How Balance Sheets Can Keep You Out Of Financial Trouble Balance Sheet 4
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There may be an offsetting liability. For a house it would be the mortgage or any other debt secured against the home. For a car it would be a car loan. The difference between the value of the house or car and what is owed is the equity in that particular investment. This is like a net worth for that particular asset. There are appreciating assets and depreciating assets. A home is generally an appreciating asset over the long term. In recent times we have learned that in the short term a home can lose its value rather quickly. However most housing markets recover in the long term and a home should appreciate over time.
On the other hand long-term assets which can include land inventory and equipment are paid off and will benefit the company over an extended period of time. Accumulative depreciation is used on balance sheets to explain how the cost of long-term assets are "used up" during the process of running a business. The cost is spread over the life of the asset. For example say a piece of machinery cost $50 000 and the useful life of the machine is 20 years therefore in the first year the accumulative depreciation for the equipment is $2 500. Liabilities can simply be explained as the amounts owed to other organizations such as the transfer of assets or services that need to be provided. Liabilities are also made up of current and long-term.
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Current liabilities are those that will be paid within one year these include accounts payable notes payable current maturities of long-term debt and payroll taxes. Long-term debt is that which is paid off over an extended period of time. Owner s equity also called net assets is the right of ownership the owners of the organization have after subtracting liabilities. Some examples of owner s equity include common stock additional paid in capital and retained earnings. Common stock is issued as an investment in the business. For example in corporations stockholders are ultimately the owners they claim all assets after liabilities and preferred stock claims are satisfied. Additional paid in capital is defined as the leftover amount paid by the investor over the stated value of the shares sold. Finally the retained earnings are the net income that is not be distributed as dividends to owners or an organization.