Lesson 02 of 04
What is owned, and what is owed
A balance sheet is one date, not a year. Assets equal liabilities plus the owners’ residual claim.
Keep these
- Assets = liabilities + equity, by construction.
- Equity is what remains, not a pile of cash with the owners’ names on it.
- Book value and market value answer different questions.
The lesson
A house is the cleanest picture of the equation. The house is the asset. The mortgage is the liability. The owner’s equity is the difference. Buy a more expensive house with the same mortgage and equity rises. Borrow more against the same house and equity falls. A company uses the same identity, with factories, inventory, and invoices in place of the house.
Equity on the statement is an accounting remainder. It is not a savings account the shareholders can withdraw on Friday. Spend the cash asset and you must also reduce a liability or equity. The two sides move together. That is why it “balances.”
Accountants record many assets at historical cost, adjusted by rules such as depreciation. The market may disagree. A brand, a mine, or a fleet can be worth more or less than the books say. The balance sheet is a structured opinion under accounting rules, useful and incomplete.