Understanding Equity, Liabilities, and Assets

Equity, Liabilities, and Assets

Equity

Equity is the residual interest in the assets of the company after deducting all of its liabilities. It primarily consists of funds provided by partners and undistributed profits in the form of reserves. The equity equation can be expressed as:

Net Worth = Assets - Liabilities

Liabilities

Liabilities comprise the totality of present obligations arising as a result of past events. The company expects the extinction of these obligations to cause an outflow of resources that can produce profits or earnings in the future. Liabilities are formed by:

• Current Liabilities: This consists of the set of obligations that the company must face in the short term.
• Non-Current Liabilities: This consists of the financing the company receives in the long term, representing payment obligations made by the company.

Assets

The elements that form the assets can be classified into two groups according to their duration of stay within the company:

• Current Assets: This is the combination of components whose function is to ensure the activity of the company. Their duration does not exceed the economic cycle.
• Non-Current Assets: This consists of all assets whose stay in the business is long-term.

PGC (General Accounting Plan)

This is structured in five parts:

1. Conceptual framework of accounting
2. Recording and valuation rules
3. Annual accounts
4. Chart of accounts
5. Accounting definitions and relations

Investment Plan

A detailed list of prior investments necessary for the implementation of the company, the permanent resources that are expected, and should cover a non-official paper of projected investments. Each company can customize it.

Self-Financing

• Maintaining Self-Financing: The imputation to the benefit of each financial year of the loss in value of fixed assets, called amortization.

• Self-Financing of Enrichment: This consists of profits not distributed to members, but that are retained in the company for new investment. Ultimately, the business grows by obtaining funds from asset sales.

Bonds or Obligations

These are fixed-income securities that involve an obligation by the borrower to pay regular, fixed income and repay the principal at maturity.

Commercial Paper

These are financial securities that pose a promise to pay, representing unsecured borrowing by the company.