Assets, liabilities and equity


The three assets that make up the balance sheet or better known as the balance sheet are assets, liabilities and equity.

These masses have a relationship of economic equilibrium that will help us to arrive at certain statements regarding economic analysis. We could study from the leverage that the company has, to analyze its solvency.

What are they for

They are used, as we have mentioned before, to make up the balance sheet of the company at a given time.

This financial statement gives us a quick and global image of how much resources have been allocated in the form of debt to obtain the assets we have. That is, how much they have had to borrow to be able to obtain the assets they already have.

As we can see, they have an economic and financial relationship. In addition, they also have an accounting relationship, since they are a fundamental pillar when carrying out accounting audits.

Relationships between assets, liabilities and equity

In the first place, the accounting relationship of these assets consists of complying with some principles and characteristics, such as reliability, usefulness and relevance. In addition, within the balance sheet, a distinction must be made between assets and liabilities in the short and long term or, in other words, current and non-current.

On the other hand, the most prominent accounting relationship is the balance sheet rule, in which adding net worth and liabilities (source of resources) must give the total available assets in the company. This simple equation can be given in three ways:

Second, the economic relationship they have can be demonstrated by operating leverage, which is the relationship of fixed and variable costs of a company. In this relationship we can say whether or not a company has an excess of fixed costs, since, if an optimal production is not reached that minimizes the costs per unit, it could enter into sustained losses over time.

Operating leverage is ultimately in the field of economic analysis, a point of equilibrium between incurring losses or gains, a kind of "zero point".

Third and last, when it comes to the financial relationship, checking the financial leverage or the origin of the resources generated could give us an idea of ​​the financial health of the company. The way in which this financial health is studied is by studying the origin of the income items and the profitability that is achieved with the financing obtained.

Examples of relationships between assets, liabilities and equity

  • Suppose we are going to focus first on the accounting relationship. Given assets and liabilities of a company worth 8 and 6 million respectively, what will be the value of the net worth?
  • On the other hand, if we refer to the economic relationship, having in a company fixed costs of € 100,000, and income of € 1,000 per unit sold. How many units will it take to avoid incurring losses if the variable costs are € 50 per unit?

1st) We propose the total costs, which are achieved by adding fixed costs (€ 100,000) plus the total variable costs (€ 50 x No. of units sold)

2nd) We take out the minimum units. Which would:

[100,000 + (50 x Z)] - [1,000 x Z] = 0 ► 100,000 + 50Z - 1,000Z = 0 ► 100,000 - 950Z = 0 ► Z = 100,000 / 950 = 105.26 units must be sold to avoid incurring losses.

3rd) Demonstration: [105.26unds x € 1,000] - [€ 100,000 + (€ 50 x 105.26unds)] = € 105,263.16 - € 105,263 = € 0.16 residual profit. Really from unit number 106 there are benefits, since in 105 units there are still losses

  • Finally, in the financial relationship if we calculate the financial leverage given some funds originating from equity € 200 plus a loan of € 800. What will be the financial leverage in this case?

1st) We calculate the total value of the investment, which would be: € 200 + € 800 = € 1,000

2nd) The financial leverage is calculated: 1: (1,000 / 200) ► 1: 5, that is to say, that for each invested unit we could multiply the profits by five by leveraging ourselves.

3rd) Real example: we buy shares for a value of € 1 each. We invested in a thousand units. Later these shares are worth € 2, then if we sell them: (€ 2 x 1,000unds) = € 2,000

Then the benefit will be: € 2,000 - € 800 - € 200 = € 1,000, since we have to subtract the loan by which we have been able to multiply our earnings and our own resources.

4th) Demonstration: As the leverage is 1: 5, the return on investment based on own resources has been multiplied by five: € 200 x 5 = € 1,000.

Statement of changes in equity

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