A balance sheet is a document that shows the financial condition of a company. It reports the assets, liability, and equity of the company at a specific point in time. An accurate and complete balance sheet maintains the basic accounting structure: Assets = Liabilities + Shareholders’ Equity.
It is essential to maintain this balance and the accuracy of the balance sheet to get a clear and comprehensive view of the company’s financial health. But what if there is any missing amount on the balance sheet? Let’s find out how to calculate missing amounts on a balance sheet.
Key Takeaways
- By using the accounting equation and following some steps, you can easily calculate the missing amounts on a balance sheet.
- Efficient accounting software can automate this calculation process and reduce the chances of manual errors.
- Avoid the common mistakes to ensure accurate financial reporting.
How to Calculate Missing Amounts on Balance Sheet
It’s easy to calculate the missing amounts on a balance sheet with the specific accounting equations. You just need to identify the known values and use the equation to solve any missing amount.
Understand the Structure of the Balance Sheet
A company’s balance sheet generally has three parts.
Assets: [What the company owns]
Assets are the things that a business owns or expects to receive. For instance, cash, inventory, and equipment. They are the resources of the company that can be measured objectively.
Liabilities: [What the company owes]
Liabilities typically show the debt of the company or what the company owes to others such as loans, accounts payable and taxes. These are the obligations the company has to pay at a specific time or condition.
Shareholders' Equity: [The net worth of the company]
Shareholder equity represents the net worth of the company, calculated as the difference between total assets and total liabilities (Assets – Liabilities). It shows the stakes shareholders have in the company. It includes both the risk they assume and the potential for returns. Shareholders expect a return on investment as a reward for their investment despite the chances of uncertainty.
Identify Known and Unknown Values
First, list the values you have for the assets, liabilities, and equity. Separate these sections to make it clearer which value might be missing.
You should also break down specific items within each section like:
- Cash, inventory, accounts receivable, and equipment under the asset section.
- Accounts payable, loan payable under the liabilities section.
- Retained earnings or common stock under the equity section.
Use the Accounting Equation to Calculate Missing Amounts
The accounting equation is, Assets = Liabilities + Equity. Here, all components of the equation are required to be in balance. So, you can use this equation to calculate the missing values after finding them.
For example, if your shareholders’ equity values are missing, you just need to rearrange the equation to find this missing one. You can use the following patterns:
- If Shareholders’ Equity is missing, calculate it as Equity = Assets – Liabilities.
- If Liabilities is missing, calculate it as Liabilities = Assets – Equity.
- If Assets are missing, calculate it as Assets = Liabilities + Equity.
This approach allows you to find any unknown value if the other two are known.
Consider Specific Categories of Assets, Liabilities, and Equity
Consider organizing the assets, liabilities, and equity value to specific categories to pinpoint the exact missing data on the balance sheet.
Assets
The assets of the balance sheet are divided into two categories. Such as,
- Current assets: Cash and cash equivalents, accounts receivable, inventory, prepaid expenses.
- Non-current assets/ Fixed assets: Property, land, equipment, intangible assets (like patents and trademarks), long-term investments.
Liabilities
The liabilities value of the balance sheet has also two categories.
- Short-term liabilities: Accounts payable, accrued expenses, short-term debt, deferred revenue.
- Long-term liabilities: Long-term debt, bonds payable, deferred tax liabilities, lease obligations.
Shareholders’ Equities
Shareholder’s equity contains two main components.
- Paid-in-capital: This represents the amount shareholders have invested including common stock, preferred stock, additional paid-In capital (APIC).
- Retained Earnings: This represents the accumulated net income that has been retained in the company instead of being distributed to shareholders as dividends..
Use Financial Ratios (If Applicable)
Using financial ratios helps to calculate the missing amounts on a balance sheet by showing connections between key financial data. For example, liquidity ratios; they connect the assets and liabilities. These financial ratios can offer a comprehensive understanding of the company’s financial health and performance.
Below are some financial ratios you can consider if required.
Verify the Balance
Make sure the balance is correct after you find out and calculate the missing amounts on the balance sheet. It means you have to verify that the total assets are equal to the sum of liabilities and equity value. Moreover, you should check that you have entered all the amounts correctly.
