Page 43 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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Debt
A/R A/R A/R Equity Debt
A/P
Inv. Cash A/R Debt Equity

Figure 2-6. The balance sheet balances!

As each transaction occurs and is recognized, the account-
ants refer to the chart of accounts to find the name and location
of the correct bucket or buckets. Then they add to each bucket
the appropriate data that represents the financial effect of that
transaction. When they add something to a bucket on the Asset
side, such as a new delivery truck, they must finish the job in
one of two ways to rebalance the scale. Either they will take
away something of equal value from a bucket on the Asset side,

Surprise! The Balance Sheet
Always Balances!
There is a relationship that is fundamental to financial
accounting: total assets must always equal the sum of total liabilities
and total stockholders’ equity.Thus, if a company is able to conduct its
financial affairs in such a way that it can add assets without adding an
equal amount of liabilities, it has effectively increased the relative
weight of the company’s ownership. Remember: the two sides must
always balance, according to the formula that is always true under the
rules of accounting:
Total Assets – Total Liabilities = Stockholders’ Equity
Now, the insight that I hope will be immediately obvious is this: the
simplest way to increase assets without increasing liabilities by an
equal and offsetting amount is to make a profit.