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Balance sheets are documents that summarize the assets and liabilities of individuals, businesses, and marital estates. The primary and most basic accounting equation is: Assets = Liabilities + Equity. This equation can be restated as: Assets – Liabilities = Equity. That is, everything that an entity owns less everything that it owes equals its equity or net worth. For example, assume that a business has $20,000 in cash and real estate that it purchased for $80,000. Its total assets equal $100,000. Assume also that the business owes $60,000 on the real estate. The net worth of the business is $40,000 (100,000 – 60,000 = 40,000).
Balance sheets can appear in many different forms and in many different situations. However, the accounting equation will not change. Therefore, whether the balance sheet appears on a corporate tax return, or a loan application, or is used to illustrate the value of a marital estate in a divorce, the basic equation remains the same. The widespread use of balance sheets allows divorce investigators to use them without undue resistance. That is, most courts recognize the basic nature of balance sheets (if not the underlying theories) and will accept their use without considerable preparatory work (foundation) being presented. This general acceptance also allows investigators involved in the valuation of marital estates to present asset and liability information in balance sheet form.