1. How do you differentiate between assets and liabilities on the balance sheet? 2. What is...

1. How do you differentiate between assets and liabilities on the balance sheet?

2. What is the basic Balance Sheet equation and why is it important?

Expert Solution

1. Assets: These are the properties owned by the business. In other words anything which can enable the firm to get cash or an economic benefit in the future can be defined as an asset. Examples of Assets are Stock, Accounts Receivables, Cash, Furniture etc.

Liabilities: It represents amount owed by a business. It represents the obligations on the organization that needs to be met out by the organization in the future. Examples includes: Creditors, Notes Payable, Debt etc.

2. Basic Balance Sheet Equation is shown below:

Assets = Liabilities + Capital

We know for every transaction in accounting there is a debit or a credit. This accounting equation helps to ensure that the entries are properly recorded in the respective accounts and by doing so the balance sheet at the end of the year tallies.

Further it also helps us in identifying how much debt the company has on its balance sheet, since too much debt on a company's balance sheet as compared to the assets is not a good sign for the investors who are looking to invest in the company.

Feel free to ask in case of any query relating to this question

jeff jeffy answered 3 months ago

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