Balance sheet accounts

What it means

Balance sheet accounts are the accounts of account classes 0 to 4, used to record assets, liabilities and equity. They include fixed assets, inventory, cash and bank accounts, receivables, payables, registered capital, funds and prior years' results.

Unlike income statement accounts in classes 5 and 6, which capture costs and revenues for one period, balance sheet accounts carry their balance from year to year. The closing balance at year-end becomes the opening balance of the next year, and the balance sheet is drawn up from these balances.

Balance sheet accounts are either asset accounts, which record property and start with a debit balance, or liability accounts, which record sources of funding, meaning equity and liabilities, and start with a credit balance. The accounting equation holds: assets equal liabilities plus equity.

How it works in practice

When opening the books, balance sheet balances are brought forward through the opening balance account, and when closing the books they pass through the closing balance account, both of which are closing accounts. Income statement accounts, by contrast, are closed to the profit and loss account and not carried into the new year.

In its chart of accounts a company sets up sub-accounts for the general balance sheet accounts, for example by bank, customer or asset type. Detailed sub-accounts make stocktaking easier and help reconcile balances with bank statements, the receivables ledger or the fixed asset register.

Before the financial statements are prepared, balance sheet balances are verified by stocktaking. Every balance should be supported, for example by a list of receivables, a bank statement or an inventory count sheet, otherwise the balance sheet may not show the true state of assets and liabilities.

What to watch out for

Unreconciled differences on balance sheet accounts are carried into later years and become hard to explain over time. Typical cases are old unmatched payments, unsettled advances or accounts left with a balance after a change of accounting software. It is better to deal with them as they arise.

The balance sheet and the profit and loss statement are linked through the profit or loss for the year. A booking error, for example in accruals or impairment allowances, therefore shows up in both statements, and when correcting it the related balance sheet balances must be checked too.