The Balance Sheet, in its simplest terms, is a snapshot showing what a company owns and what a company owes during a specific period of time. It captures the assets and liabilities of a company and allows creditors to quickly know what a company owns and owes. It is a key financial statement for entrepreneurs.
Assets are equal to a company’s liabilities plus shareholder equity. Liabilities and shareholder equity always balances with a company’s assets, hence the term Balance Sheet.
The easiest way to explain this is that a business has to pay for everything it owns. If they have an asset of $1,000 they must have paid $1,000 to acquire it. That payment would either be part of a liability, like a loan, or shareholder equity, money a shareholder put into the company to help fund it.
What makes up assets in the balance sheet?
Assets are what a company owns. This includes cash, accounts receivables, prepaid credits, land, buildings, equipment, supplies and inventory.
What makes up liabilities in the balance sheet?
Liabilities are what a company owes to creditors or stockholders. It is generally what paid for the assets. Examples of liabilities found on the Balance Sheet include, accounts payable, wages payable, notes payable, customer credits, and lawsuits.
What makes up shareholder equity?
Shareholder’s equity, also called Owner’s equity, is the book value of a business. To determine shareholder equity, calculate assets minus liabilities.