Balance Sheet Equation

  • Assets are anything that the business owns. Some examples: cash, office equipment, vehicles, tools, real estate, buildings, and land. Bills that are prepaid (such as monthly insurance premiums) are also considered an asset, as are accounts receivable (money that others owe to you).
  • Liabilities are anything the business owes to others, including banks and suppliers. Money which a company owes as a result of its ongoing trading are generally called accounts payable.
  • Equity is often a measure of what the business is worth. It is the combination of profits and money invested in or withdrawn from the company by its owners.

This is what people refer to as balancing the books: ensuring that this equation is always in balance.

Accounts typically reported on the balance sheet include:

  • Accounts receivable (money owed to the company but not collected)
  • Cash
  • Equipment
  • Accounts and notes payable
  • Prepaid items
  • Unearned revenue
  • Vehicles, land, and buildings, and their accumulated, individual depreciation (decrease in value)

The term consolidated balance sheet refers to the “consolidation,” or adding together, of individual balance sheets of various related companies into one balance sheet which shows the financial position of the entire group of companies.