Sunday, October 12, 2008

Balance sheet - current condition

"Nothing is right on the left side. Nothing is left on the right side."

This is the joke going around about balance sheets of many companies during these stressful financial times. Glad that people are able to find humor during these times.

You need to re-format the balance sheet for this to make sense. Left side includes assets and liabilities. Right side is shareholder equity. Balance sheet's equation is : Assets - Liabilities = Shareholder Equity. So per the above joke, nothing is right in assets and liabilities. Nothing is right on the left side - certainly true for assets, especially of banks. They can not value many assets on their balance sheet. They have many mortgages as assets on which people have hard time making monthly payments. Nothing is left on the right side. This means there is no shareholder equity left. Imagine holding onto useless shares of now defunct banks such Lehman Brothers. They may fetch some rare antique value after some time.


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