At the end of each month, an organization has to complete its accounts and close its books. One can also say that the credit and debt columns are equal if all the entries have been written without errors. The balance sheet works on the basis of the accounting equation. The assets of the company are broken down into current and fixed assets. An asset which has a lifetime of one year or less is termed as current while fixed assets have a life of more than one year. The closing balance of each asset is listed down separately. The closing balance is the figure calculated after all the transactions of the month have taken place.
The liabilities are also defined in two categories. One is the current liability while the other is the long term liability. The sum of money which the organization has to pay in a maximum time period of one year is called current liability and if a time of more than one year is available to clear the dues, it is called a long term liability.
The third constituent of the balance sheet is capital also called owners’ equity. In simple terms, this is the total sum of money which circulates in the business as investment. With a loss, this amount can decrease and a profit can cause a rise. A number of formats are used to make the balance sheet. Some companies prefer the column format while the others use the T account format.