The transactions during an accounting period can be recorded in a worksheet, with columns for each balance sheet item (cash, equipment, etcetera). Each transaction is written in a row, with the increases/decreases added/subtracted in the columns of the affected balance sheet items. For each transaction, the accounting equation will hold: ΔAssets = ΔLiabilities + ΔEquity.
The first row is the opening balance (in the worksheet below this row contains all zeros since in the example the company was newly incorporated). The last row, holding the column totals, contains the ending balance values.
Accounting Worksheet Example
Note that at all times total assets equal total liabilities plus equity.
Also, note that the example balance sheet shown earlier (section ‘The balance sheet’) is the ending balance sheet based on this worksheet.
When the accounting equation is used to keep track of the balance sheet, the balance sheet can be constructed by adding the columns after each transaction. In other words, the balance sheet is always up-to-date. Since the balance sheet shows the financial position at a point in time, the main drawback of this method is that it is not clear how well the firm has performed over time.
This is because the expenses and revenues are added to retained earnings and are not recorded separately. In the next lesson double entry bookkeeping, changes in retained earnings (expenses, revenues as well as dividends) are separately recorded.
Accounting Worksheet Explained
– the accounting equation can be the basis for a simplified bookkeeping method to keep track of balance sheet items only
– sales and expenses are included in retained earnings and are not separately recorded, hence, no information about the performance is readily available