Balance Sheet: Assets, Liabilities and Owner’s Equity
If you’d like to know how healthy your company is, from a financial perspective, you need to take a look at your balance sheet. You’ll recall that the income statement summarized the operating transactions in a period of time, let’s say between the 1st of the month and the 31st of the month. The balance sheet shows you a snapshot at the end of a period. Right here (31st).
And so when you’re seeing an income statement for the month of January, you know it’s the summary of the transactions between here (1st) and here (31st) for the entire month. And when you see the balance sheet for January, you know that it is the financial picture of the company’s health taken at that moment in time — at 11:59 pm on the last day of the month.
Interestingly, the balance sheet is actually two financial statements in one:
• Assets, which are the things that the company owns or is owed; and
• Liabilities and owner’s equity, which are things that the company owes to others.
And remember when we were looking at the income statement, I told you that the final total of a financial statement has a double-underline? You’ll see in the balance sheet, where the total of the assets will have a double-underline and the total of the liabilities and owner’s equity will also have a double-underline. And here’s where the balance sheet gets its name: the value of the total assets must always be, and is always, equal to the total of the liabilities and owner’s equity. These two amounts must be in balance.
The next video will show a little bit more detail on the both assets section and the liabilities and owner’s equity section of the balance sheet.