A balance sheet tells us about the financial health of a company at a particular time and date, like on August 23, 2018. As we generally listen, it gives us information about the assets and liabilities of a company, but that is not enough. A balance sheet also has an information about the owner’s equity i.e. a company may be owned by a single person or by a group of peoples.
So, the basic mathematical equation a balance sheet uses is:
Assets = Liability + Owner’s equity
Now let’s understand it with a simple example;
Assume my friend Sandeep runs a school. He has a building for that, has furniture for school, has some vehicles for students.
Assets (50000 $) = Vehicles cost (5000$) + School building cost (25000$) + Cash in hand(4000$) + Furniture cost (6000$) + Receivable Amount as fees dues (10000$)
Liabilities (30000$) = Long term loan (20000$) + Credit card balance (4000$) + dues of employees ( 6000$)
Now as per equation we can calculate the owner’s equity i.e. the equity owned by Sandeep;
Owner’s equity (20000$) = Assets (50000$) – Liabilities (30000$)
This means Sandeep has owned about 40 per cent of that school, as his equity is 20000 dollars out of 50000 dollars of assets. Owner’s equity is something, we sell out all the assets and pay off all the liabilities, what remains in last is the owner’s equity.