I am writing a business plan based on some old notes from a master in economics.

However I am I bit confused. Can you please confirm the following is right? (above all what's marked in bold)

  • Assets: anything I can sell and make money from (patents, real estates, the product I sell, etc. <-- the price I have paid them on the first place)
  • Liabilities: all my costs (salaries, leasings, equity given to investors, ...)
  • Equity: what I own (possibly not already paid) = actual money I get from selling these things, without subtracting costs (i.e. liabilities) ==> e.g. the economic value of selling patents, real estates, my product etc. (possibly higher than the original assets cost)

You are confusing your balance sheet with your income statement, and putting a few things in the wrong bins. The basic accounting identity is:

$$ Assets=Liabilities+Owners' Equity$$

Assets are generally valued not at cost (or as you put it, "the price I have paid them on the first place"), but at either their hold-to-maturity value (i.e., the present discounted value of all future cash flows from the asset), or their mark-to-market value (what you can sell the thing for).

Liabilities are money owed to others that is unpaid as of the date of the financial report— salaries do not generally appear on the balance sheet, except for a small amount that has accrued but hasn't been paid out yet. Salaries will primarily appear on the income statement. Lease accounting is complicated, but if you have capital (not operating) leases, those will show up on both sides of the balance sheet under GAAP.

Equity (including equity held by investors other than yourself) is simply the residual once the value of outstanding liabilities is subtracted from the value of assets. It is definitely not the "actual money [you] get from selling these things without subtracting costs."

  • $\begingroup$ thank you. your answer is clear. but I still don't understand: what's the difference between income statement and balance sheet? I've also read this article: investopedia.com/ask/answers/101314/… . but I've not figured it out $\endgroup$ – dragonmnl Jul 6 '15 at 17:23
  • $\begingroup$ The balance sheet is basically a snapshot as of a given day of how much your assets are worth vs. how much you owe to others. Importantly, it is the basis for assessing the solvency of a firm. In contrast, the income statement is a statement of revenues vs. expenses over a period (usually 3 months)— and the result, net income, can be negative without it meaning that a firm is necessarily insolvent, it just means that the firm spent more money in that period than it brought in. $\endgroup$ – dismalscience Jul 6 '15 at 17:40
  • $\begingroup$ @dragonmnl it's worth spending an hour to understanding the underlying double entry book keeping behind this. Equity is usually described as 'what is owed to the stock holders' which is partly true, and partly a fig leaf for 'it has to work that way to maintain the double entry book keeping equalities' $\endgroup$ – Lumi Jul 6 '15 at 17:52
  • $\begingroup$ Thank you for @Lumi for your contribution. Do you mind explaining in other words the sentence 'it has to work that way to maintain the double entry book keeping equalities' ? $\endgroup$ – dragonmnl Jul 6 '15 at 17:53
  • 1
    $\begingroup$ @dragonmnl Not at all. For example, double entry book keeping for deposit cash to buy shares in a company is [debit cash account, credit capital] - cash is an asset, capital is equity. Deconstructing - the (debit,credit) tuple of dbe requires that whatever matched the debit cash must be either a matching reduction in assets, or an increase in liabilities. So we have the fig leaf 'owed to the stock holders' to explain the increase in capital. $\endgroup$ – Lumi Jul 6 '15 at 18:21

Not the answer you're looking for? Browse other questions tagged or ask your own question.