Understanding the balance sheet can be a daunting task, but with the help of the classic game of Monopoly, it can be broken down into bite-sized chunks. In this article and corresponding video, we'll explore the basics of the balance sheet and how it relates to the game of Monopoly.
You'll want to watch the video to get the real experience...
Assets
At the beginning of the game, players are given a certain amount of cash. This cash is considered an asset, as it can be used to purchase real estate and other items. In Monopoly, these items are represented by spots on the board. The objective of the game is to accumulate enough money to win the game and out-compete other players. You do that by using your assets to invest in more cash flow-producing assets... the person who is best at this task wins.
You "finance" your assets with "capital"... equity & liabilities.
In other words:
ASSETS = CAPITAL...
Hence the name "Balance Sheet"
And that means:
ASSETS = LIABILITIES + EQUITY
Liabilities
Players also have liabilities, which are represented by cards from the community chest. You can think of liabilities as capital that you have to pay back.
For example, if a player has $150 in cash and pulls the Community Chest Card ordering them to pay $40 for street repairs, that means they have:
ASSETS: $150
CAPITAL: $150
And the Capital is broken out between:
LIABILITIES: $40 &
EQUITY: $110
Once the player pays the $40, they have a total of $110 in cash and $110 in equity capital.
Easy peasy.
Equity
Equity can be thought of (for our simple purposes here) as capital you don't have to pay back. It's YOUR claim on the assets of the business... not the bank's or a vendors. It's usually capital that your business has produced from retaining its profits, but can also come from investment... Don't get bogged down in that right now though.
In our Monopoly Game example, if our assets are $1,100 (cash: $150, real estate: $750, buildings: $200) and the liabilities are $40 (from our Community Chest Card). This leaves us with equity of $1,060.
If we ended the game at this point and you cashed you, you'd walk away with $1,060 in cash.
Make sense?
Conclusion
The balance sheet is a fundamental part of accounting and understanding how it works is essential for any business. By using the game of Monopoly as an example, we can see how assets, liabilities, and equity all work together to create a balance sheet.
Try out this little mental game next time you see a Monopoly Board and you'll realize quickly... it's not as complicated as some CPAs would like you to believe.