Why only stockholder equity in the well-known accounting equation?

Question

Assets = liabilities + stockholders' equity. Isn't this an oversimplification? The (traded) company may have raised money through stock, but maybe it also issued bonds, has profit this year, etc. Likewise(?), stockholders' equity is used when trying to valuate a company... but I don't see many mentions of bonds, etc. Why the complete emphasis on equity?

Answer 1

On the balance sheet, there are only three major categories: Assets, Liabilities, and Shareholder's Equity. All balance sheet accounts fall into one of these three categories. Bonds, as you mentioned, fall into the Liability category. Bonds are money owed. Accrued (but not yet paid) interest on bonds also fall into the Liability category.

Because of dual-entry accounting, this equation will always balance...hence the name "Balance Sheet". If you sell a piece of equipment, Cash goes up, equipment goes down, but the A=L+E still balances. If you pay down a debt with cash: A goes down, but L also goes down....and the equation still balances.

Important note: The balance sheet only balances when the income statement accounts (sometimes called temporary accounts) are closed. Make a sale for services rendered Cash goes up (debited an Asset Account), Revenue goes up (credited a income statement account). One you close the books, assuming no other transaction, revenue would be zeroed out (a debit closing entry) and the net difference would go to Shareholders Equity - everything balances and accountants can- once again -sleep good at night.