Liabilities and net worth

Recall that the balance sheet equation states that net worth equals total assets minus total liabilities. Identifying assets and recording them is one of the first steps in balance sheet preparation. In some instances, assets are acquired with cash. In others, often large purchases, they are acquired by securing debt (for example, a bank loan or a department store charge). Regardless of how an asset is acquired, items purchased through financing have associated debt which is owed by you and must be repaid in the future.

These items, orliabilities   , are generally classified according to maturity. Check the category to which each of the items belong.

	Current Liability	Long-Term Liability
Outstanding principal on a second home, not due in the current year
A college-level educational loan
From origination, 36-month automobile loan
Monthly apartment rent
Water bill

Acquiring assets by taking on debt is one way you can accumulate assets. And many of these loans will fall into the category of long-term liabilities. But, in order to present them on the balance sheet correctly, the following must be known about the loan. Complete each statement as it applies to loans.

•	Loans: Regardless of the type of loan, only thelatest outstanding loan balance   is shown on the balance sheet.
•	The initial   loan balance is not what is currently owed but whatwas originally borrowed   .
•	Loan amount: The portion of a loan listed as a liability on the balance sheet is only theloan’s principal   .

Now that you have an understanding of assets and liabilities, an easy formula can determine your net worth. Again, recalling that net worth equals total assets minus total liabilities, complete the following statements.

•	Net worth   : The fair market value of assets owned less liabilities owed
•	Equity   : The amount left after selling assets and paying off all liabilities
•	Insolvency   : Net worth is less than zero