Balance Sheets 101: Understanding Assets, Liabilities and Equity

assets = liabilities + equity

Knowing how to properly take into account your assets, liabilities, and equity is critical to the health of your business. Equity is what’s left after you’ve subtracted liabilities from assets (another way of calculating the accounting equation). Expenses and Income (revenue) are reported on the Income Statement.

assets = liabilities + equity

There are three types of Equity accounts that we need to know about. These accounts have different names depending on the company structure, so we list the different account names in the chart below. If we purchase a $30,000 vehicle (asset) with a $25,000 loan (liability) and $5,000 in cash (equity), we’ve acquired an asset of $30,000, but have only $5,000 of equity in the asset.

Accounting Equation

A balance sheet provides a snapshot of a company’s financial performance at a given point in time. This financial statement is used both internally and externally to determine the so-called “book value” of the company, or its overall worth. The shareholders’ equity number is a company’s total assets minus its total liabilities. Assets represent the valuable resources controlled by a company, while liabilities represent its obligations. Both liabilities and shareholders’ equity represent how the assets of a company are financed.

assets = liabilities + equity

A company’s negative equity that remains prolonged can amount to balance sheet insolvency. Owner contributions and income result in an increase in capital, whereas withdrawals and expenses the accounting equation may be expressed as cause capital to decrease. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.

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