ACCOUNTING TUTORIALS
Part I Financial Statements and Basic Accounting Principles
Balance Sheet Introduction
The balance sheet is a financial statement.
The balance sheet shows and organization’s assets, liabilities, and owner’s equity at a point in time. In other words, the balance sheet is a snapshot of the company’s financial situation--- taken at a specific moment in time.
The so-called “balance sheet equation” is defined as follows (example numbers included):
Assets = Liabilities + Owner’s Equity
(A) $400,000 = (L) $100,000 + (OE)$300,000
Assets = future economic benefits owned by the company. Examples include merchandise inventory, cash, and equipment
Liabilities = future economic costs; amounts owed to vendors, etc. The most common example is accounts payable.
Owner’s Equity = the owner’s rights to the company’s assets after all liabilities have been deducted.
Here is another way of stating the balance sheet equation:
Assets - Liabilities = Owner’s Equity
(A) $400,000 - (L) $100,000 = (OE) $300,000
In plain English: Suppose that the owners of this imaginary company wanted to liquidate the firm. After paying off the $100,000 in debts from the $400,000 in assets, they would walk away with $300,000 in owner’s equity.