ASSETS = LIABILITIES + OWNER’S EQUITY
(A = L + OE)
The equation can be expanded thus:
|
FIXED ASSETS + CURRENT ASSETS = |
LONG-TERM LIAIBITLITIES + CURRENT LIABILITIES + OWNERS EQUITY |
(FA + CA = LTL + CL + OE)
Current Assets comprise cash, inventories & debtors. Thus the equation, can be further expanded, thus:
Cash + INV + DR + FA = LTL + CL + OE => Cash = (LTL + CL + OE) – (INV + DR + FA)
Accordingly any increase in Long-term Liabilities, Current Liabilities (including Creditors) and/or Owner’s Equity will generate cash and increase a company’s cash position. Any decrease in those areas will reduce the cash position.
Correspondingly, any increase in Inventories, Debtors and/or Fixed Assets will consume cash and therefore reduce a company’s cash position. Any decrease in those areas will produce cash and increase the cash position.
|
|
$ |
$ |
|
Sales |
|
12,000 |
|
Less: Cost
of Sales |
|
|
|
Raw
Materials |
(3,600) |
|
|
Direct
Labour |
(1,200) |
|
|
Equipment
Depreciation |
(1,000) |
|
|
|
|
(5,800) |
|
Gross Profit |
|
6,200 |
|
Less: Selling
& Administration |
|
|
|
Rent |
(2,000) |
|
|
Staff
Wages |
(600) |
|
|
Petrol |
(300) |
|
|
Vehicle
Depreciation |
(1,000) |
|
|
|
|
(3,900) |
|
Net Profit |
|
2,300 |
|
|
$ |
$ |
$ |
|
Fixed Assets |
|
|
|
|
Equipment
(less $1,000 depreciation) |
|
9,000 |
|
|
Car
(less $1,000 depreciation) |
|
5,000 |
|
|
|
|
|
14,000 |
|
Current Assets |
|
|
|
|
Raw
Materials Inventory |
2,000 |
|
|
|
Finished
Goods Inventory |
3,200 |
|
|
|
Debtors |
4,500 |
|
|
|
Cash |
7,600 |
|
|
|
|
|
17,300 |
|
|
Less: Current
Liabilities |
|
|
|
|
Creditors |
|
(4,000) |
|
|
Net Current Assets |
|
13,300 |
|
|
Net Assets of the Company |
|
|
27,300 |
|
|
|
|
|
|
Represented by: |
|
|
|
|
Starting
Capital |
|
25,000 |
|
|
Retained
earnings |
|
2,300 |
|
|
Owner’s Equity |
|
|
27,300 |