Assets and Liabilities in Business

Assets

• Can be tangible (physical) or intangible
  • Tangible assets: buildings, land, equipment
  • Intangible assets: patents, trademarks, copyrights

Liabilities

• Represent assets owed to creditors
• Classified into current (short-term) and long-term liabilities
  • Current liabilities: employee payroll, invoices, utility, and supply expenses
  • Long-term liabilities: loans, mortgages, and deferred taxes

Owner's Equity

• Represents the value of assets belonging to the owner(s)
• Calculated by subtracting liabilities from assets
• Increases in owner's equity come from:
  • Investments by the owner
  • Revenue from business activities (sales, fees, renting, lending, commissions, etc.)
• Decreases in owner's equity come from:
  • Drawings (owner withdrawals from business accounts)
  • Expenses (e.g., capital expenditures, such as purchasing equipment or software)

Shareholders' Funds

• Refers to the amount of equity in a company belonging to shareholders
• Approximates the amount shareholders would receive if the business were to liquidate

Profit and Loss

• Profit: excess of revenue income over expenses
• Loss: excess of expenses over income
• Can be calculated for individual transactions or the business as a whole

Financial Analysis

• Process of evaluating businesses, projects, budgets, and financial transactions to determine performance and suitability
• Used to analyze stability, solvency, liquidity, and profitability before making a monetary investment

Trend Analysis

• Strategy used to make future predictions based on historical data
• Compares data points over time to identify uptrends, downtrends, and stagnation

Accounting Equation

• Basic principle of accounting and fundamental element of the balance sheet
• Equation: Assets = Liabilities + Owner's Equity
• Double-entry accounting system: every transaction affects at least two accounts