What a business owns, owes and keeps
The profit and loss account tells you what happened over a period. A balance sheet tells you where the business stands on one day. This lesson sorts everything on it into three buckets, then opens the real balance sheet of a listed company.
- Level
- Beginner
- Reading time
- About 22 minutes
- Know this first
- Revenue, expenses and profit
By the end you will be able to:
- define an asset, a liability and equity in plain words
- sort everyday business items into the right bucket
- tell a current item from a non-current one
- read the main blocks of a real company's balance sheet
Three buckets
An asset is something the business owns, or is owed, that has value to it. A liability is something the business owes to someone else. Equity is what is left for the owners once the liabilities are taken away from the assets.
Think of a shop. The cash in the till, the stock on the shelves, the shelves themselves and the money a customer owes are all assets. A bank loan and an unpaid bill from a supplier are liabilities. If the shop owns ₹5,70,000 of assets and owes ₹2,50,000, the owner's equity is the difference, ₹3,20,000.
A balance sheet lists all three as they stand on a single date, such as 31 March. It is a snapshot. The profit and loss account is a film of a period, and the balance sheet is a photograph taken at the end of it.
Sort fifteen items
These items belong to Meena's stationery shop. For each one, decide whether it is an asset, a liability, equity, or none of these. Pick an answer and you will see straight away whether it is right, and why. "Neither" is for things that belong in the profit and loss account, or that are not the business's at all.
Pick an answer for each item. 15 items.
- Cash in the till and the shop's bank balance
An asset. It is money the business owns.
- Notebooks and pens on the shelves, waiting to be sold
An asset, called stock or inventory. It is owned, and it will turn into cash when sold.
- Shelves and a counter
An asset. It is owned and will be used for many years.
- ₹20,000 a school owes for goods already delivered
An asset, called a receivable. It is a claim on money that is owed to her.
- A bank loan of ₹2,00,000
A liability. It is money borrowed that must be repaid.
- An unpaid bill from a paper supplier
A liability, called a payable. The goods have arrived and the money is still owed.
- ₹3,00,000 of her own savings that Meena put into the shop
Equity. It is the owner's money in the business, not a debt to an outsider.
- Profit from earlier months that she left in the business
Equity. Profit that is kept belongs to the owner, so it adds to equity.
- March salaries that will be paid in April
A liability. The work was done in March, so the shop owes the money on 31 March. This is an accrued expense.
- Insurance paid in March for the next twelve months
An asset, called a prepaid expense. She has paid for cover she has not used yet.
- ₹60,000 received from a school for supplies not yet delivered
A liability, called deferred revenue. She owes the school goods until she delivers them.
- A delivery van the shop owns
An asset. It is owned and used in the business.
- This month's shop rent, already paid
Neither. It is an expense of this month, so it goes in the profit and loss account.
- This month's sales of ₹4,00,000
Neither. Sales are revenue, in the profit and loss account. Their effect on the balance sheet shows up as cash, receivables and profit kept.
- Meena's personal savings account at home
Neither, for the shop. The business is treated as separate from its owner. Only money she puts into the shop is recorded, and then as equity.
Items 9, 10 and 11 are the ones people most often get wrong. They are the accrual items from the lesson on accrual vs cash accounting: a cost that has been used but not paid, a cost paid but not yet used, and money received for work not yet done. Each one lands on the balance sheet because accrual accounting needs somewhere to keep the timing gap.
Now or later
Balance sheets split assets and liabilities by how soon they turn into cash or fall due. Companies that follow Ind AS use a rough rule: within twelve months, or within the normal operating cycle of the business, is current. Anything further away is non-current.
| Item | Current | Non-current |
|---|---|---|
| Assets | Cash, stock, receivables, money in short-term deposits | Buildings, machinery, long-term investments, goodwill |
| Liabilities | Supplier bills, wages due, loans repayable within a year | Loans repayable after more than a year, long-term lease obligations |
The split lets a reader ask whether the business has enough money coming in soon to meet the bills falling due soon. Equity is not split this way, because it has no due date.
A real company: Titan
Here is Titan Company's standalone balance sheet as at 31 March 2024, in ₹ crore, with a year earlier beside it. The printed statement has about thirty lines. To keep it readable, the tables show its largest lines and combine the rest. Every combined line is added up from printed figures, and the totals are Titan's own.
