Theme: The basic accounting equation: Analysis of transactions

The Accounting Equation: Assets = Liabilities + Equity
In this explanation of the ABCs of Accounting, we will discuss assets, liabilities, and equity, including the Owner’s Equity Formula, the Statement of Owner’s Equity, the Balance Sheet Formula, and other helpful equations. Fundamentally, accounting comes down to a simple equation. Assets = Liabilities + Equity. It seems simple enough but let’s really break it down. What do these terms mean in relation to your business and how can they help you make sense of the books?
Assets
Ever heard the phrase “Tom is an asset to the company”? The meaning is clear. Tom is a good worker that brings value to the organization. In accounting terms, an asset is any item of value to the company: tangible (property, inventory, equipment) or intangible (patents, trademarks, copyrights, accounts receivable and even reputation).
Here’s how to calculate total assets:

1. 
   Consider what assets you have, including any current, fixed, and even intangible resources that could be of financial value to your business. For example:
   
   1. 
      Current assets (assets that can be converted into cash within one year or less) such as cash, outstanding invoices owed to you, and inventory that can be sold
      
   2. 
      Fixed assets (things of value that are harder to convert into cash) such as real estate, heavy machinery, furniture, vehicles, etc.
      
   3. 
      Long-term investments, like stocks and bonds
      
   4. 
      Intangible assets that have value, such as your company’s brand, reputation, social media following, and your company’s or employees’ status as influencers
      
2. 
   Make a balance sheet—a financial statement that shows a company’s assets, liabilities and equity. (See “Assets = Liabilities + Equity” below.) To create this balance sheet, you can use a spreadsheet software like Excel, but you should consider using accounting software for such important statements.
   

Liabilities
Meet Michael. Tom’s friend. Unlike Tom, Michael is a liability to the company. Being an inherently negative term, Michael is not thrilled with this description.
Under the umbrella of accounting, liabilities refer to a company’s debts or financially-measurable obligations. Liability is also classified as current or long-term.
Current liabilities are obligations that the company should settle one year or less. They consist, predominantly, of short-term debt repayments, payments to suppliers, and monthly operational costs (rent, electricity, accruals) that are known in advance. And finally, current liabilities are typically paid with Current assets.
Long-term liabilities, on the other hand, include debt such as mortgages or loans used to purchase fixed assets. These are paid off over years instead of months.
Why is all this important?
Because a company’s working capital is the difference between its current assets and liabilities. And that’s important!