Simplifying the Balance Sheet for Executives: Liabilities (What You Owe) & Owner’s Equity (What’s Left for the Organization)

Expanding on our financial literacy series – and defining terms on our reports – we start with the Balance Sheet. It has three main components, the last two of which we’ll address here: Liabilities and Owner’s Equity.

Review of the Balance Sheet basics (or for Non-Profit Organizations, The Statement of Financial Position)

The Balance Sheet is a snapshot of:

1. What a company owns (Assets),
2. What it owes (Liabilities), 
3. and what is left for the investors (Owner’s Equity or Retained Earnings).  

As a non-profit organization cannot have owner’s or equity, per se, this is called Net Assets.

The Balance Sheet is a perpetual statement – meaning it begins upon formation of the organization and has no ‘end’ until the organization ends.  Dates shown at the top of this form are as of that point in time.

The formula to ensure the statement ‘balances’ is Assets = Liabilities + Owner’s Equity.

Note:  All of this assumes we are using the Accrual Method of accounting (click HERE for a brief video explanation of cash vs accrual accounting methods explained for CEOs and Executive Directors).

Liabilities

Liabilities are what the company owes and they also are listed on the balance sheet in order of ‘liquidity’ – how quickly things must be paid from cash. 

Accounts Payable – amounts due to suppliers, vendors, consultants in the next 30 days

Deferred Revenue – Amounts paid to you by your customers ahead of time.  This money is owed to them if you don’t deliver on your promise of service; if you do deliver on your promise, this money then gets recognized as income

Notes/Mortgages – Current – These are amounts on your debts that will be paid in this year.

Notes/Mortgages – Long Term  – Amounts on your debts that will be paid after this year

Owner’s Equity/Net Assets/Retained Earnings – What is left over for the owners/organization after all liabilities are paid

Owner’s Equity – Current – Sometimes all of the Owner’s Equity is combined in one amount, but more often than not, it is broken out as you see here – so you can easily see what is coming from the Income Statement, how much has been contributed to the organization, and how much has been left over (earned) in prior years.  

Note that NOW the balance sheet balances: Assets = Liabilities + Owner’s Equity.

All of this is a rather simplified version, but it provides the basis for your understanding of the Balance Sheet components.

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