Accounting may not be fun, but it is crucial to understand value in companies.
The most important accounting equation: Assets must always equal Liabilities + Owner’s Equity
Balance Sheet Terms
- Asset – Items that a company uses to make money
- Lemons would be part of the lemonade stand’s assets, as well as the stand itself.
- Liability – Item that a company owes money on.
- A loan on the stand would be a liability, as well as anything else you may owe money on.
- Owner’s Equity – The owner’s share of assets in the company, also known as the company’s book value.
- This Lemonade Stand’s Book Value is $1,000
- Therefore, a higher book value entitles shareholders to more of the company’s assets.