Understanding a Balance Sheet is not about memorizing accounting terms, but about recognizing how daily business activities affect a company’s financial position. Assets, Liabilities, and Equity represent what a business owns, what it owes, and the value that remains for the owner at a specific point in time. Many users review these numbers without understanding how they are formed. This article explains each component clearly and shows how to view them correctly in the Balance Sheet report.
I. What Is Asset, Liability, and Equity
Asset, Liability, and Equity are the three main components of a Balance Sheet. They represent what a business owns, what it owes, and the value that belongs to the owner.
Asset
Assets are resources owned by a business that provide future economic benefits.
Assets are formed from operational and investment activities, such as:
Selling products or services (cash and accounts receivable)
Purchasing inventory or raw materials
Buying equipment, vehicles, or property
Receiving payments from customers
In simple terms, any business activity that brings value into the company will increase Assets.
Liability
Liabilities are obligations or debts that a business must pay to other parties.
Liabilities are formed from financing and operational activities, such as:
Purchasing goods or services on credit
Taking business loans or financing
Unpaid expenses (rent, salaries, utilities, taxes)
Customer deposits or advances
Any activity where the business receives value but has not fully paid for it yet will create a Liability.
Equity
Equity represents the owner’s claim on the business after deducting liabilities from assets.
Equity is formed from ownership and business performance activities, such as:
Owner capital injection or initial investment
Retained profits from business operations
Net income generated from sales
Losses or owner withdrawals (which reduce equity)
In short, Equity grows when the business earns profit or receives additional owner investment.
II. How To View Asset, Liability, and Equity
To view Asset, Liability, and Equity in the system, follow these steps:
Step 1. Go to Report, then choose Balance Sheet.
Step 2. View the Total Asset section to see the overall value of resources owned by the business.
Step 3. View the Total Liability section to understand how much the business owes to external parties.
Step 4. View the Total Equity section to see the remaining value owned by the business owner.
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