Assets, Liabilities, and Shareholder Equity on the Balance Sheet

When you're reviewing the financial statements of a company, and you turn to the balance sheet, you'll find it divided into three main sections: Assets, Liabilities, and Shareholders' 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 the financial condition of the company or partnership you are analyzing, including getting an idea of its capital structure.

The following sections examine each part of briefly.

• 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. Assets also include other 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.
• Shareholders' Equity:  The equivalent of accounting net worth, shareholders' 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 between firms, industries, and sectors.

Every balance sheet must balance, which means that the total value of a firm's assets must equal the sum of its liabilities plus shareholders' equity. Known as the accounting equation, it sounds simple but is actually a bit more complex and a vitally important basic concept to form the basis of your accounting education. 

For example, if a lemonade stand had $25 in assets and $15 in liabilities, the shareholders' equity would be $10. The assets are $25, the liabilities + shareholders' equity = $25 [$15 + $10]. An easy way to remember this is to put it into the form of the accounting equation: A (assets) = L (liabilities) + E (shareholders' equity).

Below is an example of what a typical balance sheet looks like. It's taken it from an old Coca-Cola annual report and, for the sake of space, removed lines that had a $0 value. If you want to find a balance sheet of your own choosing, the easiest place to get the full regulatory copy that was submitted to the Securities and Exchange Commission (SEC) (in the case of publicly traded firms) is to look up the company's 10-K filing. 

These reports are available for free on the SEC's EDGAR online database and with a few clicks of a button, can be downloaded in a matter of seconds. 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.