Balance Sheet

Balance Sheet

The balance sheet is a statement of the financial position of a company or individual. It is seen as a way to receive up-to-date information that will inform a company accurately about their financial options.

The balance sheet is based on a financial equation that has remained unchanged since the 18th century. The reason it has stayed this way for so many years is simply because it works so well. The equation is as follows:

Assets= liabilities + equity.

This may seem complex at first, but the concept becomes easier once you understand the definition of each part of the equation.

Assets
This is the amount of worth a company has and items that a business or person owns. Assets can be cash, property, vehicles, equipment or accounts receivable.

Liabilities
These are the opposite of assets. For the individual they are seen as personal debt. For a company, they are seen its debts and dividends that are payable to shareholders, accounts payable or unearned revenue.

Equity
In terms of home ownership, equity is the amount of ownership an individual has in a property. As a mortgage is paid off (liability), the amount of equity a person has in a property will increase. In terms of business, equity can be referred to as the remainder of assets minus liabilities, or as a visual representation:

Owner equity = assets- liabilities.