The balance sheet shows the financial situation of a company at a point in time (the balance sheet date). Balance sheet shows the economic resources controlled by the company, existing obligations and the net assets of the required right of the owners, reflecting the economic resources controlled by the company and the assets for redeem the debt in the future.
It must always satisfy the basic equation: Assets = Proprietor's capital + Liabilities
An asset is a resource controlled by the enterprise as a result of past events and form which future economic benefits are expected to flow to the enterprise. It has the following features:
controlled by the enterprise
past events
future economic benefits.
Liabilities are an entity's obligations to transfer economic benefits as a result of past transactions or events.
It has the following features:
obligations
transfer economic benefits
past transactions or events
complementary nature of assets and liabilities.
Proprietor's capital is the residual amount found by deducting all liabilities of the entity from all of the entity's assets.
The equation underlies the balance sheet in that every transaction of the enterprise affects the balance sheet twice. For the balance sheet accounts, at the left side of the equation (assets), "Dr" insteads increasing, "Cr" insteads decreasing; at the right side of the equation (proprietor's capital and liabilities), "Cr" insteads increasing, "Dr" insteads decreasing.
Each and every transaction that the business makes or enters into has two aspects to it and has a double effect on the business and the accounting equation. This is known as the dual aspect of transactions. So if a business buys some goods for cash, the two aspects of the transactions are that it now has some goods but it has less cash. Equally, if it sells some goods for cash, the effect is that cash has increased and a sale has been made on which there may have been a profit made.