Assets, liabilities, and equity explained - Where they go on a balance sheet

Published Friday 26 September 2025

Table of contents

• What goes on a balance sheet?
• What is the accounting equation?
• Where assets, liabilities, and equity go on a balance sheet
• How assets, liabilities, and equity affect each other
• How to record assets, liabilities, and equity
• Track assets, liabilities, and equity with Xero
• FAQs on assets, liabilities, and equity

Key takeaways

• Assets are what you own, liabilities are what you owe, and equity is the difference.
• Assets, liabilities, and equity appear on your balance sheet, and are fundamental to the accounting equation, which expresses the value of your business in accounting terms.
• Understanding how these three elements work together can help you make better financial decisions for your business.
• You can record your assets, liabilities, and equity yourself, or use accounting software to help you.
• Xero helps you track your assets, liabilities, and equity, and creates and updates your balance sheet for you.

What goes on a balance sheet?

A balance sheet is a financial statement that shows your business's financial position by outlining what it owns, what it owes, and its value (aka equity). Check your balance sheet regularly to see how your business is doing – this accounting statement can also help you make financial decisions about your business.

The Small Business Administration has more details on why balance sheets are important.

To understand a balance sheet, you first need to know about assets, liabilities, and equities.

Assets

Assets are anything of value your company owns – like bank accounts, real estate, equipment, and inventory. They fall into two categories:.

• Short-term assets include cash and assets you can convert to cash fairly quickly, such as cash equivalents like stocks and bonds, and tangible property like inventory.
• Long-term assets are those you can’t convert to cash quickly and that you might use for several years, such as vehicles or land.

Liabilities

Liabilities are your business debts.

• Long-term debts include mortgages, business loans, and car notes
• Short-term debts include sales tax or payroll taxes due.

Equity

Equity in accounting is the value of your business. If you sold all your assets and paid off your debts (your liabilities), equity is what's left. It's called owner's equity by sole proprietorships and general partnerships, while corporations call it shareholder's equity.

What is the accounting equation

Assets, liabilities, and equity all come together in what’s called the accounting equation – the fundamental measure of what your business is worth.

You can express the accounting equation in several ways.

• Assets - liabilities = equity
• Equity + liabilities = assets
• Assets - equity = liabilities

These three numbers are balanced in relation to each other – that's why it's called a balance sheet. As long as you know two of the numbers, you can calculate the other number.

Here’s a quick example.

• Say a business has $20,000 in inventory, a $350,000 building, and a vehicle worth $40,000. That brings its total assets to $410,000.
• It owes $300,000 on a mortgage, $30,000 on a vehicle loan, and $5,000 in sales tax, making its total liabilities $335,000.

Plug those numbers into the accounting equation, and you’ll see that the business has $75,000 in equity.

• Assets ($410,000) - liabilities ($335,000) = equity ($75,000)

The most common approach in balance sheet accounting is to subtract liabilities from assets to get equity.

Where assets, liabilities, and equity go on a balance sheet

Most accounting software sets up balance sheets in the same way – assets at the top, liabilities in the middle, and equity at the bottom.

All these balance sheet accounts have multiple subcategories. Assets and liabilities are categorized into short- and long-term subcategories, and within those categories, you may see multiple assets.

Small businesses tend to list assets individually, while larger businesses with more assets typically group similar assets together – for example, a single line item instead of individual stocks or inventory items on the balance sheet.

There are several different types of equity accounts. Sole props and partnerships may just have an owner or partner equity account on the balance sheet, while corporations with different types of shareholders can have several categories.

Here's what you might see on a balance sheet:

• Partner or owner's equity – the equity in a sole prop or general partnership
• Common stock – shareholders’ investment in a corporation, in which each shareholder has voting rights according to the size of their stake in the company's assets – a shareholder with 30% of a company's common stock owns 30% of the company's equity and their vote counts for 30%
• Preferred stock – stock owned by owners or shareholders who do not have voting rights in the company but are guaranteed dividends (payouts based on profits)
• Contributed surplus or additional paid in capital – amounts owners or shareholders put into the company over the par value of the stock
• Retained earnings – profits that weren't paid out in dividends (to corporate shareholders) or as owner's draws (to sole props or partnerships)

The asset, liability, and equity sections of the balance sheet each show a total. These totals are the numbers that fit into the accounting equation. For instance, if the business's assets are $3 million and its liabilities are $2 million, its equity is $1 million.

How assets, liabilities, and equity affect each other

To show you how assets, liabilities, and equity work together, let's track how taking out a loan, buying equipment, making a loan payment, and claiming depreciation affect a balance sheet.

