To recap, you’ll find the assets (what’s owned) on the left of the balance sheet, liabilities (what’s owed) and equity (the owners’ share) on the right, and the two sides remain balanced by adjusting the value of equity. Together, these line items make up total shareholders’ equity. This is also why all revenue and expense accounts are equity accounts, because they represent changes to the value of assets.Ĭommon line items in the equity section of the balance sheet include: Any time the value of assets change-perhaps you receive more in cash from a sale than the value of the inventory you sold, or you were forced to write down a truck that was involved in a collision and no longer works-the value of equity changes.īecause the value of liabilities is constant, all changes to assets must be reflected with a change in equity. Unlike liabilities, equity is not a fixed amount with a fixed interest rate. These are listed at the bottom of the balance sheet because the owners are paid back after all liabilities have been paid. Since they own the company, this amount is intuitively based on the accounting equation-whatever assets are left over after the liabilities have been accounted for must be owned by the owners, by equity. Liabilities are presented as line items, subtotaled, and totaled on the balance sheet.īelow liabilities on the balance sheet is equity, or the amount owed to the owners of the company. Similar to assets, liabilities are categorized as current and non-current liabilities. Liabilities are listed at the top of the balance sheet because, in case of bankruptcy, they are paid back first before any other funds are given out. The interest rates are fixed and the amounts owed are clear. With liabilities, this is obvious-you owe loans to a bank, or repayment of bonds to holders of debt. Liabilities and equity make up the right side of the balance sheet and cover the financial side of the company. Then, current and fixed assets are subtotaled and finally totaled together. Intangible assets such as patents, licenses, and goodwillĪssets will typically be presented as individual line items, such as the examples above.Some of the most common current assets include:Ĭommon fixed or non-current assets include: The assets are what allow the company to run.Īssets can be further categorized as either current assets or fixed (non-current) assets. 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. Everything listed is an item that the company has control over and can use to run the business.
Basically, a list of what the company owns. The assets are the operational side of the company. Below, we’ll explore what exactly goes on a balance sheet. But what do they actually mean and include? Let’s break it down. You’ve probably heard at least some of these terms before. Owners’ Equity = Liabilities - Assets or Liabilities = Assets - Owners’ EquityĪ balance sheet must always balance therefore, this equation should always be true. The formula can also be rearranged like so: The Balance Sheet Equationīalance sheets are typically organized according to the following formula: The balance sheet is just a more detailed version of the fundamental accounting equation-also known as the balance sheet formula-which includes assets, liabilities, and shareholders’ equity. Additionally, the balance sheet may be prepared according to GAAP or IFRS standards based on the region in which the company is located. This financial statement is used both internally and externally to determine the so-called “book value” of the company, or its overall worth.īalance sheets are typically prepared and distributed monthly or quarterly depending on the governing laws and company policies. What Is a Balance Sheet?Ī balance sheet provides a snapshot of a company’s financial performance at a given point in time. The ability to read and understand a balance sheet is a crucial skill for anyone involved in business, but it’s one that many people lack. A balance sheet is one of the primary statements used to determine the net worth of a company and get a quick overview of its financial health.