Balance Sheet

A balance sheet should always balance. The name “balance sheet” is based on the fact that assets will equal liabilities and shareholders’ equity every time.

Understanding Balance Sheets

The assets on the balance sheet consist of what a company owns or will receive in the future and which are measurable. Liabilities are what a company owes, such as taxes, payables, salaries, and debt. The shareholders’ equity section displays the company’s retained earnings and the capital that has been contributed by shareholders. For the balance sheet to balance, total assets should equal the total of liabilities and shareholders’ equity.

The balance between assets, liability, and equity,makes sense when applied to a more straightforward

Balance Sheet Balances

The major reason that a balance sheet balances are the accounting principle of double entry. This accounting system records all transactions in at least two different accounts, and therefore also acts as a check to make sure the entries are consistent.

Let our fictional bank start with deposits (liabilities) equal to Rs 100. This could be because Ms Fernandes has deposited Rs 100 in the bank. Let this bank deposit the same amount with RBI as reserves.

Represents its balance sheet.

If we assume that there is no currency in circulation, then the total
money supply in the economy will be equal to Rs 100.
M1 = Currency + Deposits

= 0 +100 =100