We'll start with a company that has $20,000 in the bank, no other assets, and no debts. Its balance sheet looks like this:

Assets

• Bank account $20,000
• Total assets $20,000

Liabilities

• Total liabilities $0

Equity

• Owner's equity $20,000
• Total equity $20,000

If the company borrows $100,000 to buy equipment, the lender deposits $100,000 in its bank account. To reconcile the transaction in their accounting software, they create a loan account – let's call it bank loan A.

Now the balance sheet looks like this:

Assets

• Bank account $120,000
• Total assets $120,000

Liabilities

• Bank loan A $100,000
• Total liabilities $100,000

Equity

• Owner's equity $20,000
• Total equity $20,000

As you can see, the business has the exact same amount of equity, even though their bank account has a lot more money in it. Here’s what happens when they use the borrowed funds to buy their equipment:

Assets

• Bank account $20,000
• Large equipment A $100,000
• Total assets $120,000

Liabilities

• Bank loan A $100,000
• Total liabilities $100,000

Equity

• Owner's equity $20,000
• Total equity $20,000

At this point, the details and totals in assets vs liabilities have changed – but the equity is the same. Let's see how that changes as the company pays down its loan. Say the company makes a $3000 payment – $2000 to the principal of the loan and $1000 in interest.

That payment reduces the value of the bank account by $3000. The $2000 principal payment reduces the amount owed by $2000. The interest expense of $1000 doesn't appear on the balance sheet – but it reduces the owner's equity account by $1000.

Assets

• Bank account $17,000
• Large equipment A $100,000
• Total assets $117,000

Liabilities

• Bank loan A $98,000
• Total liabilities $98,000

Equity

• Owner's equity $19,000
• Total equity $19,000

Accounting for depreciation

Assets typically don't retain their value – that new equipment probably isn't worth as much after a year. To account for that, you claim depreciation as a contra asset, often labeled as accumulated depreciation on the balance sheet.

Let's say the business claims $20,000 in depreciation. That appears in the asset section as a negative amount and ultimately reduces the owner's equity.

Assets

• Bank account $17,000
• Large equipment A $100,000
• Accumulated depreciation ($20,000)
• Total assets $97,000

Liabilities

• Bank loan $98,000
• Total liabilities

Equity

• Owner's equity ($1000)
• Total equity ($1000)

This equipment purchase pushed the company into negative equity. But in real life, the company would have used the equipment to generate more sales, which hopefully would have grown its bank account and increased its equity.

How to record assets, liabilities, and equity

At a very basic level, you can record assets and liabilities in a spreadsheet or a notebook, and then use the accounting equation to determine your equity. Check out Score’s balance sheet template you can use if you want to take a DIY approach.

But to be strictly accurate, you need to use double entry bookkeeping – most bookkeeping software is designed to simplify that process.

Double-entry bookkeeping

In double-entry bookkeeping, every account has its own journal – that includes asset, liability, and equity accounts, but it also includes expense and income accounts. Every time you record a transaction, you make two entries – a double entry’.

Here are some examples.

• Say you spend $1000 on inventory using your bank account. That transaction decreases the value of your bank account (an asset) and increases the value of your inventory (also an asset). Your assets have shifted, but their total value has stayed the same and your balance sheet is balanced.
• But what if you spend $1000 on a utility bill? That transaction decreases your bank account by $1000 and creates a $1000 expense. The expense doesn't appear on your balance sheet, but to keep the balance sheet balanced you decrease your owner’s equity account by $1000.
• Say you use your personal savings to pay for $10,000 of equipment. You create an asset account for the equipment,which bumps up your total assets by $10,000. Since you put in the money yourself, you add $10,000 to your owner equity account, which increases your total equity. Again, the transaction is recorded, and the balance sheet is balanced.

Accounting software makes bookkeeping easier

Accounting software does a lot of this for you. Just create accounts for all your loans and assets. Then, as you record transactions (such as loan payments or depreciation), the software updates your balance sheet in the background automatically.

Track your assets, liabilities, and equity with Xero

Xero helps you know what your business is worth – vital information for borrowing money and attracting investors – and even just for internal decisions.

Get one month free and easily keep track of your assets, liabilities, and equity.

FAQs on assets, liabilities, and equity

Here are some common questions about assets, liabilities, and equity and how they appear on a balance sheet.

What are examples of assets and liabilities in accounting?

Assets include bank accounts, equipment, and inventory. Examples of liabilities include loans or any funds that you owe to other entities, such as sales or payroll tax.

Why is the accounting equation important?

The accounting equation lets you see the value in your business once you account for all your assets and liabilities. That information is useful when you need to borrow money to expand your business, to market your business to investors, and can make major business decisions..

Do I have to include a balance sheet with my tax return?

Yes, but only if you're a corporation, or an LLC or partnership that has chosen to be taxed as a partnership. Sole props, general partnerships, and LLCs that haven't elected to be taxed as corporations don't need to include a balance sheet.