What is Balance Sheet?
Balance sheet accounting is the accounting and analysis of the balance sheet that shows the financial position of a company at a specific point in time. The balance sheet is one of the three main reports in accounting and follows the basic accounting equation: Assets = Liabilities + Equity .
What is Balance Sheet?
Balance sheet accounting encompasses all processes related to the preparation , analysis , and interpretation of the balance sheet. This includes:
- Registration of all assets and liabilities
- Classification of items into correct balance sheet categories
- Valuation of assets and liabilities
- Presentation according to accounting standards
- Analysis of financial position and solvency
The Basic Structure of the Balance Sheet
The balance sheet is structured as a T-account where the left side shows assets and the right side shows liabilities and equity:
The Main Components of the Balance Sheet
Assets
Assets represent everything the company owns and controls that can provide future economic benefits.
Fixed assets
Fixed assets are assets that are to be used in the business over a long period of time:
- Fixed assets: Buildings, machinery, fixtures
- Intangible assets: Goodwill, patents, software
- Financial assets: Long-term investments, shares
Current assets
Current assets are assets that are normally sold within one year:
- Goods: Raw materials, semi-finished products, finished goods
- Receivables: Accounts receivable, other short-term receivables
- Investments: Short-term financial investments
- Bank deposits: Cash and bank deposits
Debt and Equity (Liabilities)
Liabilities show how assets are financed - either through debt or equity.
Equity
Equity represents the owners' share of the business:
- Paid-in equity: Share capital , share premium
- Earned equity: Free equity, profit for the year
Debt
Debts are obligations the company has to others:
- Long-term debt: Loans with a maturity of more than one year
- Short-term liabilities: Accounts payable, wages owed, short-term loans
Accounting principles in Balance Sheet accounting
Basic Principles
Balance sheet accounting follows several fundamental accounting principles :
| Principle | Description | Significance for the Balance |
|---|---|---|
| The precautionary principle | Don't overestimate assets or underestimate liabilities | Conservative valuation |
| The principle of comparison | Match revenues with associated costs | Correct accrual |
| The continuity principle | Assumes continued operation | Affects valuation |
| The consistency principle | Same methods from year to year | Comparability |
Valuation principles
Valuation of balance sheet items follows specific rules:
- Historical cost: Acquisition cost less depreciation
- Lower of cost principle: Lower of cost and fair value
- Fair value: Market value at the balance sheet date
For a deeper understanding of how assets and liabilities are valued on the balance sheet, see our comprehensive guide to balance sheet valuation .
Balance Sheet Layout and Classification
Standard lineup
Norwegian companies follow the Accounting Act for the preparation of the balance sheet:
Classification rules
Classification of balance sheet items follows specific criteria:
Fixed assets vs. Current assets
- Fixed assets: Owned for use in the business, not for sale
- Current assets: Are traded or consumed within the normal operating cycle
Long-Term vs. Short-Term Debt
- Long-term debt: Due later than 12 months
- Short-term debt: Due within 12 months
Bale analysis and key figures
Important Balance Sheet Key Figures
Balancing analysis uses key figures to assess financial position:
| Key figures | Formula | What it measures |
|---|---|---|
| Equity ratio | Equity ÷ Total capital × 100% | Financial strength |
| Debt ratio | Total debt ÷ Equity | Financial risk |
| Liquidity ratio 1 | Current assets ÷ Current liabilities | Short-term solvency |
| Liquidity ratio 2 | (Current assets - Goods) ÷ Current liabilities | Fast liquidity |
| Working capital | Current assets - Short-term liabilities | Operating liquidity |
Solvency analysis
Solidity measures the company's ability to withstand losses and financial setbacks:
- High equity ratio: Indicates good solvency
- Low debt ratio: Less financial risk
- Stable working capital : Good operating liquidity
Practical Balance Management
Monthly Balance Reconciliation
Regular reconciliation ensures correct balance sheet accounting:
- Bank reconciliation: Check bank balance against ledger
- Customer reconciliation: Reconcile accounts receivable
- Vendor Reconciliation: Check Accounts Payable
- Inventory reconciliation: Verify inventory
Year-end procedures
Special procedures are required at year-end :
Important Year-End Tasks
- Periodization: Ensure correct period delimitation
- Depreciation: Calculate and post annual depreciation
- Write-downs: Assess the need for write-downs of assets
- Provisions: Create necessary provisions
- Tax provision: Calculate and provide for tax expense
Digital Tools for Balance Sheet Accounting
Modern Accounting Systems
Digitalization has revolutionized balance sheet accounting:
- Automatic posting: Reduces manual errors
- Real-time reporting: Updated balance at all times
- Integrations: Connection to bank and other systems
- Analysis tools: Built-in key figure calculations
Quality assurance
Digital controls improve quality:
- Automatic reconciliation: The system reconciles automatically
- Notifications: Warnings in case of imbalance or error
- Audit trail: Complete history of changes
- Backup: Secure storage of accounting data
Regulations and Standards
Norwegian Accounting Legislation
The Accounting Act regulates balance sheet accounting in Norway:
- Accounting obligation: Who must keep accounts?
- Accounting Principles: Basic Principles
- Layout plans: Standardized formats
- Note requirements: Additional information to the balance sheet
International Standards
For larger companies, IFRS (International Financial Reporting Standards) apply:
- IAS 1: Presentation of Financial Statements
- IAS 16: Property, plant and equipment
- IAS 38: Intangible Assets
- IFRS 9: Financial instruments
Common Challenges and Solutions
Typical Balance Problems
Common challenges in balance sheet accounting:
| Problem | Cause | Solution |
|---|---|---|
| Imbalance | Accounting errors or missing records | Systematic review of all records |
| Misclassification | Misunderstanding of classification rules | Training and routines |
| Valuation error | Misapplication of principles | Regular review of values |
| Lack of reconciliation | Bad routines | Implement monthly reconciliations |
Best Practices
Recommended routines for good balance sheet accounting:
- Monthly reconciliation: Reconcile all main entries monthly
- Documentation: Document all assessments and decisions
- Competence: Ensure up-to-date knowledge of regulations
- Controls: Implement internal controls
- Audit: Use external audit for quality assurance
The Future of Balance Sheet Accounting
Technological Trends
New technologies affect balance sheet accounting:
- Artificial Intelligence: Automatic Categorization and Analysis
- Machine Learning: Predictive Analysis and Error Detection
- Blockchain: Secure and transparent accounting
- Real-time reporting: Continuously updated balances
Regulatory Changes
Future changes in regulations:
- Increased digitalization: Requirements for electronic reporting
- Sustainability reporting: New requirements for non-financial information, including CSRD for larger companies
- Internationalization: Harmonization of standards
- Transparency: Increased disclosure requirements
Conclusion
Balance sheets are fundamental to understanding and managing a company's financial position. An accurate and up-to-date balance sheet provides valuable insight into:
- Financial strength: Equity ratio and solvency
- Liquidity: Ability to meet short-term obligations
- Efficiency: How well assets are utilized
- Risk: Financial risk and vulnerability
By following established principles , using modern tools and implementing good practices , companies can ensure high quality in their balance sheets and get maximum benefit from this important financial report.
A good understanding of balance sheets is essential for anyone working with accounting , finance and business management, and forms the basis for informed decisions about the company's future.