Start your business
Start your business
Run your business
Run your business
Grow your business
Grow your business
Accountants and Bookkeepers
Accountants and Bookkeepers
- Accountants and Bookkeepers
  Learn how accountants and bookkeepers can be productive in these articles & guides
- Learning and Development
  A range of informative content to enhance your QuickBooks experience.
Updates
Updates
- Product Updates
  Watch this space for monthly product updates.
- Intuit News
  Latest news, articles & guides

Need help choosing a plan?

1800 917 771 Schedule a call

Schedule call

Running a business

Assets and liabilities: what are they?

By Ken Boyd

Published on June 14, 20246 min read

The balance sheet (or statement of financial position) is one of the three basic financial statements that every business owner analyses to make financial decisions. Owners also review the income statement (Profit & Loss report) and the cash flow statement.

A balance sheet reports your firm’s assets, liabilities and equity as of a specific date. This discussion explains each component of the balance sheet in detail, and provides some ratios that can help you make better financial decisions.

The accounting equation (also known as the balance sheet formula) is a great tool to understand how these concepts fit together.

Assets, liabilities and equity – defined

Here are the components of a balance sheet:

Assets – What your business owns. Assets are resources used to produce revenue and have a future economic benefit.
Liabilities – Amounts your business owes to other parties. Liabilities include accounts payable and long-term debt.
Equity – Equity is the difference between assets and liabilities, and you can think of equity as the true value of your business.

The components are connected by the balance sheet formula:

Assets = liabilities + equity

The formula is used to create the financial statements, including the balance sheet.

What are assets?

In accounting, assets are the resources used to produce revenue.

Accounting standards require firms to separate assets and liabilities into current and non-current categories.

Current assets

Current assets include cash and assets that will be converted into cash within 12 months.

Cash and cash equivalents: The total amount of cash on hand. Cash equivalents refer to short-term, high-quality investments, including certificates of deposit (CDs) and commercial paper.
Accounts receivable: The amount your customers owe you after buying your goods or services on credit.
Inventory: Items purchased to sell to customers.
Prepaid expenses: Expenses you’ve paid in advance, such as six months of insurance premiums. These cash payments are assets, because the cost has already been incurred.
Investments : Money-market account balances, stocks, and bonds. Some investments may be categorised as non-current, but most are current assets. Investments in this category are also defined as marketable securities.
Notes receivable: Amounts you are owed that will be paid within 12 months.

Non-current assets are not converted into cash within 12 months.

Non-current assets

Your business may own fixed assets and intangible assets, and these accounts may be referred to as long-term assets.

Fixed assets: Fixed assets include vehicles and equipment used to produce revenue. These assets decrease in value over time. For that reason, depreciation expense is posted to record the decline in value of fixed assets. Real estate (land) is posted to the fixed asset category, but land does not depreciate in value.
Intangible assets: Assets that have no physical manifestation, such as goodwill, patents and trademarks fall into this category.

The balance sheet may also include current liabilities and non-current liabilities.

What are liabilities?

In accounting, liabilities are amounts owed to third parties.

Current liabilities : These are amounts due to be paid within 12 months, such as accounts payable (amounts you owe suppliers), payroll liabilities and amounts due on short-term business loans, such as a line of credit. Credit card balances and income tax liabilities are current liabilities.
Long-term liabilities : Amounts due to be paid in a period greater than 12 months, such as long-term loans, and mortgage payments. These liabilities are non-current, but the category is often defined as “long-term” in the balance sheet.

Any loan payments due within a year are current liabilities, regardless of the term of the loan. $10,000 in principal and interest due within 12 months on a five-year loan is posted to current liabilities.

A company’s net worth is defined as equity.

Grow Your Business with QuickBooks

30-day free trial

Buy now and save

What is equity?

In accounting, equity is total assets less total liabilities. You may also see equity defined as shareholder’s equity .

If you sold all your company assets and used the proceeds to pay off all liabilities, any remaining cash would be considered your equity balance. Equity may include common stock, additional paid in capital and retained earnings.

To illustrate, assume a company starts in business by issuing 1,000 shares of $1 par value common stock. Investors purchase the stock for $5,000. Par value is a dollar amount used to allocate dollars to the common stock category.

