Every business transaction has an effect on the financial position of the company. The following items measures company’s financial position;
- Assets
- Liabilities
- Owner’s Equity
The basic accounting equation tells us the best way to understand that what are the links between these three amounts.
The accounting equation for a sole proprietor or a company is;
Assets = Liabilities + Owner’s Equity /Stockholder’s Equity
Assets are resources of the company-things the company owns. Examples include; Accounts receivable, cash, prepaid expenses, inventory, land, building, equipment, investments and good will etc. The accounting equation explains that a number of assets must be equal to the combined amount of liabilities plus owner’s equity.
Liabilities are obligations of the company-amounts or things the company owes.Examples include; Accounts payable, interest payable, salaries and wages payable and income taxes payable etc.
Shareholder’sEquity is the amount which is left over after deducting liabilities from the assets.
Owner's equity also includes the amounts invested by the owners into the company plus cumulative income of the company that has not be distributed or withdrawn by the owners.
If a company keeps accurate records, then the accounting equation always remain balance. Balanced means left must always be equal to the right side of the equation.
All the business transactions affect two company accounts at the same time, therefore, maintenance of balance is important.
Here are some examples:
When a company takes a loan from the bank, its assets will increase and liabilities will also increase the same amount. Similarly, when a company purchases an equipment, its one asset will increase and on the hand, one will decrease.
This is because every transaction affects two or more accounts. Companies keep track of all the transactions by recording them in accounts of the company’s ledger.
In ledger, every account is named as to its type; asset, liability, owner’s equity, expense, revenue, gain or loss account.
Balance Sheet and Income Statement
The balance sheet, sometimes also known as financial position, reflects the accounting equation. It reports the company’s assets, liabilities and stakeholder’s (or owner’s) equity at a specific point in time. The accounting equation shows that a company’s total amount of assets is equal to the total amount of liabilities plus stockholder’s (or owner’s) equity.
The Income statement, one of the components of the financial statement, reports revenue, expenses and resulting net income of the company. As the Balance sheet is concerned with one point in time and the income statement covers a specific period of time of time.
The income statement explains part of the change in equity of owners or stockholders during the time interval between two balance sheets
Do you need an Accountant?
There are many things you can do yourself, however by hiring an accountant or outsourcing it to the firm who provides accountancy services for the limited company, you can rely on a qualified, specialist and comprehensive service in all relevant areas of accountancy, tax and other financial issues.
For your ease, in London, many accountancy firms are offering accountancy services UK for small business which is a far superior level of service.
Specialists’ accountants have a greater degree of knowledge to the areas that are specifically concerned with you. Chartered accountants run majority firms, who actively use the code of ethics along with the professional qualification, which gives you some degree of comfort.
Further it is always useful to get recommendations from specialists.