How to Record Balance Sheet Transactions?

All transactions made by a company bring changes in its Balance sheet. For investors it is essential to understand balance sheet transactions of companies.

Understanding of balance sheet transactions is essential for a all investors. Every day, with each transaction, the figures in balance sheet changes.

Normally, balance sheet is published at end of the financial year. The cumulative affect of all transactions made in last 12 months gets accumulated in balance sheet.

But the report is published only on FY closing (31-March).

But this does not mean that balance sheet figures remains same for all year and they change only on 31-March.



Balance sheet is as dynamic as other financial reports. Companies accounts department keeps updating balance sheet line-items on daily basis. Balance sheet represents ‘Account Balance’ of company at a specified moment of time.

The account balances of all Assets, Liabilities & Shareholder’s Capital is represented in balance sheet.

Assets = Liability + Owner’s Equity (Accounting Equation)

The financial strength of a company is represented by it balance sheet. The quality of balance sheet is determined by its composition.

Suppose there are two companies A & B whose assets are worth say $100,000 & $100,000 respectively. Looking from the weightage of Asset it may look like Company A & B are same. But judging the companies like this will not be correct.

To cross check the strength of balance sheet one must simultaneously look at Liability & Equity.

As per accounting rule assets must be balanced by Liabilities & Equity.

If Asset (on left) is balanced more by liability (on right) it is not good. If Asset (on left) is balanced more by equity (on right), like by retained earnings, is considered very good.

Balance sheet transactions which adds to assets (on left) and simultaneously adds to equity (on right) is considered perfect.

Examples of Balance Sheet Transactions

Example 1:

:
A Company named ABC collects $10,000 from its customer. But this collection was not a result of a new sale. The sale has already happened 2 months back. In this case how this transaction is recorded in Balance Sheet? As this is only a collection activity how this transaction is recorded so as to keep the equation (Asset = Liability + Owners Equity) true.

Please see the below picture. From this simulation it will be clear how balance sheet transaction has been recorded. The Cash (asset) increased from $35,000 to $45,000 due to collection of $10,000 from its existing customer. But it was not a new order, account receivables was correspondingly reduced from $40,000 to $30,000. Due to this adjustment the accounting equation remained balanced.

BalanceSheet_1

Example 2 of Balance Sheet Transactions

:
Company named ABC vide its CAPEX plan purchased new machine for its plant worth $30,000. The equipment was purchased on credit from the manufacturer. In this case how this transaction is recorded in Balance Sheet? As the equipment purchase is done on credit how this transaction is recorded so as to keep the equation (Asset = Liability + Owners Equity) true.

Please see the below picture. From this simulation it will be clear how balance sheet transaction has been recorded. The Equipment (asset) increased from $250,000 to $280,000 due to new equipment purchase vide its CAPEX Plan. Accordingly the total asset increased from $895,000 to $925,000. But as the equipment was purchased on credit, accordingly the loans payable also increased from $125,000 to $155,000. Accordingly the total liability plus owner’s equity also increased from $895,000 to $925,000. Due to this adjustment the accounting equation remained balanced.

BalanceSheet_2

Example 3 of Balance Sheet Transactions

:
Company named ABC received order worth $5,000 from its customer in exchange for an expert supervision services. In this case how this transaction is recorded in Balance Sheet? As it is a new service order how this transaction is recorded so as to keep the equation (Asset = Liability + Owners Equity) true.

Please see the below picture. From this simulation it will be clear how balance sheet transaction has been recorded. The Account receivable (asset) increased from $40,000 to $45,000 due to new order received from customer. Accordingly the total asset increased from $895,000 to $900,000. But as the order is of service type, accordingly the retained earnings column increased from $600,000 to $605,000. Accordingly the total liability plus owner’s equity also increased from $895,000 to $900,000. Due to this adjustment the accounting equation remained balanced.

BalanceSheet_3

Example 4 of Balance Sheet Transactions

:
Company named ABC made an expense worth $3,000 to pay a vendors bill. In this case how this transaction is recorded in Balance Sheet? As it is solely an expense transaction, how this transaction is recorded so as to keep the equation (Asset = Liability + Owners Equity) true.

Please see the below picture. From this simulation it will be clear how balance sheet transaction has been recorded. The Cash (asset) decreased from $35,000 to $32,000 due to vendor payment made by the company. Accordingly the total asset decreased from $895,000 to $892,000. But as the transaction is of only expense type, the retained earnings column has been simultaneously decreased from $600,000 to $597,000. Accordingly the total liability plus owner’s equity also decreased from $895,000 to $892,000. Due to this adjustment the accounting equation remained balanced.

BalanceSheet_4

Example 5 of Balance Sheet Transactions

:
Company named ABC made raised capital by issuing shares to public. The shares issued was worth $100,000. In this case how this transaction is recorded in Balance Sheet? As it is solely a funding transaction, how this transaction is recorded so as to keep the equation (Asset = Liability + Owners Equity) true.

Please see the below picture. From this simulation it will be clear how balance sheet transaction has been recorded. The Cash (asset) increased from $35,000 to $135,000 due capital raised by company by issuing shares to public. Accordingly the total asset increased from $895,000 to $995,000. But as the transaction related to stockholders, the share capital column has been simultaneously increased from $120,000 to $220,000. Accordingly the total liability plus owner’s equity also increased from $895,000 to $995,000. Due to this adjustment the accounting equation remained balanced.

BalanceSheet_5

Example 6 of Balance Sheet Transactions

:
Company named ABC purchased raw material to produce goods and services. Raw material purchased was worth $12,000. In this case how this transaction is recorded in Balance Sheet? As it is solely a raw material expense, how this transaction is recorded so as to keep the equation (Asset = Liability + Owners Equity) true.

Please see the below picture. From this simulation it will be clear how balance sheet transaction has been recorded. The Inventories (asset) increased from $35,000 to $47,000 due capital raised by company by issuing shares to public. Accordingly the total asset increased from $895,000 to $907,000. But as the transaction is only an expense, the account payable column has been simultaneously increased from $50,000 to $62,000. Accordingly the total liability plus owner’s equity also increased from $895,000 to $907,000. Due to this adjustment the accounting equation remained balanced.

BalanceSheet_6

Example 7 of Balance Sheet Transactions

:
Company named ABC purchased furniture for its office purpose. Furniture’s purchased was worth $10,000. In this case how this transaction is recorded in Balance Sheet? As it is solely an asset purchase, how this transaction is recorded so as to keep the equation (Asset = Liability + Owners Equity) true.

Please see the below picture. From this simulation it will be clear how balance sheet transaction has been recorded. The cash (asset) decreased from $35,000 to $25,000 due furniture purchases of worth $10,000. Simultaneously the Other Assets column also increased by $10,000 from $10,000 to $20,000. Accordingly the total asset remained at the same level at $895,000. Due to this adjustment the accounting equation remained balanced.

BalanceSheet_7



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Mani
I am a Blogger with a passion for investment education. I started blogging in 2007-08. Blogging didn’t happened to me as a coincidence, it was a conscious decision. The idea with which I started blogging still stands true. In my starting days my finances remained tight. I was reading heavily about how to manage finance. One day I got hold of a book which my father gifted me in 2003. It was stacked below my graduation books. It was a small-thin book with its cover named "Rich Dad Poor Dad".....more

4 Comments on "How to Record Balance Sheet Transactions?"

  1. Nice article. Very much help full.

  2. This is very useful and people who don’t know how to do accounting principles,they can easily view and learn by themselves. Examples are very clearly understood by me. Thank u so much.

  3. Very clearly explained. The examples made to understand the concepts even better. Thanks

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