are amounts of
money that a company owes to others. This can include all kinds of obligations, like money borrowed from a
bank to launch a new product, rent for use of a building, money owed to suppliers for materials, payroll a
company owes to its employees, environmental cleanup costs, or taxes owed to the government. Liabilities also
include obligations to provide goods or services to customers in the future.
is sometimes called
capital or net worth. It’s the money that would be left if a company sold all of its assets and paid off all of its
liabilities. This leftover money belongs to the shareholders, or the owners, of the
The following formula summarizes what a balance sheet shows:
ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY
company's assets have to equal, or "balance," the sum of its liabilities and shareholders'
company’s balance sheet is set up like the basic accounting equation shown above. On the left side of the balance
sheet, companies list their assets. On the right side, they list their liabilities and shareholders’ equity.
Sometimes balance sheets show assets at the top, followed by liabilities, with shareholders’ equity at the
are generally listed based on how quickly they will be converted into cash. Current assets are things a
company expects to convert to cash within one year. A good example is inventory. Most companies expect to sell
their inventory for cash within one year. Noncurrent assets are things a company does not expect to convert
to cash within one year or that would take longer than one year to sell. Noncurrent assets include fixed
assets. Fixed assets are those assets used to operate the business but that are not available for sale, such
as trucks, office furniture and other property.
Liabilities are generally listed based on their due dates. Liabilities are said to be either current or
long-term. Current liabilities are obligations a company expects to pay off within the year.
Long-term liabilities are obligations due more than one year away.
Shareholders’ equity is the amount owners invested in the company’s stock plus or minus the company’s earnings
or losses since inception. Sometimes companies distribute earnings, instead of retaining them. These distributions
are called dividends.
balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’ equity at the end of the
reporting period. It does not show the flows into and out of the accounts during the period.