Which Entries Can Zero Out the Balance Sheet?

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A balance sheet has three sections: Assets, Liabilities and Equity. Entries in the Assets section are always positive because they represent things of value that the company owns. Liabilities line items are always negative because they represent debts and other obligations that take money out of the business. In accounting, assets should theoretically always equal liabilities, just as credits should always equal debits in a standard T account. When assets plus liabilities equal anything other than zero, the amount goes to the Equity section.

Balance

In accounting, for every credit there is a debit, and at the end of the account debits should equal credits. Theoretically, the same holds true for a balance sheet: Every asset exists because of an equal liability. For every new factory there was capital expenditure or a loan that added an equal value to long-term debt, and the accounts receivable line in the Assets section is countered by an accounts payable line in the Liabilities section.

Zeroing Out

The Assets and Liabilities sections of balance sheets for a fully equipped business with no people would zero out. All equipment, property and other assets would have corresponding liabilities, with no extra cash from investors or from combining assets to create profitable goods and services. No particular entry zeroes out the balance sheet because every positive entry should be countered with a negative entry.

Extra Value and Equity

In actual businesses, people use the company's assets and liabilities to operate a business, hopefully a profitable one. Assets rarely equal liabilities; in fact, a profitable business has assets valued well above liabilities. Accounting theory states that assets cannot surpass liabilities on their own, and any surplus value is therefore attributable to the company and its owners. The Assets and Liabilities sections zero out by attributing any imbalance in their totals to company owners through the Equity section.

Equity

The balance sheet accounts for and zeroes out any difference between Assets and Liabilities through the third section, Equity. The Equity section details items that are not strictly assets or liabilities -- stock, reinvested earnings -- before taking the difference between total assets and total liabilities and placing the resultant figure in the "Total Equity" line item. On a company's balance sheet, this system means that total assets equals total liabilities -- a negative number -- plus total equity.

References

About the Author

Calla Hummel is a doctoral student studying contraband in international political economy. She supplements her student stipend by writing about personal finance and working as a consultant, as well as hoping that her investments will pan out.

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