A Balance Sheet Proves That Debits Equal To Credits (Debits = Credits) True Or False

What Does A Balance Sheet Prove?

A Balance Sheet proves that debits are equal to credits is false / wrong as it proves Assets are equal to Liabilities and Owner’s Equity (Accounting Equation) at a specified time on a particular date. However, A Trial Balance proves that debits and credits are equal in the Ledger’s Accounts.

Mathematically, we can write as shown below:

Assets = Liabilities + Owner’s Equity

Example: Cash Received From Sales Effect On Accounting Equation

Mr. A Sold Merchandise Worth For Cash Rs. 10000 on 28^th June, 2022. Prove that Assets = Liabilities + Owner’s Equity.

As we know that the accounting equation shows:

                                Assets    =      Liabilities      +     Owner’s Equity

                               +Cash     =              0             +             +Sales

                               +10000   =              0             +             +10000

From the above accounting equation, it is proved that assets are always equal to liabilities plus owner’s equity. Assets of Rs. 10000 are equal to total of liabilities plus owner’s equity i.e., Rs. 100000. So the balance sheet proves assets are always equal to liabilities plus owner’s equity.

What Does The Balance Sheet Tell You About A Business Like A Sole Proprietorship, Partnership Or A Company / Corporation

We can say that a balance sheet tells you about a company’s business resources (Assets) which are acquired as a result of the claims of Outsiders of the business (Liabilities) or the claims of Internal Owners of the business (Owner’s Equity or Equity). In other words, a balance sheet tells you about business financial situation (position) on a specified time on a particular day.

What Does A Balance Sheet Show About A Business?

A balance sheet shows a company's business financial position on a particular time on a day. Financial position is calculated with the help of accounting equation which shows assets are always equal to the liabilities and equity. If assets are not equal to liabilities and equity then the business is not measured its financial position accurately.

It also shows Net Worth of the business i.e., what is left over in the business to finance, grow and sustain the business, which is equal to Total Assets minus Total Liabilities.

Mathematically, we write as shown below:

Equity (Net Worth) = Total Assets  -  Total Liabilities

Net worth shows good financial position of the business as the value of total assets exceeds the value of total liabilities. For businesses, the net worth is a key to the success.