The balance sheet: what a company owns and owes
The income statement shows a year of activity. The balance sheet shows where a company stands on a single day: what it owns, what it owes, and what is left for the owners. This lesson builds one small company’s balance sheet and shows you how to tell a sturdy one from a shaky one.
A snapshot, not a movie
The balance sheet is a list taken at one moment, usually the last day of a quarter or a year. Picture a family writing down, on New Year’s Eve, the value of their house, car and savings, and next to it the mortgage and the credit card bill.
A company’s balance sheet has three parts:
- Assets are things of value the company owns or is owed: cash, products waiting to be sold, machines, buildings.
- Liabilities are what the company owes to others: suppliers, lenders, the tax office.
- Shareholders’ equity is what belongs to the owners once every liability is subtracted.
The equation that always balances
Every balance sheet obeys one rule: assets = liabilities + equity. Each dollar of assets was paid for with either someone else’s money (a liability) or the owners’ money (equity). There is no third source, so the two sides always match. That is where the name comes from.
Flip it around and you get the owners’ view: equity = assets − liabilities.
Current and long-term
Both sides are sorted by time. Current assets should turn into cash within about a year. They include cash itself, accounts receivable (money customers owe for things already delivered) and inventory (goods on hand to sell). Long-term assets, like buildings and machines, are used for many years.
Current liabilities are due within a year, such as accounts payable (bills owed to suppliers) and the part of a loan due this year. Long-term liabilities come due later.
Here is Pebble Creek Bikes, the made-up company from the income statement lesson. The first column is the start of this year, which is simply last year’s closing snapshot.
| Line | Start of year | End of year |
|---|---|---|
| Assets | ||
| Cash | $200,000 | $150,000 |
| Accounts receivable | $150,000 | $250,000 |
| Inventory | $250,000 | $400,000 |
| Total current assets | $600,000 | $800,000 |
| Workshop and equipment, after depreciation | $1,050,000 | $1,100,000 |
| Goodwill | $100,000 | $100,000 |
| Total assets | $1,750,000 | $2,000,000 |
| Liabilities | ||
| Accounts payable | $250,000 | $300,000 |
| Loan payments due within a year | $100,000 | $100,000 |
| Total current liabilities | $350,000 | $400,000 |
| Long-term bank loan | $500,000 | $600,000 |
| Total liabilities | $850,000 | $1,000,000 |
| Shareholders’ equity | ||
| Money paid in by owners | $400,000 | $400,000 |
| Retained earnings | $500,000 | $600,000 |
| Total equity | $900,000 | $1,000,000 |
| Total liabilities and equity | $1,750,000 | $2,000,000 |
Check that it balances at year end: $1,000,000 of liabilities + $1,000,000 of equity = $2,000,000, the same as total assets.
Now the working capital: $800,000 − $400,000 = $400,000 at year end, up from $600,000 − $350,000 = $250,000.
And retained earnings: $500,000 at the start + $120,000 net income − $20,000 in dividends = $600,000.
Working capital: the short-term cushion
Working capital is current assets minus current liabilities. It asks whether the things that will become cash this year cover the bills due this year. Pebble Creek’s $400,000 says yes, comfortably.
Look inside the number, though. Only $150,000 of the $800,000 is actual cash. The rest is bikes not yet sold and money not yet collected. Those count only if the bikes sell and the customers pay.
Debt: borrowed money with a schedule
Debt is money borrowed that must be paid back, with interest, on set dates. Pebble Creek owes its bank $100,000 + $600,000 = $700,000, up from $600,000 a year ago.
Not every liability is debt. A supplier’s bill usually carries no interest. A lender, though, can demand its money or force tough terms if payments are missed. So ask three things: how much is owed, when it comes due, and whether profits easily cover the interest. The ratios lesson turns those questions into numbers.
Retained earnings: profits kept in the business
Equity has two main pieces. Paid-in capital is the money owners put in when the company sold them shares. Retained earnings is every profit the company has ever made, minus any losses, minus all dividends (cash paid out to owners). Pebble Creek paid $0.20 a share on 100,000 shares, or $20,000, and kept the rest of its $120,000 profit.
Two cautions. Retained earnings is not a pile of cash; Pebble Creek has $600,000 of it but only $150,000 in the bank, because the profits were spent on bikes, tools and a bigger workshop. And a negative number, called an accumulated deficit, means the company has lost more over its life than it has earned.
Goodwill in one paragraph
A few years ago Pebble Creek bought a small repair shop for $300,000. The shop’s tools, parts and other assets were worth $200,000. The extra $100,000 it paid for the shop’s loyal customers and good name went on the balance sheet as goodwill. Goodwill can’t be sold on its own. If the purchase turns out to be a mistake, the company must write the goodwill down, which shrinks both assets and profit. When goodwill makes up a big share of a company’s assets, its balance sheet rests on old deals having been worth the price.
Book value: the owners’ slice on paper
Book value is another name for equity: assets minus liabilities. Pebble Creek’s is $1,000,000, or $1,000,000 ÷ 100,000 shares = $10 a share. Leave out goodwill and you get tangible book value: $900,000, or $9 a share.
Book value is a rough guide, not a price tag. Most assets are recorded at what the company paid, minus depreciation, not at what they would sell for today. A brand built over decades may barely appear at all. The P/E and friends lesson shows quick ways investors compare a share price with numbers like these.
Sturdy or fragile?
Signs of a sturdy balance sheet:
- A healthy cash balance and positive working capital.
- Debt that is small next to equity and next to what the business earns, with due dates spread out.
- Retained earnings that grow year after year.
- Assets that could actually be sold, not mostly goodwill.
Signs of a fragile one:
- Current liabilities bigger than current assets, with little cash on hand.
- A large loan due soon and no clear way to repay it.
- Receivables and inventory growing much faster than sales.
Pebble Creek mostly looks sturdy. But sales grew 33% while receivables grew 67% ($150,000 to $250,000) and inventory grew 60% ($250,000 to $400,000). Cash fell and debt rose. The balance sheet shows that this happened. The cash flow statement shows why.
- Assets
- Things of value a company owns or is owed.
- Liabilities
- What a company owes to others.
- Shareholders’ equity
- Assets minus liabilities; the owners’ share. Also called book value.
- Current
- Expected to turn into cash, or come due, within about a year.
- Working capital
- Current assets minus current liabilities.
- Retained earnings
- All past profits, minus losses and dividends, kept in the business.
- Goodwill
- The part of a purchase price paid above the value of the assets bought.
Where to see it on Filing.fyi
Every 10-K and 10-Q includes a balance sheet, and a company page’s filing timeline links to each one. Several score cards are built from balance sheet lines. The Altman Z-Score uses working capital, retained earnings and total assets to look for early signs of money trouble. The Piotroski F-Score checks whether long-term debt shrank compared with assets and whether the current ratio improved. How to read a Filing.fyi company page shows where each card sits.
- The balance sheet is a one-day snapshot of what a company owns, owes and has left for owners.
- Assets always equal liabilities plus equity.
- Working capital and cash show the short-term cushion; debt and its due dates show the pressure.
- Retained earnings are past profits kept in the business, not cash in the bank.
- Watch for receivables and inventory growing faster than sales.
This lesson is education, not investment advice. Examples use made-up companies and round numbers unless a real filing is named.