Common stock

Par value of common stock outstanding, multiplied by the number of shares. In this case, the common stock balance is $1,000.

Additional paid in capital

The amount of money invested by shareholders that is greater than the par value of the stock. Additional paid in capital is ($5,000 sales proceeds less $1,000 par value), or $4,000.

Retained earnings

The retained earnings balance is calculated as total company earnings (net income) since inception, less all dividends paid to owners since inception. Firms can choose to retain earnings for use in the business, or pay a portion of earnings as a dividend. Dividends reduce the equity balance.

Each accounting transaction must keep the balance sheet formula in balance.

Keeping the accounting equation in balance

Assets on the left side of the accounting equation must stay in balance with liabilities and equity on the right side of the equation:

Assets = liabilities + equity

Assume a firm issues a $10,000 bond and receives cash. The company posts a $10,000 debit to cash (an asset account), and a $10,000 credit to bonds payable (a liability account).

Here is the impact on the equation:

$10,000 increase assets = $10,000 increase liabilities + $0 change equity

Intuit QuickBooks accounting software will ensure each journal entry posted keeps the formula in balance and total debits and credits stay in balance. If you use a bookkeeping service or work with an accountant, they will also keep an eye on this process.

The details in the balance sheet allow the owner to perform financial analysis.

Financial analysis

The balance sheet provides a wealth of information about your business. Here are some assessment tools that use balance sheet data.

Liquidity

Liquidity is defined as the ability to generate sufficient current assets to pay current liabilities, such as accounts payable and payroll liabilities. If you can’t generate enough current assets, you may need to borrow money to fund your business operations.

Working capital is frequently used to assess liquidity. The ratio is defined as current assets less current liabilities. Working capital reports the dollar amount of current assets greater than needed to pay current liabilities, and financially healthy companies maintain a positive working capital balance.

Solvency is another term that describes the financial health of a company.

Solvency

Your firm must be able to generate profits over the long term to purchase assets and to make payments on long-term debt. A business that can meet its obligations is considered to be solvent.

Debt-to-equity ratio

This ratio is calculated as total liabilities /total equity, and this metric tracks increases and decreases in liabilities, as a percentage of equity.

If a company’s accounts payable and long-term debt balances are growing at a much faster rate than equity, the ratio will increase. An increasing ratio may be an indication the firm is taking on too much debt, and cannot make payments on all liabilities.

Accounts receivable turnover ratio

You may run short on cash if your sales are growing and you don’t collect accounts receivable dollars fast enough.

To avoid this problem, many owners analyse the accounts receivable turnover ratio.

(Net credit sales) / (Average accounts receivable)

You’ll note the formula uses sales, which is taken from the income statement.

Here’s an explanation of each component of the formula:

Credit sales: Sales to customers who don’t pay immediately.
Net: The net in this case refers to accounts receivable balances that will not be collected. These bad debts are subtracted from the credit sales total.
Average accounts receivable: Beginning plus ending balance for the period, divided by two. The period of time may be a month or year.

Ideally, a company can increase credit sales, while also minimising accounts receivable. Increasing the turnover ratio means a company’s financial health is improving.

Understanding the balance sheet can help you improve your business results.

Make better decisions

The balance sheet is one of three financial statements that explain your company’s performance. Review your balance sheet each month, and use the analytical tools to assess the financial position of your small business. Use the balance sheet data to make better decisions and to increase profits.

Looking for something else?

Get QuickBooks

Smart features made for your business. We've got you covered.

See how it works

Help Me Choose

Use our product selector to find the best accounting plan for you.

Choose your product

QuickBooks Support

Get help with QuickBooks. Find articles, video tutorials, and more.

Start learning

A computer screen showing a picture of a computer.

TAKE A NO-COMMITMENT TEST DRIVE

Your free 30-day trial awaits

Our customers save an average of 9 hours per week with QuickBooks invoicing*

No credit card needed

Cancel anytime

Unlimited support

By entering your email, you are agree to our Terms and acknowledge our Privacy Statement.

