Balance (accounting) facts for kids

A balance in banking and accounting is like checking your piggy bank to see how much money is left inside! It's the amount of money that's still in a bank account, or how much money is still owed to someone.

In bookkeeping, which is how businesses keep track of their money, the "balance" shows the difference between money coming in (called "credits") and money going out (called "debits").

• If a business has more money going out (debits) than coming in (credits), it has a debit balance.
• If a business has more money coming in (credits) than going out (debits), it has a credit balance.
• If the money coming in and going out are exactly the same, the balance is zero!

At the end of a financial period (like a month or a year), the balance helps a business see its total value, including what it owns (assets) and what it owes (liabilities).

What is Balancing the Books?

Balancing the books is a super important step in accounting. It means making sure everything adds up correctly, just like making sure both sides of a seesaw are even.

The main idea behind balancing the books comes from a key accounting rule:

Assets = Liabilities + Owner's Equity (Capital)

Let's break that down:

• Assets are things a business owns that have value, like cash, buildings, or equipment.
• Liabilities are what a business owes to others, like loans or bills.
• Owner's Equity (also called capital) is the money the owner has put into the business, plus any profits the business has made.

Checking the Numbers

The first step in balancing the books is to check if the equation (Assets = Liabilities + Owner's Equity) is true. This is often done using something called a trial balance. It's like a quick check to see if all the numbers from different accounts match up.

If the assets and liabilities don't match up perfectly, accountants make adjustments to the owner's equity to make the equation balance.

• If assets are more than liabilities, it means the business has more value, so the owner's equity increases.
• If liabilities are more than assets, it means the business owes more, so the owner's equity decreases.

Connecting Financial Statements

Besides the main balance sheet, businesses also have another important report called the Profit and Loss Statement (P&L). This report shows how much money a business made or lost over a period. Accountants also make sure the P&L statement connects correctly with the balance sheet to give a full picture of the business's financial health.

Images for kids

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  A friendly robot helping to explain finances.