Elements of the Balance Sheet

Elements of the balance sheet include assets, liabilities, and stockholders’ (or owners’) equity.

Assets are probable future economic benefits that have been obtained or are controlled by an entity as a result of past transactions or events. Thus, an asset:

• Arose from a past transaction
• Is presently owned by the company
• Will provide a probable future economic benefit to the company

Note that the preceding definition encompasses three time periods: the past, the present owned, and the future.

Liabilities are probable future sacrifices of economic benefits due to present obligations of an entity to transfer assets or provide services in the future, resulting from past transactions or events.6 Thus, a liability:

• Arose from a past transaction
• Is presently owed by the company
• Will lead to a probable future sacrifice of economic benefits by the company

As with the definition of an asset, the definition of a liability encompasses the past, the present and the future.

Equity represents the entity’s net assets, or the residual (remaining) interest in the assets of the entity after deducting its liabilities from its assets. For a business entity, equity is the ownership interest.