How the Balance Sheet Works: Assets, Liabilities, Equity

Introduction

At the end of its 2025 fiscal year, Costco owed its suppliers $19.8 billion and held $18.1 billion of merchandise inventory. Its suppliers, in other words, were financing every item on its shelves and more. That fact does not appear on the income statement or in any headline figure; it sits in two lines of the balance sheet, and it explains a large part of how Costco funds its growth.

The balance sheet is where questions like that are answered. It lists what a company owns, its assets, what it owes, its liabilities, and the residual belonging to shareholders, its equity, at the close of business on a single date. Where the income statement shows how a company performed over a period, the balance sheet shows how it is built: how much capital the business ties up, how that capital is financed, and how much flexibility the company has if conditions change.

Every balance sheet satisfies the identity that assets equal liabilities plus equity, the logic of which is explained in the accounting equation. Within that structure, US companies typically present items in order of liquidity: assets from the most liquid, cash, down to long-term assets such as property and goodwill, and liabilities from those due soonest down to long-term obligations, followed by equity.

The most important division is between current and noncurrent items. Under the Accounting Standards Codification (ASC) Topic 210, current assets are cash and assets expected to be converted into cash or used up within one year, or within the company's operating cycle if longer; current liabilities are obligations due within the same period. Everything else is noncurrent. Costco's fiscal 2025 annual report shows a balance sheet close to the textbook layout:

Working capital

Current assets minus current liabilities. Bankers more often use operating working capital, which excludes cash and debt and focuses on receivables, inventory, payables and accruals, because those balances move with the business and drive the cash it absorbs or releases.

What Counts as Current

The dividing line is usually twelve months, but the rule allows the operating cycle instead when it is longer: the time it takes to turn cash into inventory, inventory into sales and sales back into cash. A distiller ageing whisky for a decade, a homebuilder developing land over several years or an aircraft maker with long production runs can classify inventory as current even though it will not be sold within a year. Deferred tax assets and liabilities, by contrast, are always classified as noncurrent under US GAAP (ASC 740), regardless of when they will reverse. And debt is classified by when the lender can require repayment, not only by its scheduled maturity, so a loan that the lender can demand immediately because of a covenant breach can move into current liabilities overnight.

Costco's current liabilities nearly equal its current assets, and if cash and short-term investments are excluded, its operating current liabilities far exceed its operating current assets. That is negative working capital, and for Costco it is a sign of strength rather than stress: members pay at the register, suppliers are paid later, and annual membership fees arrive in advance.

Current Assets

Cash and cash equivalents are the most liquid assets: bank deposits and highly liquid investments with original maturities of three months or less. Cash that is legally restricted, for example held as collateral, is shown separately, a distinction covered in cash, cash equivalents and restricted cash. Short-term investments are securities with longer maturities that the company can still sell quickly.

Receivables are amounts customers owe for goods and services already delivered, shown net of an allowance for those not expected to be collected, as explained in accounts receivable and credit losses. Costco's receivables are small relative to its sales because most members pay immediately. Inventory is goods held for sale or in production, measured at cost and written down if its value falls below that cost. Other current assets gather prepaid expenses, such as insurance and rent paid in advance, and smaller items, covered in prepaid expenses and other current assets.

Noncurrent Assets

Below the current section sit the assets the company uses over many years. Property, plant and equipment is carried at cost less accumulated depreciation and any impairment; for Costco, the warehouses, land and equipment that make up most of its noncurrent assets. Right-of-use assets represent the company's right to use leased property and equipment, recorded under the lease standard (ASC 842) alongside a corresponding lease liability. Intangible assets and goodwill, which are small at Costco but dominant at companies built by acquisition, record purchased brands, customer relationships, technology and the premium paid in acquisitions over the fair value of identifiable net assets. Long-term investments, deferred tax assets and other items complete the side.

Goodwill and Intangible Assets

For companies built through acquisitions, goodwill and intangibles can be the largest assets on the balance sheet, sometimes exceeding total shareholders' equity. Goodwill is not amortized under US GAAP (ASC 350) for public companies; it stays on the balance sheet at its original amount until an impairment test shows that it has lost value, while acquired intangibles with finite lives, such as customer relationships, are amortized over their estimated lives. That has two consequences. Tangible book value, equity less goodwill and intangibles, can be negative even when reported equity is positive, and a large share of the asset base is exposed to impairment if acquired businesses underperform. Lenders often focus on tangible measures for exactly that reason.

Most of these assets are measured at historical cost, not current value, which is why the asset side of a balance sheet is a record of past spending rather than an estimate of what the business could be sold for. Which items are carried at cost and which at fair value is set out in historical cost vs fair value.

Current Liabilities

Accounts payable are amounts owed to suppliers for goods and services received. Accrued liabilities are expenses incurred but not yet paid or invoiced, such as wages, bonuses, interest and taxes; Costco shows accrued salaries and benefits and accrued member rewards separately. Deferred revenue, which Costco reports as deferred membership fees, is cash received for goods or services not yet delivered, a liability that turns into revenue over time. Payables and accruals together are covered in accounts payable and accrued liabilities. The current portion of long-term debt and of lease liabilities, the amounts due within twelve months, also sit here, sometimes within other current liabilities.

Noncurrent Liabilities

Long-term obligations include long-term debt, carried at amortized cost rather than market value, lease liabilities, deferred tax liabilities, pension and other postretirement obligations, and provisions such as asset retirement obligations. The split between current and noncurrent debt is more than presentation: debt moving into the current section signals a maturity the company must refinance or repay within a year, as discussed in debt on the balance sheet.

