Assets, Liabilities, and Shareholder Equity on the Balance Sheet
Whenever you pick up the financial statements of a company, any company, and turn to the balance sheet, you ll find it divided into three main sections every time: Assets, Liabilities, and Shareholder Equity. By understanding the role these sections play, and how each one relates to the others, you ll have a much easier time uncovering the economics and financial condition of the company or partnership you are analyzing, including getting an idea of its capital structure.
Assets, Liabilities, and Shareholder Equity
Let s take a moment to briefly examine each.
- Assets. Broadly speaking, assets are anything that has value. For a company, assets on the balance sheet will consist of things such as land, buildings, desks, lamps, computers, signage, and patents. Some businesses require far more assets to operate than others, which influences return on capital employed calculations.
- Liabilities. Broadly speaking, liabilities are debts and obligations owed by the company; the opposite of assets. Liabilities include monthly lease payments on real estate, bills 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 is what remains when you subtract all of the liabilities from all of the assets. It is also referred to as 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 is all but meaningless. Learning to distinguish between the two involves understanding how the profitability and business models of differ between firms, industries, and sectors.
Every balance sheet must balance. It sounds axiomatic, and it is, but it is vitally important to internalize this basic concept from the very beginning of your education. The total value of all assets must be equal to the combined value of all liabilities and 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]. An easy way to remember this simple formula is A (assets) L (liabilities) E (shareholder equity).
What Does a Balance Sheet Look Like?
Below is an example of what a typical balance sheet looks like. I ve taken it from an old Coca-Cola annual report and, for the sake of space, removed lines that had a $0 value. Don t worry, though, we will still discuss each line you are likely to encounter when reading a balance sheet, whether it s for a small business or a large publicly traded corporation, in later lessons.
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 (in the case of publicly traded firms) is to get your hands on the company s 10-K filing. These days, they are available for free online 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 we will later get into discussing everything from depreciation policies to allowances for non-repayment of accounts receivable.
Sample Coca-Cola Balance Sheet
Consolidated Balance Sheet – January 31, 2001