The Daily Technical #17: Could you give context on what assets, liabilities, and equity each represent?

Good morning. Welcome to the 17th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Walk me through the balance sheet.

Overview: The balance sheet shows a company’s assets, liabilities, and equity sections at a specific point in time. The fundamental accounting equation is: Assets = Liabilities + Shareholders’ Equity.

The assets belonging to a company must have been funded somehow, so assets will always be equal to the sum of liabilities and equity.

Assets: Organized in the order of liquidity

• Current Assets: assets that can be converted into cash within a year.

  • Cash, marketable securities, accounts receivable, prepaid expenses, and inventories.

• Long-Term Assets: assets that cannot be converted into cash within a year.

  • Property, plant, equipment (PP&E), intangible assets, goodwill, and long-term investments.

Liabilities: Listed in the order of how close they are to coming due.

• Current Liabilities: Accounts payable, accrued expenses, and short-term debt.

• Long-Term Liabilities: Long-term debt, deferred revenue, and deferred income taxes.

Shareholders' Equity: Common stock, additional paid-in capital (APIC), treasury stock, and retained earnings.

Common Mistakes

1. Forgetting Structure: Always start with the fundamental accounting equation and purpose of the statement.

2. Ignoring Order: Clearly distinguish between current and long-term categories, and organize them by how quickly they can be converted to cash or are due.

Key Takeaways / TLDR

• Start with the balance sheet's purpose and the fundamental equation: Assets = Liabilities + Shareholders’ Equity.

• Comprised of assets, liabilities, and shareholders’ equity.

• Discuss assets and liabilities in order of liquidity and due date respectively.

TODAY’S QUESTION
Could you give context on what assets, liabilities, and equity each represent?

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