What the Liability Side Leaves Out

Some obligations never reach the balance sheet. Under ASC 450, a lawsuit is recorded as a liability only when a loss is probable and can be estimated; if it is merely reasonably possible, it is disclosed in the notes without an amount on the balance sheet. Purchase commitments, such as contracts to buy minimum volumes from suppliers, are disclosed rather than recorded. Guarantees of other parties' debt may carry only a small recorded liability relative to the exposure. These items sit in the commitments and contingencies note, which is why Costco's balance sheet shows a commitments and contingencies caption with no amount next to it, and why bankers read that note before concluding that a company's liabilities are fully captured. The rules for recording such obligations are covered in contingencies and litigation reserves.

Equity is the residual: assets minus liabilities. Its components record where that residual came from.

Shareholders' equity

The residual interest in a company's assets after deducting its liabilities, made up of capital contributed by shareholders, earnings retained in the business, accumulated other comprehensive income and, as a deduction, shares repurchased and held as treasury stock. It is measured by the accounts, not by the market.

Common stock and additional paid-in capital record the amounts shareholders contributed when shares were issued, plus the value of stock-based compensation. Retained earnings accumulate net income not paid out as dividends. Treasury stock, a negative balance at many companies, records shares the company has bought back and still holds. Accumulated other comprehensive income holds gains and losses that bypass net income, such as currency translation. And noncontrolling interests represent outside shareholders' stakes in subsidiaries the company consolidates.

Costco's equity of $29.2 billion at the end of fiscal 2025 consisted mostly of $22.7 billion of retained earnings and $8.3 billion of paid-in capital, reduced by $1.8 billion of accumulated other comprehensive loss. Its equity rose by about $5.5 billion in the year, mainly because net income of $8.1 billion far exceeded the $3.1 billion of dividends declared and shares repurchased. Each component, and why some companies report negative equity despite being profitable, is explained in shareholders' equity.

That is the core insight of the right-hand side of the balance sheet: it shows who bears the risk of the assets on the left. The more of the assets that are funded by debt, the smaller the cushion of equity that absorbs losses before lenders are affected, which is why leverage analysis starts here.

Bankers rarely read a balance sheet line by line from the top. They ask a small number of questions, each answered by specific lines:

Working Capital and Liquidity

The first question is about the cash cycle. Costco's balance sheet shows a business that collects from customers almost immediately and pays suppliers later, so growth releases cash rather than consuming it. A manufacturer selling on 60-day terms and holding months of inventory shows the opposite: every increase in sales ties up more cash in receivables and stock. The days measures bankers use to compare these cycles are explained in working capital drivers.

Costco's figures make the point concrete. Its operating current assets at the end of fiscal 2025, receivables of $3,203 million, inventory of $18,116 million and other current assets of $1,777 million, total $23,096 million. Its operating current liabilities, payables of $19,783 million, accrued salaries and benefits of $5,205 million, accrued member rewards of $2,677 million and deferred membership fees of $2,854 million, total $30,519 million. Operating working capital is therefore about $7.4 billion negative, before counting other current liabilities: suppliers, employees and members together finance the company's day-to-day operations.

Debt, Cash and the Bridge to Equity Value

The second and third questions feed the bridge from enterprise value to equity value. Costco's $14.2 billion of cash and $1.1 billion of short-term investments exceed its long-term debt of $5.7 billion, so on a simple measure it has net cash rather than net debt, before considering lease liabilities and any current portion of debt within other current liabilities. Which items count as debt and which as cash in that bridge is a valuation judgment, covered in the Valuation guide's article on the equity value to enterprise value bridge.

Capital Intensity and Acquisitions

The last questions concern how the business was built. Property, plant and equipment relative to revenue shows how much physical capital each dollar of sales requires, which drives capital expenditure and depreciation forecasts. Goodwill and acquired intangibles show how much of the asset base was bought rather than built, and how much is exposed to impairment if acquisitions disappoint.

The gap between recorded equity and what investors pay for a company is explored in book value vs market value.

A balance sheet describes one date, which creates two practical cautions. First, year-end dates are often chosen at a seasonal low point: many US retailers close their year after the holiday season, when inventory and payables are at their lowest, so a single year-end balance sheet can understate the working capital a business needs at its peak. Quarterly balance sheets, or the average of the opening and closing balances, give a better picture. Second, companies can manage the closing position, for example by delaying supplier payments or collecting receivables early in the last days of a period, a practice known as window dressing that flatters cash and working capital on that one date.

How the Balance Sheet Connects to the Other Statements

Every change between two balance sheets is explained somewhere else. Retained earnings rise by net income from the income statement and fall by dividends; cash changes by exactly the total of the cash flow statement; property, plant and equipment rises with capital expenditure and falls with depreciation and disposals; debt rises with borrowing and falls with repayments. Bankers formalize those links in roll-forwards, schedules that start with an opening balance, add and subtract the period's flows, and arrive at the closing balance. The most common ones are covered in the retained earnings roll-forward and PP&E and debt roll-forwards, and they are the backbone of every projected balance sheet.

Balance Sheets Across Industries

The layout above fits most operating companies, but some industries organize the balance sheet very differently. Banks do not split assets and liabilities into current and noncurrent: their assets are loans and securities, their largest liabilities are customer deposits, and their balance sheets are many times larger than their equity. Insurers hold large investment portfolios against reserves for future claims. Software companies carry little property but large deferred revenue balances from customers who pay in advance. Utilities carry enormous amounts of property and plant, financed by long-term debt and recovered through regulated rates. The primers in why accounting differs by industry introduce each layout.

Read this way, the balance sheet complements the other statements: the income statement says how profitable the business was, the cash flow statement how cash moved, and the balance sheet what the business owns, what it owes and how much room it has to absorb a downturn or fund an acquisition. How the three fit together is explained in the three financial statements.