Assets, Liabilities, and Shareholder Equity

When you're trying to decide whether to invest in a publicly-traded company, take a look at its financial statements. One of the most important statements is the firm's balance sheet. The balance sheet provides a snapshot of the organization's financial state each year.

A balance sheet is divided into three main sections: assets, liabilities, and shareholder equity. By knowing the role that each of these sections plays, and how each one relates to the others, you'll be able to get a good sense of a company's finances. Along with other types of reports, a balance sheet provides insight into its capital structure and general outlook.

What Goes on a Balance Sheet?

Every balance sheet must balance. This means that the total value of a firm's assets must equal the sum of its liabilities plus shareholder equity.

For instance, let's say a lemonade stand has $25 in assets and $15 in liabilities. In this case, the equity would be $10. The assets are $25, the liabilities + equity = $25 [$15 + $10]. 

Here is a summary of each part of the equation:

• Assets: Assets are things that have value. In most cases, assets on the balance sheet will consist of large items. These could be items such as land, buildings, and equipment. They also include items such as desks, lamps, and signage. Assets can also be intangible, such as patents or goodwill. Some businesses need far more assets to operate than others; it just depends on the firm. The assets that are needed impact their return-on-capital calculations.
• Liabilities: Liabilities are debts owed by the company. They are the opposite of assets. Liabilities include items like monthly lease payments on real estate and bills owed to keep the lights turned on and the water running. They can also include things such as credit card debt, bonds issued, and other outflows.
• Shareholder Equity:  This is much like accounting net worth. Shareholder equity is what remains when you subtract all of the liabilities from all of the assets. It's sometimes known as "stockholder equity." It is also referred to as the firm's "book value." For some, book value provides good insight into the economic state of the business. For others, book value on the balance sheet carries much less meaning. Learning the difference between the two involves knowing how profitability and business models differ among firms and sectors.
  

How Do You Find Balance Sheets?

If you want to find the balance sheet of a publicly traded firm, there is an easy way to get the full copy that was submitted to the Securities and Exchange Commission (SEC). All you have to do is look up the 10-K filing. 

Companies may also include their balance sheet in their report to stockholders each year. But these are often summary versions. They may not include the detailed footnotes that discuss everything from depreciation policies to allowances for non-repayment of accounts receivable.

Sample Corporate Balance Sheet

Below is an example of what a balance sheet looks like. The numbers are taken from an old report of a large public firm. (For the sake of space, we removed lines that had a $0 value.)