The 3 statements · 2

The balance sheet

The balance sheet is a photo taken on one single day (usually the last day of the year). It lists everything the company owns and everything it owes. What's left over belongs to the owners.

👴 In one sentence It's like your house: the house is worth $300,000, you still owe the bank $125,000, so $175,000 of it is really yours.
Assets = Liabilities + Equity

This equation is always true — that is why it's called a balance sheet. Everything the company owns was paid for either with borrowed money (liabilities) or with the owners' money (equity).

Rat Bakery's balance sheet

Rat Bakery Ltd. — Balance sheet At 31 Dec 2025 · in $
ASSETS — what we own
Cash60,000
Money in the till and the bank account. The safest asset of all.
Receivables20,000
Cafés bought bread but will pay next month. It's ours, but not in our pocket yet.
Inventory15,000
Flour, sugar and boxes waiting to be used.
Current assets95,000
Current = will turn into cash within 12 months.
Ovens & equipment (net)205,000
Purchase price minus all depreciation so far. A non-current (long-term) asset.
Total assets300,000
Everything the bakery owns.
LIABILITIES — what we owe
Accounts payable25,000
We received flour but haven't paid the miller yet. An interest-free loan from suppliers!
Short-term debt15,000
The part of the bank loan that must be repaid this coming year.
Current liabilities40,000
Bills due within 12 months. Compare with current assets ($95,000): can we pay them? (See the ratios lesson.)
Long-term bank loan85,000
Repaid over the next years. Total debt = 15,000 + 85,000 = $100,000.
Total liabilities125,000
Everything owed to others.
EQUITY — what belongs to the owners
Share capital100,000
The money the founders put in on day one.
Retained earnings75,000
All past profits kept in the business instead of paid out as dividends. This year added 72,000 − 28,800 = 43,200.
Total equity175,000
Also called book value. Assets − liabilities = 300,000 − 125,000.
Liabilities + equity300,000
✅ Equals total assets. It balances!

How the statements connect

The net income from the income statement ($72,000) doesn't disappear: whatever isn't paid out as dividends is added to retained earnings on the balance sheet. That's the first link between the statements. The second link is cash, which we follow in the cash flow lesson.

What an analyst looks for

✏️ Check yourself: the bakery takes a new $50,000 bank loan and keeps the money in the bank. What happens to assets, liabilities and equity?
Show the answer

Cash +50,000 → assets $350,000. Debt +50,000 → liabilities $175,000. Equity stays at $175,000. The owners are not richer: they just borrowed. That's why "total assets" alone tells you little — always check how they are financed.