Assets = Liabilities + Shareholders' Equity
The Short Version
Every balance sheet is built around one unbreakable equation. Assets are everything the company owns or is owed (cash, inventory, buildings, equipment, receivables). Liabilities are everything the company owes to others (loans, unpaid bills, bonds). Equity is what's left over for shareholders after subtracting what's owed from what's owned — it's the company's actual net worth on paper.
Explain It Like I'm 10
Imagine your piggy bank has $50 in it (an asset — something you own). But $20 of that is actually money you owe your sister that you're holding for her (a liability — something you owe). That means only $30 of what's in the piggy bank is truly, actually yours (your equity). No matter how the numbers shuffle around, Assets always equals Liabilities plus Equity — it's just simple math that has to balance, like a seesaw.
Step-by-Step Example
- 1 Total assets (everything owned): $80,000,000.
- 2 Total liabilities (everything owed): $30,000,000.
- 3 Equity = Assets − Liabilities = $80,000,000 − $30,000,000 = $50,000,000.
- 4 Check the equation the other way: Liabilities ($30M) + Equity ($50M) = $80M, which matches Assets exactly — it always must balance.
- 5 This $50,000,000 equity figure is exactly the 'book value' used to calculate the P/B ratio from the Stock Market guide.
A company with $80 million in assets and $30 million in liabilities has $50 million in shareholders' equity.
Quick Recap
- ✓ Shareholders' equity is also called 'book value' — this is the number behind the P/B ratio from the Stock Market guide.
- ✓ This equation must always balance — it's why the statement is called the 'balance' sheet.