Assets, Liabilities, and Shareholder Equity

When you're trying to determine whether to invest in a publicly traded company, it's essential to do a thorough review of its financial statements. One of the most important statements to examine is the company's balance sheet, which provides an annual snapshot of the organization's financial condition.

A balance sheet is divided into three main sections: assets, liabilities, and shareholder equity. By understanding the role that each of these sections plays, and how each one relates to the others, you'll have a much easier time understanding a company's finances. Together with corporate and annual reports, an organization's balance sheet provides insight into its capital structure and general outlook.

What Goes on a Balance Sheet?

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

For example, if a lemonade stand had $25 in assets and $15 in liabilities, the shareholder equity would be $10. The assets are $25, the liabilities + shareholder equity = $25 [$15 + $10]. 

The following sections examine each part of the accounting equation.

• Assets: Broadly speaking, assets are anything that has value. For a company, assets on the balance sheet will consist of large items such as land, buildings, and manufacturing equipment. They also include tangible items such as desks, lamps, computers, and signage. Assets can also be intangible, such as patents or goodwill. Some businesses require far more assets to operate than others, which influences their return-on-capital calculations.
• Liabilities: Broadly speaking, liabilities are debts and obligations owed by the company, the opposite of assets. Liabilities include items like monthly lease payments on real estate, bills owed to keep the lights turned on and the water running, corporate credit card debt, bonds issued to investors, and other outflows.
• Shareholder Equity:  The equivalent of accounting net worth, shareholder equity (or "stockholder equity") is what remains when you subtract all of the liabilities from all of the assets. It is also referred to as the company's "book value." For some businesses, book value is highly informative of the economic condition of the firm. For others, book value on the balance sheet carries much less meaning. Learning to distinguish between the two involves understanding how profitability and business models differ among firms, industries, and sectors.

How Do I Find Balance Sheets?

If you want to find the balance sheet of a publicly traded firm, the easiest way to get the full regulatory copy that was submitted to the Securities and Exchange Commission (SEC) is to look up the company's 10-K filing. 

Companies also routinely reproduce their balance sheet in their annual report to stockholders, though these are often summary versions and don't include the extensive 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 typical balance sheet looks like. The numbers are taken from an old annual report of a large public company. For the sake of space, we removed lines that had a $0 value.