Balance Sheets 101: Understanding Assets, Liabilities and Equity

A balance sheet explains the financial position of a company at a specific point in time. As opposed to an income statement which reports financial information over a period of time, a balance sheet is used to determine the health of a company on a specific day. In this example, Apple’s total assets of $323.8 billion is segregated towards the top of the report. This asset section is broken into current assets and non-current assets, and each of these categories is broken into more specific accounts. A brief review of Apple’s assets shows that their cash on hand decreased, yet their non-current assets increased.

Example of a Balance Sheet

In a sense, the left side of the balance sheet is the business itself – the buildings, the inventory for sale, the cash from selling goods, etc. If you were to take a clipboard and record everything you found in a company, you would end up with a list that looks remarkably like the left side of the Balance Sheet. The left side of the balance sheet is the business itself, including the buildings, inventory for sale, and cash from selling goods.

The equity equation

1. In this example, Apple’s total assets of $323.8 billion is segregated towards the top of the report.
2. If the accounting equation is out of balance, that’s a sign that you’ve made a mistake in your accounting, and that you’ve lost track of some of your assets, liabilities, or equity.
3. The double-entry practice ensures that the accounting equation always remains balanced, meaning that the left-side value of the equation will always match the right-side value.
4. The accounting equation helps to assess whether the business transactions carried out by the company are being accurately reflected in its books and accounts.

When most of us think of the stock market, we think of common shares that are actively traded on exchanges. For example, if you buy a car for $40,000 and expect it to last for five years, you might depreciate it at $8,000 per year. After the first year, your car would be shown on the balance sheet at the purchase price of $40,000 minus $8,000 accumulated depreciation, for a net book value of $32,000. Our easy online application is free, and no special documentation is required.

Different accounting systems and ways of dealing with depreciation and inventories will also change the figures posted to a balance sheet. Because of this, managers have some ability to game the numbers to look more favorable. Pay attention to the balance sheet’s study on operational readiness growth and profitability footnotes in order to determine which systems are being used in their accounting and to look out for red flags.

All this information is summarized on the balance sheet, one of the three main financial statements (along with income statements and cash flow statements). We could also use the expanded accounting equation to see the effect of reinvested earnings ($419,155), other comprehensive income ($18,370), and treasury stock ($225,674). We could also look to XOM’s income statement to identify the amount of revenues and dividends the company earned and paid out. You can learn a lot about a business’s health by looking at its balance sheet and calculating some ratios. Comparing several years of a company’s balance sheet may highlight trends, for better or worse.

Accounting equation

However, due to the fact that accounting is kept on a historical basis, the equity is typically not the net worth of the organization. Often, a company may depreciate capital assets in 5–7 years, meaning that the assets will show on the books as less than their “real” value, or what they would be worth on the secondary market. Your liabilities are any debts your company has, whether it’s bank loans, mortgages, unpaid bills, IOUs, or any other sum of money that you owe someone else. However, unlike liabilities, equity is not a fixed amount with a fixed interest rate. Unlike liabilities, equity is not a fixed amount with a fixed interest rate. Everything listed is an item that the company has control over and can use to run the business.

A few days later, you buy the standing desks, causing your cash account to go down by $10,000 and your equipment account to go up by $10,000. Assets are anything valuable that your company owns, whether it’s equipment, land, buildings, or intellectual property. “Members’ capital” and “owners’ capital” are commonly used for partnerships and sole proprietorships, respectively, while “distributions” and “withdrawals” are substitute nomenclature for “dividends.” All programs require the completion of a brief online enrollment form before payment.

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