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Understanding balance sheets

by Intuit• Updated 1 year ago

The assets on the balance sheet consist of what a company owns or will receive in the future in which they are measured. Liabilities are what a company owes, such as taxes, payables, salaries, and debt. The shareholders' equity is the company’s retained earnings and the capital contributed by shareholders. For the balance sheet to balance, total assets should equal the total of liabilities and shareholders' equity. 

The balance between assets, liability, and equity makes sense when applied to a more straightforward example, such as buying a car for a sum of money. In such case, you might use the amount of the loan (debt), plus cash (equity) to purchase it. Your assets are worth a certain total, while your debt is another dollar amount and equity the remaining amount. In this example, assets equal debt plus equity.

Assets are the first of 3 major categories on the balance sheet. Current assets represent the value of all assets that can reasonably expect to be converted into cash within 1 year and are used to fund ongoing operations and pay current expenses. Some examples of current assets include: 

  • Cash and cash equivalents
  • Accounts receivable
  • Prepaid expenses
  • Inventory

Current liabilities are short-term liabilities that are due within 1 year and include: 

  • Accounts payable are a short-term debt owed to suppliers.
  • Accrued expenses are expenses that have yet to be paid, but have a high probability of being paid.

For example, a company's long-term lease that lasts more than 1 fiscal year is listed on the balance sheet. The rental arrangement is listed as an asset on the balance sheet, and the lease obligation is listed as a liability. Since the lease lasts longer than one fiscal year, it is a non-current liability.

Shareholders' equity is the net of a company's total assets plus its total liabilities. Shareholders' equity represents the net worth of a company and helps to determine its financial stability. Shareholders' equity is the amount of money that would be left over if the company paid off all liabilities such as debt in the event of its liquidation. 

Retained earnings is money held by a company to either reinvest in the business or pay down debt. Retained earnings are also earnings that have not been paid to shareholders via dividends.

A shareholder is a person, company, or institution that owns at least 1 share of a company’s stock or by way of a mutual fund. Shareholders essentially own the company, which comes with certain rights and responsibilities. This type of ownership allows the holder to reap the benefits of a business’s success.

Total assets do not equal my liabilities

You need to either add or remove an amount that is causing the imbalance in either the Assets or Retained Earnings. Review both your financial statement and balance sheet from your recorded business activity (accounting software or spreadsheet software) you may be able to find the item that is causing the balancing issue.

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