When speaking with your accountant, I'm sure you've heard the words "assets", "liabilities" and "equity" repeated frequently. But what do these words really mean? And how do they impact your business?
Let me help by defining each word and then we can discuss their importance.
- Assets are what your business owns or controls.
- Liabilities are what your business owes to other parties.
- Equity is the difference between assets and liabilities.
In other words, when you take all your assets and subtract all your liabilities you get the true value of your business.
So, what’s the big deal?
Well- for starters- assets, liabilities, and equity make up the most important equation in all of accounting.
The Accounting Equation.
Assets = Liability+ Equity
The goal is to keep the equation in balance. Assets on the left side must stay in balance with the liabilities and equity on the right side. If the equation is out of balance, that's a sure sign that an error was made.
Assets, liabilities, and equity are also the components of a balance sheet. A balance sheet is one of the three common financial statements every business owner analyzes to make financial decisions. It provides a clear picture of the financial health of your business, which is not only useful to you as the owner, but to investors and shareholders who may want a deeper look at your company's day-to-day operations.
Without a clear understanding of assets, liabilities, and equities, it will be difficult to master your business finances. However, now that you are armed with this essential information, you will be able to understand the elements that make up your balance sheet and know exactly where your business stands.
- Kat McGowan