The relationship between assets & liabilities and the relationship between revenue & expenses are things you will have to understand in order to be able to run a successful business.
Let us explain it to you in detail: –
• Assets versus Liabilities – Accounting standards identify an asset as something your firm owns that can provide you with some future economic benefits. Cash accounts receivable, inventory, land, buildings, equipment – these are all assets! Liabilities are your firm’s obligations – either money that has to be paid or services that have to be performed. A successful organization has more assets than liabilities. In other words, it has the ‘resources’ to fulfill its obligations. Whereas, a company whose liabilities surpass its assets is almost certainly in a mess.
• Balance Sheet – Your organization’s assets & liabilities are reported on its ‘balance sheet.’ Assets are penned down on one side of the sheet, while liabilities on the other. The difference between the two is the owners’ equity in the organization – what the owner would take away if he sold off all the assets and paid off all the debts. The ‘balance’ is the fact that the ‘total’ value of the organization’s assets always synchronizes with the total value of its liabilities, plus the owner’s total equity. This can be well calculated by an efficient accountant in Melbourne.
• Revenue Versus Expenses – Revenue is the money your organization earns from the business. For case in point, if you owned an ice-cream stand, revenue is what you obtain from customers who pay money for ice cream. On the other hand, expenses are the costs you bring upon yourself to generate that revenue. The ingredients you purchase to prepare the ice cream, the wages you shell out to your employees, the rent & utilities you pay for the stand – these are all expenses. A company’s revenue has to exceed its expenses to be able to earn a profit.
• Income Statement – Revenue & expenses appear on your organization’s income statement. Total revenue minus total expenses equal your ‘operating profit’ – the profit your firm made in totality. Revenue & expenses are distinct from gains and losses, which represent cash made or lost on the sale of the organization’s assets or other activities outside the daily operations of the firm. For case in point, when an ice-cream stand sells an ice-cream cone, the money it gets is ‘revenue.’ However, when that stand sells a piece of equipment it no longer requires, any profit it acquires from the sale is a ‘gain’. That is because the organization is in business to sell ice creams, not equipment. Gains & losses appear on the ‘income statement’ separate from revenue & expenses.