There are many accounting ratios and even more accounting management reports, so it can be a minefield to figure out what is really useful and what just wastes management (and clerical) time and money.
The underlying accounting equation is the called exactly that: the Accounting Equation and is the basis of all balance sheets.
Here it is: Assets = Liability + Equity.
Liability and Equity are what the business owes and assets are what the business owns. So why is what the business owes split into two sections?
Simple. Equity is what the business owes its owners (shareholders, partners and sole proprietors) whereas Liabilities are what the business owes its suppliers.
Assets are what the business owns itself. To understand that you need to remember that even a 1 person business always consists of two things: the owners and the business. They are separate things in the eyes of the law (or Inland Revenue).
But as a partner or sole-proprietor you are liable for the business' liabilities. This is why so many business owners opt to incorporate so they limit their liability to whatever they chose to invest in the business in the first place (and thus not lose your house over it).
We have outlined and explained all the other accounting ratios over on Accounting for Everyone, so take a look there and find out what your 'acid ratio' amongst many others.
The underlying accounting equation is the called exactly that: the Accounting Equation and is the basis of all balance sheets.
Here it is: Assets = Liability + Equity.
Liability and Equity are what the business owes and assets are what the business owns. So why is what the business owes split into two sections?
Simple. Equity is what the business owes its owners (shareholders, partners and sole proprietors) whereas Liabilities are what the business owes its suppliers.
Assets are what the business owns itself. To understand that you need to remember that even a 1 person business always consists of two things: the owners and the business. They are separate things in the eyes of the law (or Inland Revenue).
But as a partner or sole-proprietor you are liable for the business' liabilities. This is why so many business owners opt to incorporate so they limit their liability to whatever they chose to invest in the business in the first place (and thus not lose your house over it).
We have outlined and explained all the other accounting ratios over on Accounting for Everyone, so take a look there and find out what your 'acid ratio' amongst many others.