- - QuickBooks reserves the right to change pricing, features, support and service at any time. Prices are in AUD and include GST. See our Terms of Service for further information.
  - Pricing: All prices are in AUD and include GST.
  - ProAdvisor Program: Please find the terms of our ProAdvisor program here.
  - 50% off for 3 months: For new subscribers, enjoy a 50% off price subscription on QuickBooks Online Simple Start, QuickBooks Online Essentials or QuickBooks Online Plus for the first 3 months of your subscription (Offer). The discount will applied from the date of your enrolment and will continue for 3 months. From month 4, you will be charged the then current monthly retail price for your subscription. See current prices here. QuickBooks Payroll and QuickBooks Time prices are not eligible for any discount and will be invoiced separately according to your usage on a monthly basis during your subscription. Intuit reserves the right to request information to verify the eligibility of a purchaser of the Offer. Acceptance of such verification information is at the reasonable discretion of Intuit, which may revoke the Offer and impose a monthly cost for the subscription at the then current retail prices, at any time if it considers the purchaser is ineligible for the Offer.
  - 50% off for 12 months: For new subscribers, enjoy a 50% discount off the current monthly retail price for QuickBooks Self-Employed, QuickBooks Online Simple Start, QuickBooks Online Essentials or QuickBooks Online Plus for the first 12 months of your subscription (Offer). The discount will applied from the date of your enrolment and will continue for 12 months. From month 13, you will be charged the then current monthly retail price for your subscription. See current prices here. QuickBooks Payroll and QuickBooks Time prices are not eligible for any discount and will be invoiced separately according to your usage on a monthly basis during your subscription. Intuit reserves the right to request information to verify the eligibility of a purchaser of the Offer. Acceptance of such verification information is at the reasonable discretion of Intuit, which may revoke the Offer and impose a monthly cost for the subscription at the then current retail prices, at any time if it considers the purchaser is ineligible for the Offer.
  - 50% off for 3 months (existing subscribers): For existing QuickBooks subscribers who upgrade to QuickBooks Online Essentials, Plus or Advanced, enjoy a 50% discount off the current monthly retail price for 3 months of your subscription (Offer). The discount will be applied from the date you upgrade in-product and will continue for 3 months. From month 4, you will be charged the then current monthly retail price for your subscription. See current prices here. QuickBooks Payroll and QuickBooks Time services and prices are not eligible for any discount and will be invoiced separately according to your usage on a monthly basis during your subscription. Intuit reserves the right to request information to verify the eligibility of a purchaser of the Offer. Acceptance of such verification information is at the reasonable discretion of Intuit, which may revoke the Offer and impose a monthly cost for the subscription at the then current retail prices, at any time if it considers the purchaser is ineligible for the Offer.
  - Free Trial: First thirty (30) days of subscription to QuickBooks Online, QuickBooks Self-Employed and QuickBooks Payroll (including QuickBooks Advanced Payroll), starting from the date of enrolment, is free. During the free trial, you may pay any number of employees using QuickBooks Payroll free of charge. To continue using QuickBooks after your 30-day trial, you'll be asked to present a valid credit card for authorisation and you'll be charged monthly at the then-current fee for the service(s) you've selected.
  - QuickBooks Payroll powered by Employment Hero: Payroll services are offered by a third party, Employment Hero. QuickBooks Payroll is only accessible via QuickBooks Online subscriptions. You will be charged $6.00 (incl. GST) per month for each ‘active employee’ paid using QuickBooks Payroll. An ‘active employee’ is one who has been paid at least once in the billing month. For Advanced Payroll, there is an additional monthly subscription fee of $10 (incl GST). Pricing, terms and conditions, including service options, are subject to change.
  * Employment Hero was voted the leading payroll solution for SMBs <50 employees (Australian Payroll Association 2021 Payroll Benchmarking Study)
  - Customer support: Call or chat to an expert for QuickBooks Online Accountant, QuickBooks Simple Start, Essential, Plus, and Advanced or use in-product QB Assistant and chat for QuickBooks Self-Employed. You'll also find useful resources in the QuickBooks Community.
