The Basic Concept behind a Balance Sheet

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The Basic Concept behind a Balance Sheet

The concept behind the balance sheet is very simple. In order to acquire assets, a firm must pay for them with either debt (liabilities) or with the owners’ capital (shareholders’ equity). Therefore, the following equation must hold true:

Assets = Liabilities + Shareholders’ Equity

For example:

Example of Basic Equation

This equation is the foundation of the balance sheet.