Companies prepare and issue balance sheets annually to inform owners and other stakeholders of the financial position of the company at the end of the fiscal year. A balance sheet is a major financial statement for a company. At its most basic, a balance sheet calculates a company’s assets and its liabilities. It also reports the company's equity, which is the difference between the company’s assets and liabilities.
TL;DR (Too Long; Didn't Read)
Company assets are generally reported at less than their actual value because of accounting principles. This means that stockholders’ equity does not necessarily represent the value of the corporation if it were to be sold off because chances are that the assets would sell for more than they are listed for on the balance sheet. There is likely also to be value in the company's goodwill and brand equity.
Assets and Liabilities
Assets are reported in the first section of a company's balance sheet. Assets are things that the company owns, such as real estate, equipment, cash, company stock or product. Assets can also include accounts receivable for goods shipped to customers for which payment has yet to be received.
Liabilities are what the company owes. This would be things like debt for financing or accounts payable, value of outstanding stock or unfilled orders. If the company's assets are greater than the liabilities, then the company has a value beyond its income expenses.
Stockholders' or Owner's Equity
When a corporation prepares its balance sheet, one section will be stockholders’ equity. This is the difference between a corporation’s assets and its liabilities. This is also called the corporation’s “book value.” This is also known as total equity or if the business is a sole proprietorship, it is called owner’s equity.
Revenue will increase the stockholders’ equity because it is either held as cash, invested in the company or used to pay off liabilities. Expenses automatically decrease stockholders’ equity because they increase a company’s debt.
Stockholders’ Equity Section
A corporation’s stockholders’ equity section of a balance sheet will include information on paid-in capital, retained earnings, treasury stock and accumulated other comprehensive income. However, what is required in this section will vary somewhat depending on where the corporation has its headquarters. This is due to differences in state laws.
Underreported Value of a Company's Assets
Company assets are generally reported at less than their actual value because of accounting principles. This means that stockholders’ equity does not necessarily represent the value of the corporation if it were to be sold off because chances are that the assets would sell for more than they are listed for on the balance sheet. A company will also have goodwill and brand equity that will be of value to a potential buyer. This will be worth something in addition to the equity in the company found on the balance sheet.
- Accounting Coach: Common Stock, Accounting for Stockholders' Equity
- Accounting Coach: Balance Sheet – Liabilities and Stockholders' Equity
- Accounting Coach: Introduction to Stockholders' Equity, What is a Corporation?
- ADVFN: Total Equity
- U.S. Securities and Exchange Commission. "Beginners' Guide to Financial Statement." Accessed July 6, 2020.
- Nasdaq. "Paid-In Capital." Accessed July 6, 2020.
- Nasdaq. "Retained Earnings." Accessed July 6, 2020.
- Financial Accounting Standards Board. "Statement of Financial Accounting Standards No. 130," Page 38. Accessed July 6, 2020.
- U.S. Small Business Administration. "5 Things to Know About Your Balance Sheet." Accessed July 6, 2020.
- U.S. Securities and Exchange Commission. "How to Read a 10-K." Accessed July 6, 2020.
James Rada, Jr. was a newspaper reporter for eight years and earned 23 awards from the Maryland Delaware D.C. Press Association, Associated Press, Society of Professional Journalists, Maryland State Teachers’ Association and CNHI. He also worked for 12 years as a marketing communications writer, earning a Print Copywriter of the Year Award from the Utah Ad Federation. He holds a Bachelor of Arts in communications.