There are three primary sections in a balance sheet, which are assets, liabilities and shareholder equity. If we understand the functions of each section and how they relate to each other, we can better understand the financial and economic condition of a business and also know its capital structure, especially when it comes to more advance financial ratios. The accounting equation provides us with an easy way to learn the relationship between these components. The accounting equation for a corporation is:
If we understand the functions of each section and how they relate to each other, we can better understand the financial and economic condition of a business and also know its capital structure. The accounting equation provides us with an easy way to learn the relationship between these components. The accounting equation for a corporation is:
Assets = Liabilities + Stockholder equity
Asset (What you own)
Generally, anything that has value is an asset. For a business, assets listed on the balance sheet are buildings, computers, desks, lamps, patents and signage. Some companies need more assets to run compared to others, which affects the return on capital employed calculations. We know that the amount of assets must be the same as the combined amount of liabilities and stockholder equity based on the accounting equation.
Liabilities (What you owe to others)
Liabilities are the opposite of assets, which includes obligations and debts owed by the company. Some examples of liabilities are company credit card debt, electricity bills and water bills, monthly lease payments on the property and other outflows.
Shareholder Equity (The difference between Assets and Liabilities)
Shareholder equity, which is known as “book value”, is the equivalent to the accounting net worth. The book value is the remains when all the liabilities are subtracted from all the assets. The book value is very useful in giving information about the economic condition of the company.
Any bookkeeping services in Johor Bahru must ensure the balance of every balance sheet. The combined value of all the liabilities and shareholder equity should amount to the total value of all assets. For instance, if a fruit stall has RM50 in assets and RM40 in liabilities, the shareholder equity is RM10. The assets are RM50, the liabilities combined with shareholder equity = RM50 [RM40 + RM10]. Based on the double entry accounting, a simple method to keep in mind of this basic formula is
A (Assets) = L (Liabilities) + E (Equity)
Now, we have learned the three vital components on the balance sheet. Using assets, liabilities and shareholder equity, we can measure the financial position of a company. You can learn more about the accounting of your business by engaging an accounting firm in Johor Bahru.