This tutorial is going to explain you all about how the balance sheet elements are formed and formula to calculate capital is formed. Story is named is “The story of capital” and explains the concept of assets, liabilities and capital.
Imagine.. A man wanted to start up a business on his own. Lets say he decided to set up a book shop. This how he financed his start up expenses.
He had some savings of $ 100000 and using that he fixtures worth $ 50000 and $ 50000 worth of goods to be resold.
He arranges his domestic garage to be used as the shop floor and transfer it to the business. This premise is worth approximately $ 300000
Now lets start recording these transactions. When we look at a balance sheet we know both sides of the balance sheet has to tally. Therefore, at this stage:
Assets = Capital
$50000 [fixtures] + $50000 [goods to be resold] + $300000 [premises] = $100000 + $ 300000 [Capital]
$50000 [fixtures] + $50000 [goods to be resold] + $300000 [premises] = $ 400000 [Capital]
$400000 [assets] = $ 400000 [capital]
Now lets say the owner wanted to buy a vehicle for $ 100000 for the business use and he decides to take a bank loan to finance it. Now lets record this in the formula.
Assets = Capital + Liability
$50000 [fixtures] + $50000 [goods to be resold] + $300000 [premises] + $100000 [vehicle]= $ 400000 [Capital] + $100000 [bank loan]
$500000 [assets] = $ 400000 [capital] + $ 100000 [liabilities]
Based on these fundamentals lets build balance sheet formula and the way to find capital.
Assets = capital + liabilities
Capital = Assets – Liabilities [which is also called as net assets of a firm]