The three financial statements
The balance sheet
What a business owns, what it owes, and what belongs to its owners, at a single date.
18 minfoundationMembers
Learning objectives
- Classify items as assets, liabilities or equity, and as current or non-current
- Build a balance sheet and prove the accounting equation
- Explain why equity and retained earnings are not cash
The income statement is a video of a period; the balance sheet is a photograph taken on one date. It lists everything the business owns (assets) and how those assets were funded: by borrowing (liabilities) or by the owners (equity).
Lenders read it to judge whether they will be repaid. Investors read it to see how much capital the business ties up and how it is financed. Analysts use it in nearly every ratio that matters.
Assets = Liabilities + Equity
- Assets
- resources the business controls that will bring future benefit: cash, receivables, inventory, equipment
- Liabilities
- amounts owed to others: suppliers (payables), staff (accruals), lenders (loans)
- Equity
- the owners' claim: money they put in (share capital) plus profits kept in the business (retained earnings)
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.