  - Compatible Devices: QuickBooks Online, QuickBooks Self-Employed and QuickBooks Payroll require a computer with Internet Explorer 10, Firefox, Chrome, or Safari 6 and an Internet connection (a high-speed connection is recommended). The QuickBooks Online mobile app works with iPhone, iPad, and Android phones and tablets. QuickBooks Online and QuickBooks Payroll are accessible on mobile browsers on iOS, Android, and Blackberry mobile devices. Devices sold separately; data plan required. QuickBooks Payroll cannot be used on the mobile apps. Not all features are available on the mobile apps and mobile browser. QuickBooks Online mobile access is included with your QuickBooks Online subscription at no additional cost. Data access is subject to cellular/internet provider network availability and occasional downtime due to system and server maintenance and events beyond your control. Product registration required.
  - Get paid faster: Get paid 2.5x faster invoicing with PayPal
  * PayPal and QuickBooks customers get paid on average in less than 5 days, which is over 7 days faster than the average for invoices that get paid with other payment methods. Data is for paid invoices that were created in QuickBooks in Australia between 23.05.22 and 23.11.22
  - Tax deductions: Tax deductions not guaranteed due to being subject to user data entry errors. Mileage calculation provided by the Australia Taxation Office - 85 cents per kilometre for the 2023-2024 income year. To a maximum of 5,000 business kilometres per car (Deductions are only applicable to cars)
  - Customer Service Awards: Excellence in Customer Service Award at the CX Australia Awards 2022
  - Multiple file discount: Multiple file discount applies to QuickBooks Australia customers only and valid when signing up for more than one QuickBooks Online subscription in one order. Further terms and conditions available here. Not applicable to QuickBooks Self Employed.
  - Reviews: GetApp, Capterra, Google Play Store, Apple App Store reviews as at date 08/01/24.
  - Cost per day claim (annual): Based on a QuickBooks Simple Start plan at its regular retail price of $313 per year and a 365 day year.
  - Annual Billing: You may pay for your QuickBooks Online subscription on an annual, upfront basis to enjoy a discount on the current fees. If you use QuickBooks Payroll powered by Employment Hero, your payroll costs will still be charged monthly to your nominated payment method in accordance with your usage as set out here. If you cancel your QuickBooks Online subscription within the pre-paid 12 month period, you will not be eligible for a refund, but will retain full access to your QuickBooks Online subscription for the remainder of the 12-month period. Unless cancelled by you prior, your annual subscription will auto-renew on the 12 month anniversary of your sign-up date using the billing details you have given us. Discounts, prices, terms and conditions are subject to change.
  - Over 7 million customers: Based on number of global QB customers (ecosystem) (7.1m) worldwide as of October 2022.
  - Free Onboarding: Applicable to Buy Now subscriptions on QuickBooks Simple Start, Essentials and Plus plans. Not available for QuickBooks Self-Employed.
  - Save Hours: Save up to an average of 29 hours per month with QuickBooks.
  - * Based on a survey conducted by Intuit Australia Pty Ltd in September 2022. Time saving is in comparison to previous accounting method, based on 184 responses from customers that saw time savings.
  - Get access to QuickBooks Tax: ***Access QuickBooks Tax, powered by LodgeiT, by becoming a member of the QuickBooks ProAdvisor Program (it’s free to join). Find out more about the ProAdvisor Program here, including the terms of the QuickBooks Tax offer in the Program here.
  - QuickBooks Time Disclaimers & Offers for Australia: For Important pricing offers and disclaimers with further information, please see here.
  - *Full terms and conditions for access to QuickBooks Tax, powered by LodgeiT as part of the the Proadvisor Program can be found here. QuickBooks reserves the right to change pricing, features, support and service at any time.
  - **Intuit conducted a study involving 56 interviews with accountants and bookkeepers who used Books Review for BAS preparation between March to December 2021 and found that when using Books Review, participants reduced the time spent preparing their clients BAS Reports by around 40%.
  - Our Terms of Service apply to all QuickBooks Online subscriptions. Please review them carefully.

Intuit helps put more money in consumers’ and small businesses’ pockets, saving them time by eliminating work, and ensuring they have confidence in every financial decision they make.