Balance sheet

A balance sheet, statement of financial position (balans) is an overview of the posessions, liabilities and equity of a company at a certain moment in time.

Of the four basic financial statements, the balance sheet is the only one that describes something at a specific point in time.

The right side of the balance sheet lists the liabilities and equity (passiva in Dutch) - - the resources of the organisation.
The left side of the balance sheet lists the assets (activa in Dutch) - where those resources are dedicated to; What the company owns

Some basics

Very basic

      Balance sheet
--------------------------------------------
Assets      | Liablities
            | ------------------------------
            | Subtotal
            | Equity: Assets -/- liabilities
----------- | ------------------------------
Sum         | Sum

It doesn't balance without equity

There are a couple of suprising features about balance sheets, first and foremost of these: You have to add an entity called equity, to make the balance-as-a-whole, well, balance (meaning: left and right the same amount). Equity can be calculated with the equity equation.

Maybe the actual reason why a balance doesn't balance without equity, is because a balance doesn't represent transactions, but states of different accounts.

Reset posts at opening balance?

Another suprising feature of balances: Some accounts get reset at each new opening balance, especially Private withdrawal (Ontrekking privé)

Maybe you can say that all P&L related accounts get reset: Revenue over 2022 doesn't play a role anymore in 2023. And once again, it seems that equity balances stuff
However, Onttrekking privé is a balance post, not a P&L post, so you can't compare it completely.

P.s.: Since I first wrote this (2023.03), I think I found a whole bunch of accounts that get reset periodically. I forgot what the rule was for this.

Only the balance sheet, is not enough

Another surprise: If I go in a bookkeeping from one year to another, just having the balance sheet, is not enough: It doesn't contain enough information to accurately describe the state of a company's finances at a given moment.

Some examples of what is missing

Details about depreciation: The type of depreciation; begin date; start date; purchase price; etc. Some of these figures are needed solely for doing depreciation, other figures are needed for the Belastingdienst
Details about the upcoming VAT submission over the last period of the previous year: Separate VAT due and pretax for domestic, EU- and international transactions (slightly more complicated than that, though). Again: This is needed for the Belastingdienst, rather than for the actual business administration.

I tend to include this additional information somewhere on the closing balance sheet (in the bookkeeping spreadsheet) of the previous year and copy it to the opening balance sheet of the next year. I don't think I have a fixed format for that yet (2023.08).

Where to include?

See SSoT (Bookkeeping) for some background. For now:

The actual documents are the primary source. Unfortunately, that's still not enough information. Example: The actual VAT submissions are nice and official documents, but they lack details concerning VAT Due and Pretax for NL, EU and non-EU separately. Solution: Include a text file with the official file. The same can be applied to depreciation: Include the original documents (e.g., a purchase document, even if it's some years old)
Within the bookkeeping, the general ledger is the SSoT → Include the extra information in the description field. But only if this doesn't cause more work than it saves. E.g.: including all details with each VAT booking, is an annoyingly tedious job.

Example: Additional information, included in the description field of an opening balance line about upcoming VAT submission

Example: Additional information, included in the description field of a VAT submission

First VAT submission of the new year

At the beginning of a new year, there usually is a VAT submission to the Belastingdienst, concerning the last period (month or quarter) of the previous year. On the balance sheet, that usually is just a couple of accounts.

However, for the actual submission to the Belastingdienst, more figures are needed. This is one of the reasons for maintaining a VAT ledger (BTW-boek). See VAT submission & website Belastingdienst for details.

VAT at the opening balance, is quite similar to a regular VAT submission, except that stuff hasn't been submitted

Where to include the balance in a spreadsheet bookkeeping?

Over the years, I have tried out various layouts for including the opening- and closing balance in a spreadsheet bookkeeping.

Separate sheets in the same file

For most years, for both balances, I used separate sheets in the same file as the general ledger:

Pro: Nice and clean
Pro: These sheets are optimized for incorporating balance sheets only
Con: I get tired of going back-and-forth between different sheets
Con: I can't see the general ledger and a balance at the same time
Con: Difficult to sync changes across general ledger and balance sheets. E.g., when an account is added.