| ₹ crore, as at 31 March | 2024 | 2023 |
|---|---|---|
| Non-current assets | ||
| Property, plant and equipment | 1,380 | 1,068 |
| Right-of-use assets | 1,225 | 1,058 |
| Investments | 6,178 | 1,116 |
| All other non-current assets | 1,386 | 1,160 |
| Total non-current assets | 10,169 | 4,402 |
| Current assets | ||
| Inventories | 16,874 | 14,952 |
| Investments | 1,635 | 2,143 |
| Trade receivables | 937 | 908 |
| Cash and cash equivalents | 272 | 119 |
| All other current assets | 2,975 | 2,564 |
| Total current assets | 22,693 | 20,686 |
| Total assets | 32,862 | 25,088 |
| ₹ crore, as at 31 March | 2024 | 2023 |
|---|---|---|
| Equity | ||
| Equity share capital | 89 | 89 |
| Other equity | 14,368 | 11,905 |
| Total equity | 14,457 | 11,994 |
| Non-current liabilities | ||
| Borrowings | 3,139 | 0 |
| Lease liabilities | 1,666 | 1,359 |
| Provisions | 238 | 214 |
| Total non-current liabilities | 5,043 | 1,573 |
| Current liabilities | ||
| Borrowings | 2,670 | 1,190 |
| Gold on loan | 4,938 | 5,090 |
| Trade payables | 943 | 965 |
| All other current liabilities | 4,811 | 4,276 |
| Total current liabilities | 13,362 | 11,521 |
| Total equity and liabilities | 32,862 | 25,088 |
Total assets were ₹32,862 crore. The largest asset was stock: inventories of ₹16,874 crore, about 51% of everything Titan owns. That is what you would expect of a jeweller, which holds a large amount of gold and finished jewellery. Property, plant and equipment, meaning items such as factories and machinery, was only ₹1,380 crore.
Look at how the other side is funded. Equity was ₹14,457 crore, about 44% of the total. The remaining ₹18,405 crore was liabilities, including ₹3,139 crore of long-term borrowings that did not exist a year earlier and ₹4,938 crore labelled "gold on loan". Both figures are Titan's own.
Investments held for the long term rose from ₹1,116 crore to ₹6,178 crore in the year. The cash flow statement in the lesson on cash vs profit shows where that money went. A balance sheet shows the result of a year's choices. The cash flow statement shows the choices themselves.
This is an educational reading of published figures, not a view on whether Titan's shares are a good or bad investment.
Three buckets in three large companies
Every balance sheet sorts what a company has and what it owes into the same three buckets: assets, liabilities and equity, with assets and liabilities divided into current and non-current. The sizes of the buckets, though, depend on the business. The table shows the latest balance sheets of Apple, Microsoft and Toyota, in millions of each company's own currency.
| Latest balance sheet, millions | Current assets | Non-current assets | Total assets | Current liabilities | Non-current liabilities | Equity | Equity share of assets |
|---|---|---|---|---|---|---|---|
| Apple | $147,957 | $211,284 | $359,241 | $165,631 | $119,877 | $73,733 | 20.5% |
| Microsoft | $191,131 | $427,872 | $619,003 | $141,218 | $134,306 | $343,479 | 55.5% |
| Toyota | ¥37,078,676 | ¥56,522,674 | ¥93,601,350 | ¥29,434,220 | ¥27,288,217 | ¥36,878,913 | 39.4% |
The last column shows how much of each company is financed by its owners' equity: 55.5% for Microsoft, 39.4% for Toyota and 20.5% for Apple. A lower number means more of the assets are funded by what the company owes. The numbers do not by themselves say a company is risky, because the kind of liabilities matters at least as much as their size, and the following sections look at what actually fills the buckets.
What fills the buckets
Microsoft: acquired businesses and customers' prepayments. Goodwill and other intangible assets, mostly left behind by the companies Microsoft has bought, are $142,113 million, which is 23.0% of its total assets. On the other side, unearned revenue, cash received from customers for services still to be delivered, is $67,265 million, or 24.4% of its liabilities. About a quarter of what Microsoft owes is not borrowed money but service it has been paid for and has yet to provide.
Toyota: a lender inside a car maker. Receivables related to financial services, the loans and leases its finance arm has extended to car buyers and dealers, are ¥33,625,035 million, 35.9% of Toyota's total assets. To fund them Toyota borrows, and its debt is ¥38,792,879 million. A reader who compares Toyota's debt with a car company that does not run a finance arm would see high borrowing; the better comparison is with a bank, whose assets are loans and whose liabilities are funding. It also shows that the same word, "debt", can mean different things in different businesses.
Apple: a large pool of investments and a negative working capital. Marketable securities held for more than a year are $77,723 million, 21.6% of Apple's assets. Its current assets of $147,957 million are smaller than its current liabilities of $165,631 million, a gap of $17,674 million. That sounds alarming, but Apple holds the long-term securities in the non-current bucket, and the figure reflects its supplier credit, payables and other short-term obligations, along with its cash held in long-dated investments.
Same bucket, different names
Terminology shifts between systems. IFRS companies, like Toyota, call the balance sheet the statement of financial position; US companies use balance sheet, and Indian companies using Ind AS write balance sheet too. Apple and Microsoft write "stockholders' equity" or "shareholders' equity", and Toyota writes "shareholders' equity" and splits it between the parent's shareholders and "non-controlling interests", the share of subsidiaries owned by others. British-style accounts often call equity "net assets" because it equals assets less liabilities. Learn to read all of these as the same bucket.
The rulebooks also measure some items differently, and the balance sheet is where it shows up:
- Inventory. IFRS prohibits the last-in, first-out cost method (LIFO), while US GAAP permits it. When prices are rising, LIFO shows a lower inventory value on the balance sheet. IFRS also requires a write-down of inventory to be reversed if value recovers, up to the original cost, while US GAAP prohibits reversal.
