Chapter 3

 The Balance Sheet and Its Components

Key  Points You Will Learn in This Chapter

*Understanding the Balance Sheet

*The Accounting Equation

*The Components of the Balance Sheet

*The Transactions Behind the Balance Sheet

Understanding the Balance Sheet

Imagine that you make a list of everything that is important to you.  Along with this list you attach values to all of these items.  Then you make a list of everything that you owe to others, and again you attach values to these items.  Then you subtract the total value of the second list from the total value of the first. Voila!  You have just created the basic components of a Balance Sheet.

In a business, the first list of items is called Assets.  Assets are valuable resources owned by the business and can be either short- or long-term in nature.

Your second list of items is called Liabilities.  Liabilities are what you owe to others for resources that were furnished to the business.  The parties to whom the company owes money are normally called creditors.  The creditors are said to “have a claim against the assets.”  Figure 3.1 illustrates the origin of some liabilities a company or individual might incur.

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