Included in general ledger

Since somewhere in 2023, I have included both balances on the general ledger:

Pro: Easy to sync changes across general ledger and sheets (e.g., adding an account)
Pro: No need to go back-and-forth between sheets all the timne
Pro: I can see a balance sheet + general ledger at the same time
Con: I needed a trick to include equity. Solution: Just add it as a separate line, just as the lines for the other accounts
Con: I needed to remove the check columns for balance sheet lines - Small price.

Separate file?

In 2024, I moved the VAT ledger to a separate file, mostly so I can open it at the same time as the general ledger. Do something similar with these balances?

Probably not:

Balances aren't that spectacular: I don't spend much time on them
It's quite practical to include them on the general ledger, so they share the accounts (as columns). Additionally, the values nicely propagate through the sheet

Partitioning?

When you partition a year into twelve months and you make end balances for those months and for the year as a whole, do these 12 monthly balances add up to the yearly balance?

I guess so, but let's check:

Example

Booking facts: Every month, 1 invoice of € 1.000 (ex VAT) is send. It's paied immediately and VAT is settled the same month.

Balance at the beginning of the year: € 0 - € 0

Balance at the end of the first month:

Debit: Bank account: € 1.000
Credit: Equity = assets - liabilities = € 1.000.

Balance at the end of the second month:

Debit: Bank account: € 2.000
Credit: Equity = assets - liabilities = € 2.000.

Etc.

Balance at the end of the 12th month:

Debit: Bank account: € 12.000
Credit: Equity = assets - liabilities = € 12.000.

Conclusions

It doesn't! The balance at the end of the year, is just that: An inventory of the state at that specific moment. Early balance sheets have no meaning in this context.

I guess I confused a point-in-time entity like balance sheet with an interval entity like income statements: There you can add partitions to arrive at the sum covering the partitions

Change a negative equity into a positive liability

It's possible to have negative equity (e.g., a checking account with an overdraft), but it might be better to move that amount to the right side of the balance sheet as a liability.

A specific case I had in 2023.08: Too much VAT pretax had been claimed, resulting in a negative amount for VAT: pretax on the left side of the balance sheet. I couldn't incorporate that in the jaarrekening.

ChatGPT (2023.08):

I'm working on the annual accounts of a single-owned business, located in The Netherlands. Concerning the balance sheet, is it possible to have negative amounts at activa (the left side of the sheet)?
ChatGPT: In a balance sheet, also known as a statement of financial position, the left side lists the assets (Activa in Dutch), and the right side lists the liabilities and equity (Passiva in Dutch). The balance sheet is designed to showcase the financial position of a business at a specific point in time, illustrating the relationship between assets, liabilities, and equity.
Generally, assets are presented on the left side (Activa) and represent what the company owns, while liabilities and equity are presented on the right side (Passiva) and represent what the company owes or what its owners have invested. In a well-balanced balance sheet, the total value of assets should equal the total value of liabilities and equity.
Negative amounts on the assets side (Activa) can occur, but they are not typical for most businesses. Negative amounts in this context would imply that the company owes more than it owns, which might indicate financial difficulties or certain accounting scenarios.
Here are a few scenarios where negative assets might appear:

Accrued Liabilities: If a company has accrued more liabilities (debts) than the value of its assets, it could result in negative net assets. This might happen if the company has taken on a substantial amount of debt.

Intangible Assets: Certain intangible assets, like goodwill or patents, might have a negative value due to factors such as impairment or changes in market conditions.

Depreciation: If the accumulated depreciation on assets (like equipment or buildings) exceeds their original cost, it could lead to negative net book value for those assets.

Unearned Revenue: Negative assets could also arise if the company has received payments for goods or services that have not yet been delivered, creating a liability that exceeds the value of the related asset.

Special Accounting Situations: In specialized accounting scenarios, certain circumstances might result in negative asset values, such as when reclassifying assets or addressing accounting errors.

It's important to note that negative assets are not a standard feature of a healthy balance sheet and could indicate financial issues or irregularities. If you're encountering negative asset amounts in your single-owned business's balance sheet, it's advisable to consult with a qualified accountant or financial professional to understand the underlying reasons and address any potential concerns.

