Assets, Liabilities, & Equity Breakdown

The fundamental identify (The Accounting Equation - A Point-in-Time Snapshot)

Assets = Liabilities + Shareholder’s Equity

Balance sheet balancing explanation (The Accounting Equation - A Point-in-Time Snapshot)

The balance sheet must always balance because everything a company owns (Assets) was purchased either by borrowing money (Liabilities) or using the owners’ money (Equity)

Assets recorded in Current Assets (Current Assets - The Liquidity Engine)

Assets expected to be converted into cash within one year

Cash & Equivalents (Current Assets - The Liquidity Engine)

The most liquid form of capital

Accounts Receivable (AR) (Current Assets - The Liquidity Engine)

Money owed by customers (Net of “Allowance for Doubtful Accounts”)

Inventory (Current Assets - The Liquidity Engine)

Raw materials, WIP, and finished goods

Prepaid Expenses (Current Assets - The Liquidity Engine)

Payments made in advance (e.g., insurance).

Assets recorded in Non-Current Assets (Non-Current Assets - The Long-Term Engine)

Assets with a useful life of >1 year, including PP&E and Intangible Assets

PP&E (Property, Plant & Equipment) (Non-Current Assets - The Long-Term Engine)

Buildings, machinery, and land (report “Net of Accumulated Depreciation”)

Intangible Assets (Non-Current Assets - The Long-Term Engine)

Patents, trademarks, and Goodwill (the premium paid during an acquisition)

What is recorded in current liabilities (Current Liabilities - Short-Term Obligations)

Debts due within one year, including accounts payable, accrued expenses, and deferred revenue

Accounts Payable (AP) (Current Liabilities - Short-Term Obligations)

Money owed to suppliers

Accrued Expenses (Current Liabilities - Short-Term Obligations)

Obligations incurred but not yet billed (e.g., wages)

Deferred Revenue (Current Liabilities - Short-Term Obligations)

Cash received before the service is provided (a “Liability” to perform work).

What is recorded in Non-Current Liabilities (Non-Current Liabilities - Long-Term Funding)

Obligations extending beyond one year, including long term debt and deferred tax liabilities

Long Term Debt (Non-Current Liabilities - Long-Term Funding)

Bonds or loans used for expansion

Deferred tax liabilities (Non-Current Liabilities - Long-Term Funding)

Taxes owed in the future due to timing differences in accounting

Shareholder’s equity (Shareholder’s Equity - The Residual Equity)

What is left for the owners after all debts are paid, includes common stock / paid-in-capital, retained earnings, and treasury stock

Common Stock / Paid-in-Capital (Shareholder’s Equity - The Residual Equity)

Capital raised by issuing shares

Retained Earnings (Shareholder’s Equity - The Residual Equity)

Cumulative net income not yet paid out as dividends

Treasury Stock (Shareholder’s Equity - The Residual Equity)

Shares the company has bought back (a “Contra-equity” account).

How the Balance Sheet Interacts with the P&L? (Connecting the Statement to Operations)

For example; Inventory on the Balance Sheet become COGS on the P&L when sold. Accounts receivable on the balance sheet represents revenue on the P&L not yet collected in cash