How to Read a Balance Sheet – Equity Section (Simple Format)
The equity section of the balance sheet equals assets minus liabilities. Traditionally the equity section is referred to as the net worth of the company. If you were to dispose of all the assets through a sale and pay off liabilities, the money left over would be available for distribution to the shareholders. The shareholders basically own the equity section of the balance sheet.
How is this section formatted? How do you read this section? How do you determine the value of a company by reading the equity section of the balance sheet?
Before continuing, please read: How to Read a Balance Sheet.
The equity section is composed of two significant areas or elements to determine value. The first or primary area is the stock available and sold. The second area relates to the activities of the company over a period of time, this is known as retained earnings.
When a single individual or a group of individuals get together to start a company, they generally agree on a stock based company. The first step is to
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