Balance Sheets

When we discussed debits and credits earlier in this appendix, we learned that debits and credits must equal each other so that the accounts stay in balance. There is also an official formula, the Accounting Equation, which is used to show that all accounts are in balance. The accounting equation is defined as: Assets = Liabilities + Owners Equity. This is commonly shortened to A = L + OE. In this formula, the total amount of assets (on the left) will equal the total amount of the liabilities plus the owner’s equity. Now there are two ways for ensuring that a company’s books are in balance.

The report which proves that a company’s accounts follow the accounting equation is the Balance Sheet. It is one of the primary financial reports used by companies in their annual report presented to stockholders. It is also used by financial analysts, lenders, and investors for calculating financial ratios that evaluate a company’s financial health.

Let’s look at a balance sheet template so that we can understand the different aspects of it. We’ll see how it is formatted so that the reader can see the balances of individual accounts and at the same time make sure that it follows the accounting equation. Figure A-4 shows a simplified balance sheet template.

Figure A-4. A simplified balance sheet template.

The first thing you want to look at with a balance sheet is whether the balances match the accounting equation. In other words, do the assets equal the liabilities plus owner’s equity? Assuming that the company has followed proper accounting practices, your balance sheet should be in balance.

We can see that the balance sheet is formatted to make it easy to check if it is in balance. The right-most column only shows two figures: Total Assets and the Total Liabilities & Stockholder’s Equity. If these two numbers are the same, the accounting equation has been satisfied and you are in good shape. If not, either some accounts were missed or they were categorized in the wrong section.

The second aspect of the balance sheet you want to be aware of is how the accounts are categorized. When you create a balance sheet, each category is going to be its own group. This lets Crystal Reports use indentation to separate each category and summarize the balances. We already saw that the two primary categories are Assets and Liabilities & Owner’s Equity. Within each of these two categories are the sub-categories which provide a more detailed classification of each account. Each sub-category also has a sub-total associated with it. These sub-totals are one of the more important aspects of a balance sheet because readers use these values for calculating financial ratios.

It’s important for you to recognize how the categories and sub-categories match up to your database tables. In the section that discussed the different accounting systems and their database structure, we saw that some databases had fields for classifying the accounts into sub-categories and some didn’t. If your database has fields for the sub-categories, it becomes very easy to create a group for each sub-category and show sub-totals in each group footer. If your database doesn’t give you this information, your balance sheet will either be limited in how it classifies accounts or you’ll have to manually create the sub-categories using formulas. The more detailed information that your database has in it, the less work you have to do.

Earlier in the chapter, we learned that accounts are typically numbered in ascending order based on liquidity (from the most liquid to the least liquid). The balance sheet follows this same ordering system. For example, in the assets section, cash is listed first and non-current assets such as machinery are listed last. Since accounts are already ordered by liquidity, you can sort your report on the account number and this aspect of the report is taken care of for you automatically.

One last thing to notice on the balance sheet is the contra-accounts. Contra-accounts decrease an account’s balance and are typically formatted differently so that they stand out. In this balance sheet, there are two contra-accounts: Allowance For Bad Debts and Accumulated Depreciation (they are both in the Assets section). Each account is prefixed with the word “Less:” in front of the name. In the actual database, the account isn’t going to have the word “Less:” in its account name field. You are going to have to add this to the report yourself. This requires you to create a formula for the account name and when you see that an account is a contra-account, then you have to add the “Less:” prefix to the account name. We’ll look at how this is done in the detailed tutorial steps.