You may have found yourself blankly staring at hundreds of pages of numbers and tables, when flipping to the back of the company's Annual Report. You know that those numbers are important to your investment decision, but you're not sure what they mean. This information is likely a company's balance sheet, which depicts the financial health of a company.The balance sheet, together with the Notes to Accounts, Income statement and Cash flow statement, make up the cornerstone of any company's financial statements.
How any increase/decrease in the asset side is offset by an equal increase / decrease of liability or owner's equity or vice versa.
All business transactions have an impact on the Balance Sheet. Business Transactions occur on a daily basis as a result of doing business.
These business transactions result in changes to the basic accounting equation.
Regardless of the nature of the specific transaction, the accounting equation must stay in balance at all times.
For instance, a business purchases a building for Rs 25 lakhs with a cash down payment of Rs 10 lakhs and a loan for the balance Rs 15 lakhs outstanding. More than two accounts are affected by this transaction. The asset “Building” increases by Rs 25 lakhs, the asset “Cash” decreases by Rs 10 lakhs, and the liability “Bank Loan” increases by Rs 15 lakhs. The net result is that both sides of the equation increase by Rs 15 lakhs, regardless of the transaction, the accounting equation must stay balanced.
For instance, a Company pays Rs 50000 on existing supplier invoices. This reduces the cash (Asset) account by Rs 50000 and reduces the accounts payable (Liability) account by the same amount. Thus, the asset and liability sides of the transaction are equal.
For instance, Issue of shares by the company. This leads to an increase in share capital (equity) and increase in cash (asset).
For instance, the business’ owner withdraws Rs 20000 for his personal use. The effect of this transaction is the asset “Cash” is decreased by Rs 20000 and the drawing decreases Owner’s Equity by the same amount.
For instance, the company purchases machinery in cash, it results in increase in asset (ie machinery) and decrease in cash.
For instance, bills Payable issued to Creditors.ie., This will reduce one liability (Creditors) on the one hand and increase another liability (Bills Payable) on the other hand.
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