- Impairment. When an asset is written down because it has lost value, IFRS requires the loss to be reversed for most assets if conditions improve, but never for goodwill. US GAAP prohibits reversing an impairment loss at all, for any asset.
- Leases. Under IFRS 16, every lease a company takes is recorded on its balance sheet as an asset and a liability. US GAAP also records most leases on the balance sheet, but splits them into two types that affect the profit and loss account differently.
Because of these differences, two companies with identical economics can show somewhat different assets, and a ratio such as the current ratio or return on assets can differ for reasons that have nothing to do with the businesses.
Common mistakes
Putting an expense on the balance sheet
Rent that has been used up is an expense. Only the part that has been paid but not yet used, such as rent for next month, is an asset.
Treating all liabilities as bad
A liability is an obligation, and many are ordinary. A supplier's bill and a customer's advance are part of normal trading. What matters is whether the business can meet them when they fall due.
Confusing equity with cash
Equity is a claim on all the assets, not a pile of money. Titan's equity of ₹14,457 crore is spread across stock, shops, investments and cash.
Mixing the owner and the business
The business is treated as separate from its owner. The owner's house is not an asset of the shop, and the owner's own bills are not its liabilities.
Reading assets at today's market value
Most assets are recorded at what they cost, less wear, not at what they could sell for today. A shop bought long ago may be worth far more than its balance sheet figure.
Try it yourself
1. A tailor has ₹40,000 in the bank, a sewing machine bought for ₹25,000, ₹10,000 of cloth in stock, and ₹15,000 owed to a cloth wholesaler. What are his assets, his liabilities and his equity?
Show the working
Assets are ₹40,000 + ₹25,000 + ₹10,000 = ₹75,000. Liabilities are the ₹15,000 owed to the wholesaler. Equity is ₹75,000 − ₹15,000 = ₹60,000.
2. A coaching centre receives ₹48,000 on 1 January for a year's tuition. On 31 March, which bucket does the part it has not yet taught belong in, and how much is it?
Show the working
January to March is 3 months taught and 9 months to go. ₹48,000 × 9 ÷ 12 = ₹36,000 is still owed in teaching, so it is a liability, deferred revenue. The ₹12,000 already taught has been earned.
3. From Titan's balance sheet: how much did inventories grow between 31 March 2023 and 31 March 2024, and as a share of total assets did they rise or fall?
Show the working
Inventories rose from ₹14,952 crore to ₹16,874 crore, an increase of ₹1,922 crore. As a share of total assets they fell, from 60% to 51%, because investments grew faster than stock.
Where this is used
The balance sheet is where people judge strength and funding.
- A lender compares current assets with current liabilities to see whether short-term bills can be met.
- An investor looks at how much of the business is funded by the owners and how much by borrowing.
- A supplier checks whether a customer is stretching out its payments.
- An owner uses it to see what the business is worth to them on paper, which is equity.
Key terms
- Asset
- Something the business owns or is owed that has value to it.
- Liability
- Something the business owes to someone else.
- Equity
- The owners' share: assets less liabilities. Also called net worth or shareholders' funds.
- Balance sheet
- A statement of assets, liabilities and equity on one date.
- Current
- Due or expected to turn into cash within twelve months or the normal operating cycle.
- Non-current
- Due or expected to turn into cash after that.
- Inventory
- Goods held for sale, or materials held to make them. Also called stock.
- Receivable
- Money owed to the business by customers.
- Payable
- Money the business owes to suppliers.
Questions people ask
Is a balance sheet the same as a net worth statement?
They are close. A balance sheet for a person or a company lists what is owned and owed, and the difference is net worth, or equity. A company's balance sheet also follows set rules about layout and about how items are measured.
Why is equity not always the "value" of the company?
Because most assets sit at cost, and some valuable things, such as a brand built over decades, are not on the balance sheet at all. A company's market value can be far above or below its equity.
Are loans from the owner equity or liability?
It depends on the terms. Money put in as capital is equity. Money lent with an obligation to repay is a liability. The wording of the agreement decides, so record it clearly when it happens.
Can equity be negative?
Yes. When liabilities exceed assets, usually after large losses, equity is negative. It signals that the business owes more than it owns.
Sources and review
- Titan Company Limited, audited standalone and consolidated financial results for the year ended 31 March 2024, filed with BSE. Source of the statement of assets and liabilities.
- IFRS Foundation, Conceptual Framework for Financial Reporting, which contains the definitions of an asset, a liability and equity.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
- Deloitte, Roadmap: IFRS and US GAAP comparison, 1.4 Inventories, for LIFO, cost formulas and the reversal of write-downs.
- Deloitte, Roadmap: IFRS and US GAAP comparison, 1.7 Impairment of nonfinancial assets, for the impairment tests and the reversal of losses.
- Deloitte, Roadmap: IFRS and US GAAP comparison, 5.7 Leases, for lessee accounting under IFRS 16 and ASC 842.
How the numbers were checked: every subtotal in the Titan tables was rebuilt by adding the printed lines, and total assets equal total equity and liabilities in both years. The "all other" lines are the printed lines not shown separately.