The balance sheet is one of the three core financial statements that reports a company's assets, liabilities, and shareholder equity at a specific period. For a balance sheet to reflect the true picture, it follows an equation that equates assets with the sum of liabilities and shareholder equity. (Assets = Liabilities + Equity). It is generally used along with the income statement and cash flow statement.
The balance sheet is used by executives, investors, analysts, and regulators to evaluate a company’s performance. A healthy balance sheet usually means strong cash position, high qualify assets, very little or no debt and a high amount of shareholder's equity.
In this article, we will briefly talk about the most familiar items under liabilities and equity.
What is Liability?
On the other side of the balance sheet there are liabilities which are related to all financial debt or obligation by one company to another. Liabilities include debts (short-term and long-term loans), account payable, accrued expenses and employee benefits.
There are two types of liabilities on the balance sheet:
- Current liabilities: due within a period of one year or less.
- Non-current liabilities: due after a period of one year or more.
Items Under Liabilities:
Account payable (also known as trade payables) is money owed by a company to suppliers and creditors (under current liability).
2- Debt (short-term loan and long-term loan)
Debt is mostly owning money to lenders:
In accounting, debt can be classified into two types:
- Short term debt - due within a period of one year or less (under current liability on the balance sheet).
- Long term debt - due after a period of one year or more (under non-current liability on the balance sheet).
3- Accrued expenses
Accrued expenses refers to expenses that are recognized on the books before it has been paid (under current liability).
4- Employee benefits
Employee benefits are compensation given to employees apart from base salaries (under non-current liabilities).
What is Equity?
Shareholder equity is the difference between total assets and total liabilities, and it refers to the net worth of the company.
Items Under Equity:
1- Share Capital
Share capital (also known as paid-in capital) is the amount paid by shareholders for the business when a company is newly established.
2- Retained Earnings
Retained earnings is the amount left from a company’s net profit and after paying off dividends.
Dividends is the distribution of profits made by a company to shareholders.