Balance (accounting)

In accounting, "balance" has several related but distinct meanings. The most common usage refers to the equality of debits and credits within the accounting equation. This fundamental equation states that Assets = Liabilities + Equity. For every transaction, the total debits must equal the total credits to maintain this balance.

Another common usage is to refer to the "balance" of an account. This represents the net amount in an account at a specific point in time. The balance is calculated by subtracting the total credits from the total debits (or vice versa, depending on the account type) that have been posted to that account. For example, a cash account with total debits of $10,000 and total credits of $3,000 would have a balance of $7,000.

The term "balance" also appears in the phrase "trial balance." A trial balance is a list of all the general ledger accounts and their balances at a specific date. It is used to verify that the total debits equal the total credits, ensuring the accounting equation is in balance. A balanced trial balance is a prerequisite for preparing financial statements.

Finally, “balance” can also refer to the financial statements themselves, such as the "balance sheet," which presents a snapshot of a company's assets, liabilities, and equity at a specific point in time. The balance sheet derives its name from the accounting equation, as it is designed to visually demonstrate the balance between a company's resources (assets) and its obligations (liabilities and equity).