liabilities were $241 billion.
 Shareholders' equity was $134 billion (highlighted in yellow). 1

At the bottom of the balance sheet, we can see that total liabilities and
shareholders' equity are added together to come up with $375 billion which
balances with Apple's total assets.

If the balance sheet you're working on does not balance, it's an indication that
there's a problem with one or more of the accounting entries.