A balance sheet is a snapshot of your business finances as it currently stands. It illustrates the assets you own, and liabilities (i.e., debts) you owe, at a particular point in time.

Balance sheets have three general categories: assets, liabilities, and equity.

Assets

Assets are anything valuable that your company owns including the business bank accounts.

But total assets can also include equipment, furniture, land, buildings, notes receivable, and even intangible property such as patents and goodwill.

Liabilities

Liabilities are debts you owe to other people as well as credit card debt, mortgages, and accrued expenses such as utilities, taxes, or wages owed to employees.

Equity

Equity is the remaining value of the company after subtracting liabilities from assets. 

It’s important to note that equity is only the “book value” of your company. It’s not your business’ market value if you wanted to sell the business. When selling a business, buyers usually pay more than the book value of the business based on things like the company’s annual earnings, the market value of tangible and intangible property it owns, and more.

The balance sheet formula

To grasp how the three categories on the balance sheet work together, remember this formula:

Equity = Assets – Liabilities

To put it simply: Whatever value (equity) your business actually has consists of what it owns (assets) minus what it owes (liabilities).