Topic 3.7 · The Balance Sheet and Net Worth
The Balance Sheet and Net Worth
The accounting equation, assets by liquidity, current vs. long-term liabilities, owners' equity, working capital, and personal net worth.
25 min read Reviewed
Learning objectives
- 3.7.ADetermine and describe components of a business balance sheet.
- 3.7.BInterpret the information in a business’s balance sheet.
- 3.7.CDescribe the purpose of determining personal net worth.
Objective statements © College Board, quoted from the Course and Exam Description.
While the income statement covers a period of time, the balance sheet is a snapshot at one point in time, such as the end of a quarter, usually shown next to the same date in earlier years.
Rearranged: Owners' equity = Assets − Liabilities. That is the business's net worth.
Assets, grouped by liquidity
| Group | Liquidity | Examples |
|---|---|---|
| Current assets | High | Cash, short-term investments, accounts receivable, inventory |
| Long-term assets | Lower |
Key terms
- Balance sheet
- A snapshot at a point in time comparing assets to liabilities and owners' equity.
- Accounting equation
- Assets = Liabilities + Owners' equity.
- Liquidity
- How easily an asset can be converted into cash.
- Current assets
- Highly liquid assets used in daily operations: cash, short-term investments, accounts receivable, inventory.
- Accounts receivable
- Money customers owe the business.
- Long-term assets
- Less liquid assets, such as fixed assets (plants, equipment) and long-term investments.
- Intangible assets
- Non-physical assets of value, such as patents.
- Accounts payable
- Money the business owes its suppliers.
- Current liabilities
- Obligations due within one year.
- Long-term liabilities
- Obligations due beyond one year, such as mortgages, bank loans and long-term bonds.
- Retained earnings
- Cumulative profits not paid out as dividends. Part of owners' equity.
- Working capital
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