User: When you have a deficit on a checking bank account, would that be an example?
ChatGPT: Yes, a deficit in a checking bank account is a common example of a negative asset in a balance sheet. In this case, the deficit represents a negative balance in the bank account, indicating that the company owes more money to the bank than it currently has in the account.
Here's how this scenario would be reflected on a balance sheet:
Assets (Activa):

Checking Bank Account: -$5,000

Liabilities and Equity (Passiva):

Equity: $50,000

Loans Payable: $20,000

Accounts Payable: $5,000

In this example, the checking bank account has a deficit of $5,000, which is listed as a negative asset under the "Assets" section. The negative balance indicates that the company's bank account is overdrawn by $5,000. This overdrawn amount is considered a liability to the bank and will likely accrue interest or fees until it's repaid.
It's important to address such deficits in a timely manner to avoid additional interest or fees and to maintain a healthy financial position for your business.

User: This example of a negative checking account: Wouldn't that number somehow be transfered to the other side of the balance? Because now it becomes a liability? Or would it be better to keep it at the left side, to make it clear that this is unusual?
ChatGPT: You're correct that the deficit in the checking bank account would eventually need to be accounted for on the liabilities side of the balance sheet to accurately reflect the financial position of the business. This is because the deficit represents an obligation that the business owes to the bank. In other words, the negative balance in the checking account would essentially be treated as a liability.
So, you would typically record it as a liability under the "Liabilities and Equity" (Passiva) side of the balance sheet. Here's how it might look:
Assets (Activa):

Cash on Hand: $2,000

Accounts Receivable: $8,000

Inventory: $15,000

Liabilities and Equity (Passiva):

Equity: $25,000

Loans Payable: $20,000

Accounts Payable: $5,000

Bank Overdraft: -$5,000

In this example, the bank overdraft of -$5,000 is shown as a liability on the "Liabilities and Equity" side of the balance sheet. This accurately reflects the fact that the business owes the bank $5,000, and it's consistent with standard accounting practices.
While it might seem unusual to have a negative number on the assets side, it's generally more accurate and in line with accounting conventions to represent this as a liability. It's important for a balance sheet to accurately represent the financial position of the business, and presenting the bank overdraft as a liability achieves this goal.
Including the bank overdraft as a liability also makes it clear that the business has an obligation to repay this amount to the bank. This approach is more informative and transparent for anyone reviewing the balance sheet, including potential investors, creditors, or regulators.

User: How would you record such a change from asset to liability in a journal?
ChatGPT To record the change from an asset to a liability in your accounting records, you would use a journal entry. In this case, you're transitioning the negative balance in the checking bank account from the assets side to the liabilities side of the balance sheet. Here's how you might record this change:
Let's assume your initial balance sheet looked like this:
Before the Change:
Assets (Activa):

Checking Bank Account: -$5,000

Liabilities and Equity (Passiva):

Equity: $50,000

Loans Payable: $20,000

Accounts Payable: $5,000

Now, you want to move the negative balance from the checking bank account to the liabilities side as a bank overdraft. Here's the journal entry:
Journal Entry:

Debit: Bank Overdraft (Liabilities) $5,000

Credit: Checking Bank Account (Assets) $5,000

This journal entry effectively "closes" the negative balance in the checking bank account and transfers it to a new liability account called "Bank Overdraft." The debit side increases the liability, indicating that the business owes this amount, and the credit side decreases the asset, closing out the negative balance.
After making this journal entry, your adjusted balance sheet will now look like this:
After the Change:
Assets (Activa):

Cash on Hand: $2,000

Accounts Receivable: $8,000

Inventory: $15,000

Liabilities and Equity (Passiva):

Equity: $25,000

Loans Payable: $20,000

Accounts Payable: $5,000

Bank Overdraft: -$5,000

Now, the negative balance has been appropriately represented as a liability in the "Bank Overdraft" account on the liabilities side of the balance sheet.
Please note that while this example demonstrates the accounting process, it's recommended to consult with a professional accountant or financial advisor to ensure that your accounting records are accurate and compliant with the relevant regulations.

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