The balance sheet is made up of three main categories, assets, liabilities, and equity, and essentially presents the accounting equation in a vertical format, assets at the top, which balances with the sum of liabilities and equity at the bottom.
If a company has assets of 100 with 80 of liabilities and 20 of equity, the right hand side of the accounting equation matches the 100 of assets on the left.
In a balance sheet, assets of 100 would be shown on the top half, and liabilities and equity totaling 100 on the bottom.
Let's have a look at each of these categories in turn. Assets, an asset is something controlled by the business that is expected to generate some sort of future economic benefit to that business. Assets can be physical things such as buildings, equipment, or inventory, or they can be intangible where they don't have a physical form such as a patent or a trademark.
Owning these do give benefits to the company through being able to stop others from producing the same product, but they don't have a physical form.
Finally, assets can be financial in nature.
For example, cash or receivables, sometimes known as debtors who owe money to the business. On a balance sheet the first clear way that you'll see assets classified is based on how liquid they are.
In other words, how quickly they can be turned into cash.
The category of current assets includes short term assets where the benefit they provide to the organization is expected to be realized within the next 12 months.
For a food retailer, their inventory or stock is a great example of a current asset as they expect to sell their inventory within the next year.
The other category of assets you usually see on a balance sheet is non-current assets.
These are long-term assets when initially purchased or created.
They are expected to provide benefits to the organization for longer than 12 months.
If we stick with the example of a food retailer, warehouses that they own would be an example of non-current assets.
