Here are some notes about the computation of the balance sheet equation in detail:
- Assets: Assets are anything of value that a company owns. They can be tangible assets, such as cash, inventory, and equipment, or intangible assets, such as patents and goodwill. Assets are listed on the balance sheet in order of liquidity, meaning how quickly they can be converted into cash.
- Liabilities: Liabilities are debts that a company owes to others. They can be current liabilities, such as accounts payable and accrued expenses, or long-term liabilities, such as bonds payable and notes payable. Liabilities are listed on the balance sheet in order of maturity, meaning when they are due to be paid.
- Equity: Equity is the owner’s claim on the company’s assets. It is equal to the difference between assets and liabilities. Equity is also known as net worth or shareholders’ equity.
- Computation: The balance sheet equation can be computed by adding the assets and subtracting the liabilities from equity. For example, if a company has $100 in assets, $50 in liabilities, and $50 in equity, the balance sheet equation would be:
Assets = Liabilities + Equity
$100 = $50 + $50
- Notes: The balance sheet equation must always be balanced. This means that the total assets must always equal the total liabilities plus equity. If the balance sheet equation is not balanced, then there is an error in the accounting records.