Explains Assets, Liabilities, and Equity in the UAE Accounting Equation
This ABC of Accounting Equation explains assets, liabilities, and Equity, including equity formulas, equity statements, balance sheet formulas, and other useful equations. Basically, accounting boils down to a simple equation.
Assets = Liabilities + Equity.
It sounds pretty simple, but let’s break it down. What do these terms mean for your business, and how do they help you understand your book?
Financial Assets
Ever heard the phrase “Tom is an asset to the company”? It makes sense. Tom is a great employee who brings value to the organization. From an accounting point of view, an asset is an object of value to a company.
Tangible (property, inventory, equipment) or intangible (patents, trademarks, copyrights, claims, even reputation).
To Calculate Total Wealth:
Think about what assets you have, including all current fixed and even intangible resources that could have financial value to your business. For example:
- Current assets (assets that can be converted into cash within one year) such as cash, outstanding bills, and inventory available for sale
- Fixed assets such as real estate, heavy machinery, furniture, and vehicles (valuables that are difficult to convert into cash)
- Long-term investments such as stocks and bonds
- Valuable intangible assets such as your brand, reputation, number of social media followers, influencer status of your company, and employees
Prepare a balance sheet (a financial statement showing the company’s assets, liabilities, and Equity). (See “Assets = Liabilities + Net Assets” below.) This balance sheet can be created using spreadsheet software such as Excel, but please consider using accounting software for important calculations.
Liabilities
Meet Michael. Tom’s friend. Unlike Tom, Michael is responsible for the company. This is an inherently negative term, so Michael isn’t thrilled with the explanation.
In accounting terms, liabilities refer to the liabilities or financially measurable obligations of a company. Liabilities are also classified as short-term or long-term. Current liabilities are obligations that a company must settle within one year. These primarily consist of short-term debt repayments, supplier payments, and known monthly operating costs (rent, electricity, accounts payable). Finally, current liabilities are usually settled with current assets.
Fixed liabilities, on the other hand, include liabilities such as mortgages and loans used to purchase fixed assets. These are repaid over years, not months.
Why Is This Important?
A company’s working capital is the difference between current assets and liabilities. And it matters!
Formulas For Equity And Owners Equity
Equity refers to the owner’s value in an asset or group of assets. Just as homeowners accumulate capital by paying off their mortgages, capital is defined as the portion of the total assets of a business that can be claimed by the owner (whether sole proprietorship or partnership). Will be Shares, also known as net worth, capital, and capital. This stock becomes an asset because the homeowner can borrow it when they need it. It can be calculated by subtracting all liabilities from total assets.
(Equity = Assets – Liabilities).
In accounting terms, the total capital value of a company is the sum of the owner’s Equity, which is the value of the assets invested by the owner, and the gross income earned and retained by the company.
Consider a company with total assets worth $1,000. I have a debt of $900. In this example, the owner’s asset is worth $100, which is the company’s capital.
Assets = Liabilities + Equity
Now that we understand each of these terms, let’s look at the UAE Accounting Equation again. The basic UAE Accounting Equation is the basis of the double-entry bookkeeping system common in bookkeeping, where every financial transaction has equal and opposite effects on at least two different accounts. This basic UAE Accounting Equation balances a company’s balance sheet and states that the company’s total assets equal the sum of its liabilities and Equity. Also known as the balance sheet equation, this Formula states that what a company owns (assets) is bought by its liabilities (liabilities) or what its owners invest in (Equity).
If a company wants to manufacture auto parts, it has to buy Machine X, which costs $1000. After borrowing $400 from the bank, he spent another $600 on the machine. His net worth is currently $1000, which is the sum of his liabilities ($400) and Equity ($600). It is important to pay close attention to the balance of debt and Equity. A company’s financial risk increases when liabilities fund its assets. This is sometimes called corporate leverage.
Owner’s Equity Statement
A statement of Equity (also called a statement of changes in Equity) provides an overview of how a company’s Equity has changed during a specified period as a result of contributions, withdrawals, net gains, or losses. Net profit is revenue minus expenses. Owner contributions and incomes lead to an increase in capital, while withdrawals and expenditures lead to a decrease in capital.
The Formula For Net Change
If you want to calculate the change in value from the previous value of an asset, sales, or even stock price over a period of time, the net change formula makes it easy.
Net Change Formula = Current Period Value – Prior Period Value
You can also calculate this change as a percentage using the following Formula:
Net change (%) = [(current period – previous period) / previous period] X 100
If you find it difficult to answer these questions, read our article on UAE Accounting Equations to learn more.
FAQ
What Is The UAE Accounting Equation?
The equations that describe the assets and the claims on those assets are called UAE Accounting Equations. The Formula is Assets = Liabilities + Equity.
What is Capital?
An owner’s ownership interest in a company is known as the owner’s Equity or Equity. It is equal to total assets minus total liabilities.
If total assets are $50,000 and total liabilities are $20,000, what is the owner’s Equity?
The capital is $30,000 ($50,000 – $20,000).
If the total liabilities are $40,000 and the owner’s Equity is $60,000, what will be the total assets?
Total net worth is $100,000 ($40,000 + $60,000).
If the total assets are $20,000 and the owner’s Equity is $15,000, what is the total liability?
The company has total liabilities of US$5,000 (US$20,000-15,000).
A $12,000 item sells for $15,000. How does this exchange influence the bookkeeping condition?
The transaction increases cash by $15,000, reduces goods by $12,000, and increases the owner’s Equity by $3,000.
A $15,000 item sells for $12,000. How does this exchange influence the bookkeeping equation?
The transaction increases cash by $12,000, reduces goods by $15,000, and reduces the owner’s Equity by $3,000.
Which financial statements are closely related to the UAE Accounting Equation and why? Hide answers
Balance, both UAE Accounting Equations and balance sheets, though in different formats, convey information about assets, liabilities, and Equity (that is, information related to the financial condition of a company).
What is the difference between debt and Equity?
Both debt and Equity are obligations of the company. The difference is that debt is a company’s obligation to parties other than the owner (i.e., creditors), whereas Equity is a company’s obligation to the owner.
How does fixed asset depreciation affect the UAE Accounting Equation?
On the asset side of the equation, when depreciation on a fixed asset is recognized or offset, the fixed asset is reduced by the depreciation amount. On the other side of the equation, the owner’s Equity is reduced by the same amount.