Feminization Hypnosis: What Makes It Effective?

 

 The Accounting Equation

The accounting equation is a fundamental concept in the business world that shows the relationship between assets, liabilities, and equity. Assets are what the company owns and can be converted into cash. Liabilities are what the company owes to others, such as debt. Equity is what belongs to the owner of a company – typically called shareholders – when all debts owed by the business have been paid off. The accounting equation can be expressed as:

Assets = Liabilities + Equity

A common word for this equation is "balance sheet". This means that on one side of the balance sheet there should be an asset list and on other side there should be a liability list.

The accounting equation basically says that the business can only trade in assets; the rest of the assets will stand by themselves. The business has no obligation to use its assets for anything other than generating a profit for its owners. The owner of a businesses has to have an effective plan for making money and should set out expectations for its operations. Wealth is created by using the goods and services that are available in an efficient manner. This shows that balance sheet is not static but dynamic, meaning that it is guided by business needs, which change as they progress through time. It shows how there are different types of balance sheet items: financial, nonfinancial, permanent and temporary. (Kessinger, 2012)

The purpose of the accounting equation is to guide the business owner in managing the company's assets. Many new businesses are started with an investment of cash or money loaned by someone. This helps to get things off the ground before selling a product or service and generating revenue. The goal is to make sure that investors, who have loaned money, are paid back by when they are expected. Also, it is important to show second party investors that the venture will be successful based on past financial performance. Third party investors may be potential customers like banks who also want assurance that they will receive value for money if they give a loan or provide credit to a company. Another possible situation is that a company may have to borrow money from a bank but must have assets on hand to show the bank that they can repay the borrowed amount.

The accounting equation tells what assets a company should have on hand to protect their owners, to pay back investors and creditors, and to become stable in the future. The statement shows what the assets are that are being used by the business or owned by it if it has zero debt. A popular term for this is net assets, which is what's left over after debts and liabilities (bad debt) are subtracted from total assets.

There are two main types of assets: current and fixed. Fixed assets are those that are not currently being used by the company; they are available when the company needs them. They include: land, buildings, machinery and equipment. Current assets include cash and other assets that bring in money for the company. This could be money that is in the bank or it could be a product or service that is ready for sale but isn't immediately needed by the company.

The accounting equation shows an example of what would happen to a business if it borrowed 100 dollars from a bank. At first, the business would have $100 on hand after paying back their loan and not having any cash to invest into investments or in purchasing new property such as buildings or vehicles. The business would have enough money left over to make payroll at the end of the week and pay the owner. They would also have the ability to sell $10,000 worth of product in order to make back their initial investment, but not yet pay back investors and creditors. This shows that although a company might have great financial resources, they still need to show that they will be able to repay debt and other monetary obligations.

The example below is what happens when someone invests into a new business by buying share or stock. The company then pays back the loan and has $100 cash on hand. The company also purchased a $10,000 computer system to help run the business.

After one year, the business owner wants to expand and purchase property and new equipment. They are approved for a loan of $5,000 by their bank after providing all of their financial documents for review. Their total assets show that they have cash on hand ($100), property ($10,000) which are valued at cost less depreciation, a computer system worth $10,000 at cost, and truck showing as a value of $10,000 at price paid without depreciation.

This shows that the accounting equation can help a business stay on track financially and also keep investors and lenders informed.

The bottom line is that the company has $100 cash on hand, $5,000 in debt owed by the business, $20,000 in property less depreciation (the amount of property value used up or lost over time) which is equal to $5,000 in assets not counted because it is owned by the company. They have cash on hand of $100. In addition, they have a computer worth $5,000 and truck worth $10,000 plus office equipment valued at another $1,000 which totals to be of total assets of $36,100.

The accounting equation is used to calculate the two main financial ratios: debt ratio and interest coverage. The amount of debt that a company has currently and the ability to pay it back with its current assets will give insight into how much cash they will have at the end of the fiscal year. This is important because if they aren't able to repay their creditors at the end of their fiscal year, they will not be able to pay themselves or customers. The interest ratio shows how much was paid in interest and calculated by dividing total interest expense by total operating revenues. The debt ratio is calculated by dividing total liabilities by total assets. The only numbers taken into consideration are the current liabilities, which will include cash and accounts payable. In order to have an accurate calculation, all debts that the business will be paying in dollars shall be used. They do not include loans that have interest rates although some may have compound interest or are backed by a financial product such as bonds with fixed interest rates.

Debt Ratio is calculated by dividing current liabilities (a financial obligation of the company) by operating revenue (the money it brings in each year). For example, a company having total current liabilities of $30,000 and operating revenues of $30,000 would have a debt ratio of 1:1 or one. To calculate the interest ratio, total interest expense is divided by total operating revenues in this case 30,000 divided by 30,000 equals 0.3. This number is then multiplied by one hundred to find out how much money was spent on interest payments (0.03 multiplied by 100 equals 3.3).

Example: Company A has $10,500 in cash and $40,500 in debt owed to banks after paying back its bank loan. The company has an annual interest payment of $3/month ($33).

Conclusion: The company has $10,500 in cash ($40,500 - $33.00 debt) and $40,500 owed to banks. The company's interest coverage ratio is 1:1 or one.

The company has $10,500 in cash ($40,500 - $33.00 debt) and $40,000 owed to banks. The company's interest coverage ratio is 1:1 or one meaning that the business can make their monthly interest payments of $33 on current liabilities and still have enough money (in this case for salaried employees) left over to pay suppliers and investors at the end of the year.