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The balance sheet approach measures changes in net operating assets relative to their average balance. Work a complete example, define the operating scope, and check whether acquisitions or currency changes distort the result.
The balance sheet accrual ratio divides the change in net operating assets by average net operating assets over the same period. It measures how much the net operating balance grew relative to its starting and ending size. The result is a review signal, and it needs account-level explanations before it supports a conclusion about earnings quality.
This article uses the net-operating-assets version of the balance sheet approach. Its scope includes operating assets and subtracts nonfinancing operating liabilities. It excludes cash, financial investments and interest-bearing debt for the illustrated business.
Net operating assets (NOA) = Operating assets - Operating liabilities
Balance sheet accruals = Closing NOA - Opening NOA
Average NOA = (Opening NOA + Closing NOA) / 2
Balance sheet accrual ratio = Balance sheet accruals / Average NOA
Multiply the final quotient by 100 to express it as a percentage. Both dates must cover the same entity, currency and account definitions. An annual result and a quarterly result cover different measurement periods even if their percentages happen to match.
The CFA Institute's financial-report quality reading discusses accruals as one indicator of earnings persistence and recommends examining differences between earnings and operating cash flow. The ratio here is one part of that review, not a test that establishes whether reporting is correct.
For the underlying recording concept, see accrual. For the statement's overall structure, use the separate balance sheet guide.
Bring opening and closing trial balances or comparative statements. Retain the entity, reporting date, account code, description, currency and signed balance. Add an explicit operating or financing classification instead of deciding from an account name alone.
Receivables, inventory, prepayments and net operating equipment are operating assets in this example. Trade payables and accrued operating expenses are operating liabilities. An accrued interest balance would need separate treatment because it belongs to financing under this scope.
Ask the controller to approve the classification of leases, taxes, pensions, goodwill and any other accounts present in your own statements. The example does not contain those balances. Excluding an account because the export lacks detail would silently change the measure; obtain the supporting schedule instead.
Fictional Michigan manufacturer Cedar Works compares December 31, 2025, with December 31, 2026. The balances below are supplied inputs. Dollar amounts are exact, and calculated percentages are rounded to two decimal places only after division.
| Operating asset | Opening balance (USD) | Closing balance (USD) |
|---|---|---|
| Trade receivables, net | 400,000 | 490,000 |
| Inventory | 300,000 | 360,000 |
| Operating prepayments | 50,000 | 50,000 |
| Operating property and equipment, net | 800,000 | 840,000 |
| Operating assets | 1,550,000 | 1,740,000 |
| Operating liability | Opening balance (USD) | Closing balance (USD) |
|---|---|---|
| Trade payables | 250,000 | 290,000 |
| Accrued operating expenses | 100,000 | 110,000 |
| Operating liabilities | 350,000 | 400,000 |
Use those totals to calculate NOA and the ratio:
| Step | Calculation | Result |
|---|---|---|
| Opening NOA (USD) | 1,550,000 - 350,000 | 1,200,000 |
| Closing NOA (USD) | 1,740,000 - 400,000 | 1,340,000 |
| Balance sheet accruals (USD) | 1,340,000 - 1,200,000 | 140,000 |
| Average NOA (USD) | (1,200,000 + 1,340,000) / 2 | 1,270,000 |
| Accrual ratio | 140,000 / 1,270,000 x 100 | 11.02% |
The company added $140,000 to net operating assets. That is the numerator to explain. The ratio does not mean that the same percentage of reported revenue or net income is unpaid: neither revenue nor net income is its denominator.
Rebuild the change from the individual rows. Increases in operating assets raise NOA; increases in operating liabilities reduce it.
| Account | Closing minus opening (USD) | Effect on NOA (USD) |
|---|---|---|
| Trade receivables | 90,000 | 90,000 |
| Inventory | 60,000 | 60,000 |
| Operating prepayments | 0 | 0 |
| Net property and equipment | 40,000 | 40,000 |
| Trade payables | 40,000 | -40,000 |
| Accrued operating expenses | 10,000 | -10,000 |
| Total | 140,000 |
The bridge matches closing NOA minus opening NOA exactly. Separately, match the classified accounts back to the source statements, retaining the excluded financing accounts so every source row has a destination. Use flux analysis for a deeper explanation of the individual movements.
The SEC's financial-statement guide distinguishes balance sheets, which measure a position at a date, from cash flow statements, which report flows over a period. That distinction matters here: a balance difference is not automatically a cash receipt or payment.
The same account schedule can also support a measure scaled by average operating assets before deducting operating liabilities. It is a different denominator and must have a different label.
| Denominator choice | Calculation (USD) | Denominator (USD) | Same numerator divided by denominator |
|---|---|---|---|
| Average net operating assets | (1,200,000 + 1,340,000) / 2 | 1,270,000 | 11.02% |
| Average operating assets | (1,550,000 + 1,740,000) / 2 | 1,645,000 | 8.51% |
The numerator remains $140,000. Calling both outputs the same ratio would hide the denominator difference. For internal reporting, put the full definition beside the result and keep it unchanged between periods.
The controller owns the classification and reconciliation. Receivables and inventory owners explain their respective increases, and the fixed-asset owner supplies additions, disposals, depreciation and other changes behind net equipment.
Ask whether receivables growth follows sales or slower collection, whether inventory supports approved demand, and whether capital spending explains the equipment movement. These questions guide operating reviews without assuming that a higher ratio is misconduct. Working capital examines the shorter-term operating funding question; it does not replace the broader NOA calculation used here.
Bring your comparative statements and approved account classifications; Covirage maps the columns, and its tools compute and check the operating-balance changes and ratio. The external AI model explains the result with every figure traced to its rows. Create a free Covirage account, which takes about a minute, then set up your business and bring a sample of your own data.
See Covirage for finance teams for the supporting workflow.
No. Growth can increase receivables, inventory and equipment even when transactions are recorded correctly. A positive result identifies a change to investigate. Review collection, inventory movement, capital spending and accounting adjustments before deciding what explains it.
Interest-bearing borrowing is classified as financing in the approach used here. Including it would make a financing decision change a measure intended to track operating balances. Document the treatment of leases and other ambiguous accounts so the scope stays consistent.
The version defined here uses average net operating assets, after deducting operating liabilities. Average operating assets before that deduction produces a different scaled measure. State the denominator in the report and do not compare results from different definitions as if they matched.
You need opening and closing balances to measure the change and calculate the average. A comparative statement can provide both dates. You also need enough account detail to classify operating and financing items consistently across those dates.