What are assets, liabilities and equity?

Assets, liabilities and equity are three core elements of a company’s balance sheet. They offer a look at what your company owns, owes and allows you to know the true performance both past and present so you can make strategic plans for the future. 

Examples of assets, liabilities and equity

Assets, liability and equity all have their differences but they overlap and weave together on your balance sheet. Being able to organise them correctly will make the difference in a correct balance sheet or a clustered one. Let’s look at them individually. 

Assets

Assets simply put are what you own. They are the resources a company owns and uses for its operations, contributing to revenue generation. They are broadly categorised into:

• Current assets: Easily convertible into cash within a year.
  • Cash and cash equivalents
  • Accounts receivable
  • Inventory
• Non-current or fixed assets: Long-term investments, offering benefits beyond one year.
  • Property, plant and equipment (PP&E)
  • Intangible assets (e.g., patents, trademarks)
  • Long-term investments

How to calculate total assets

The total assets of a company are the sum of its current and noncurrent assets. The formula is straightforward:

Total Assets = Current Assets + Non-Current Assets

Let’s take this formula and consider a simplified scenario for a business. 

• Current Assets:
  • Cash: €20,000
  • Accounts Receivable: €15,000
  • Inventory: €10,000
• Non-Current Assets:
  • Property and Equipment: €50,000
  • Intangible Assets: €5,000

If you were needing to calculate your total assets, you would use the formula as so:

Total Assets = €20,000(Cash) + €15,000(Accounts Receivable) + €10,000(Inventory) + €50,000(Property and Equipment) + €5,000(Intangible Assets)

Total Assets = €100,000

This calculation reveals the business’s total assets to be €100,000, encompassing both its immediate resources and long-term investments.

Liabilities

Liabilities in its simplest form are what you owe. These are the financial obligations a company owes to external parties, categorised based on their due period:

• Current liabilities: Obligations due within one year.
  • Accounts payable: Money owed to suppliers.
  • Accrued expenses: Incurred expenses not yet paid.
  • Short-term loans: Loans due within a year.
• Long-term liabilities: Debts payable beyond one year.
  • Long-term debt: Includes bonds payable, long-term loans.
  • Deferred revenue: Payment received for services yet to be delivered.

How to calculate total liabilities

Total liabilities are calculated by adding together all current and long-term liabilities:

Total Liabilities = Current Liabilities + Long-Term Liabilities

Let’s consider a business with the following liabilities: 

• Current Liabilities:
  • Accounts Payable: €8,000
  • Accrued Expenses: €2,000
  • Short-term Loans: €5,000
• Long-Term Liabilities:
  • Long-term Debt: €20,000
  • Deferred Revenue: €3,000

Applying the formula:

Total Liabilities = €8,000(Accounts Payable) + €2,000(Accrued Expenses) + €5,000(Short-term Loans) + €20,000(Long-term Debt) + €3,000(Deferred Revenue)

Total Liabilities = €38,000

This demonstrates that the business has total liabilities of €38,000, indicating the sum of its immediate and future financial obligations.

Equity

Equity, often referred to as shareholders’ equity or owners’ equity, encapsulates the owner’s stake in the company. It’s what remains of the assets after all liabilities have been settled. Key components include:

• Common Stock: Equity capital received from stock investors.
• Preferred Stock: A class of ownership with a higher claim on assets and earnings than common stock.
• Retained Earnings: Profits reinvested in the business rather than distributed to shareholders.
• Treasury Stock: Shares that were issued but later bought back by the company.
• Additional Paid-In Capital: The excess amount paid by investors over the par value of the stock.

How to calculate total equity

Total equity is calculated by subtracting total liabilities from total assets, which can also be seen as the net assets owned by shareholders:

Total Equity = Total Assets – Total Liabilities

Leveraging the numbers from our previous examples:

• Total Assets: €100,000
• Total Liabilities: €38,000

Using the total equity formula:

Total Equity = €100,000(Total Assets) – €38,000(Total Liabilities)

Total Equity = €62,000

This calculation indicates that the business’s equity, or the residual interest in the company’s assets after all debts have been paid, is €62,000. This equity value is crucial for owners and investors as it represents the net value of the company attributable to them.

Why are assets, liabilities and equity important?

Assets, liabilities, and equity are important because they form the basic framework for evaluating a company’s financial health. With it you can see how well a company has performed, what it has earned, what it has spent and how the shareholders have benefited or invested over time.

What do they mean for your business?

For your business, understanding assets, liabilities, and equity means grasping the core financial components that dictate its operational success and stability. 

Assets: The lifeblood of your business operations, assets hold everything your company owns with value. They are a representation of resources at your disposal.

Liabilities: While often perceived negatively, liabilities are a sole part of business dynamics, representing the financial commitments your company must honour. They indicate the obligations that need to be managed efficiently. 

Equity: Equity serves as the barometer of shareholder value–  the net worth of your company after all liabilities have been settled. It reflects the cumulative result of your business operations over time, including retained earnings, capital infusions and adjustments for gains or losses.

Final thoughts

In the intricate landscape of finance, the mastery of assets, liabilities and equity is not merely foundational—it’s transformative. These critical financial pillars do more than just outline the present state of your business’s finances; they are the indicators of your company’s potential for growth and enduring success. By effectively managing them, you unlock a clearer vision for strategic decision-making, risk management and investment opportunities.

Here at Swoop, we understand the unique challenges and opportunities that you face in the financial ecosystem. Our platform is designed to empower businesses like yours with innovative funding solutions that resonate with your specific needs. From securing the right loans to optimising your equity and managing liabilities, our tailored services are here to support your aspirations.
Get started today. You’ll discover a spectrum of funding options crafted to enhance your financial posture and accelerate your business’s journey towards its goals.