How Do Assets and Equity Differ from Each Other?
The accounting terms like assets, liabilities, equity, accruals, deferrals and various other phrases associated with this field may not sound familiar to most people who have little exposure to accounting. However, if you own a business, you most probably need to deal with these terms and their related documents. You may choose to outsource the accounting-related tasks to an accounting firm in Johor Bahru if you are unable to deal with the financial statements. Nevertheless, as the business owner, it would be best if you can understand those statements thoroughly so that you know the financial performance of your business.
Before you start studying the financial statements that the accountants (Also see How Do the Accountants Reconcile the Accounts?) have prepared for you, you need to know some of the terms that you will typically see in those documents. In this article, the terms that we are going to discuss are assets and equity.
In a company, assets play a crucial role as they help in manufacturing the products as well as generating operating revenue for the business. Business owners will need these resources not only to run the business but also for the growth and development of their company. In the balance sheet, the sum of various line items will form the total assets that the company owns. Some of the line items are cash and cash equivalents, property, plant and equipment, accounts receivable, as well as other tangible and intangible assets.
Equity, on the other hand, refers to what the business owners or the shareholders have invested in the company. When one has decided to start running a business, he needs resources to buy machinery, property, raw materials and so on so that he can produce the products and start running the business. Business owners can obtain funds from two different sources, one of them is by getting funds from loans, and another source is equity. Equity comprises of retained earnings, contributed capital, preferred shares and so on. Thus, equity is the portion of funds that is funded by the company’s owners.
Both assets and equity form part of the accounting (Also see Inherent Risks in Accounting) equation and they play a crucial role in the financial status of a business. Although they seem to be quite similar in some ways, they have some significant differences that all business owners (Also see When Will Business Owners Issue Debit Notes?) need to know. Assets are the resources that a company requires for it to run the business operations, whereas the equity is the source of fund that the company needs to buy the assets. Besides, fixed assets in a company will be netted with the amount of accumulated depreciation so that business owners get to know the net fixed assets that his company owns. As against, equity will not be influenced by depreciation.
In conclusion, assets and equities are two essential elements on the balance sheet. They also make up the accounting equation which states that the sum of liabilities and equity of an entity should be equal to the total assets. Furthermore, the line items of assets and equity have also joined the financial statements together.