Double-Check the Integrity of the Balance Sheet
The balance sheet of the company must have to be complete and correct. So, never leave any chance of errors.
Double-check all the calculations to ensure the balance sheet accurately shows the company’s true financial situation. To maintain the accuracy and integrity of the balance sheet, consider reviewing the following items:
- Check the sources for data accuracy.
- Check for any changes made to the balance and ensure they are correct.
- Ensure the balance sheet matches with the other financial documents. Such as income statements, cash flow statements, and so on.
| Financial Ratio | Formula |
|---|---|
| Liquidity ratios | |
| Leverage ratios | |
| Efficiency ratios | |
| Profitability ratios | |
| Market value ratios |
Calculating Missing Amounts on a Balance Sheet
Let’s say we have a partial balance sheet of a company that has missing equity. Now we will walk through a practical example to calculate the missing value using the accounting equation.
The accounting equation is-
- Assets = Liabilities + Shareholders’ Equity
Suppose, the given amount of the company is
- Assets: 500,000
- Liabilities: 300,000
Now, we have to subtract the liabilities from the total assets to calculate the missing equity.
So the equation will be,
- Equity = Assets – Liabilities = 500,000 – 300,000 = 200,000
Let’s have the final verification to ensure the balance sheet of the company is balanced correctly.
According to the accounting equation,
- Liabilities + Shareholders’ Equity
= 300,000 + 200,000
= 500,000
= Assets
The total of the liability and equity equals the assets. So, the balance sheet is correct.
Common Pitfalls
It’s very tricky to work with the balance sheet. Here, even small mistakes can lead to wrong financial reporting and decision making. Let’s check out some common mistakes and ways to avoid them.
Asset and Liability Types Mixed Up
It’s quite possible to mix up the current and long-term assets or liabilities. Current items are those which you will use or need to pay within a year. However, the long-term ones are meant for longer periods. Correct classification of the assets and liabilities type is essential to ensure the accuracy of the balance sheet.
Correct Time Period isn’t Used
Balance sheets are generally the snapshot of specific dates. It can lead to errors if you use the data from different periods. So, always double-check that all numbers come from the same accounting period to ensure accuracy.
Failure to Follow the Balance Principle
According to the balance principle, total assets must always equal the sum of liabilities and equity. If they don’t match, then it means something is miscalculated or some data is missing. Always verify this balance to catch mistakes early.
Adjustments and Depreciation are Avoided
Typically, assets lose value over time. So, if you overlook depreciation or any other adjustments, it can mislead to a financial picture. This mistake can make the assets look more valuable than they are. So, ensure that adjustments are applied regularly for accurate reporting.
Retained Earnings With Cash Confusion
Retained earnings are equal to the total profit minus the dividends paid out. It does not reflect the available cash. It’s possible that some may confuse retained earnings with cash which can lead to a misrepresentation of the company’s liquidity. Properly distinguish retained earnings from cash to find out true liquidity.
Accounting Software for Balance Sheet Calculations
Balance sheet calculation requires accurate organizing. It can be complex having to work with different financial data such as assets, debts, or equity. As the business grows, financial data increases and becomes more intricate & complicated.
Here, manual calculations take time and increase the chances of human error. The study conducted by the Journal of Accountancy shows that the human error rate in the manual data entry can range between 1% to 5%. It can lead to inaccurate financial reporting. Ultimately misinformed decision!
But accounting software hits the mark by automating this complex process. Accounting software like Financfy can make balance sheet management easy by automating calculations, continuously updating financial records and identifying imbalances.
The software applies standard accounting formulas and ensures that each entry meets the correct category.
Accounting software offers an efficient way to reduce the chances of human error and maintain a correct balance sheet.
Conclusion
Accurate balance sheet calculation is essential for reliable financial reporting and effective business management. You can easily calculate the missing values and maintain accuracy using the accounting equation.
Here, accounting software can further make the process simple and reduce the chances of error. So, use the right software and avoid common mistakes to ensure financial accuracy.
