At the end of your Balance Sheet, it will say “Total Liabilities and Equity.”
This is Total Liabilities plus Total Equity. I recall long ago I said, “what do I care about these two added together?” Well, remember, the Balance Sheet IS Assets = Liabilities + Owners Equity. So this means that your total assets have to equal liabilities plus owners equity.
That’s why they call it a “Balance Sheet.” The two sides have to balance.
If your Balance Sheet is “growing,” it means that the number the two sides are balancing at is a higher number than the year or month before.
If Assets = Liabilities + Owner Equity, then Assets – Liabilities = Owners Equity also.
To create more Equity, we need to add to our assets while adding to our liabilities at a slower rate, or reduce our liabilities. If we take less money out of our company than the company earns on its Income Statement, that will do it too.
Do we want to increase our equity? If we want the company to be worth more, we do. In the end, if we sell our company, the buyer will look at your Balance Sheet to see the overall health of the business. At the same time, they don’t necessarily want your assets, they want the profits they produce.
Helpful?
Just wanted to say Thank you for these Business Info Blogs these past few days. I’m currently attending CSFM and this is actually the topic being covered. Very helpful….