A Guide to Net Equity
Financial information is used by various people, for example, the managers, employees, investors and other stakeholders hence having financial information for your business is very important. For example, most investors when they want to evaluate your business to make a decision of investing or not investing in need, they look at your financial information therefore this information is important in influencing the decision about investing in your firm. Other people that value the financial information are creditors because they use the information to come to a decision of whether they can give you goods or their services on credit have not. The management, on the other hand, uses the financial information to make decisions concerning the business, for example, the decision where to invest more cash to bring more income and where to stop investing in because the investment is not bringing in any cash flows. Financial information is also a tool that can be used by the managers to assess the performance of their staffs.
Examples of different types of financial statements includes statement of changes in equity, balance sheet, statement of cash flows and the income statement. Reports are required to be done annually according to the international set principles such as the generally accepted accounting principles GAAP and international financial reporting standard IFRS. Balance sheets also called the statement of financial position accounts for the balance of the assets, liabilities, and equity. When you speak of assets, they can be classified as tangible or intangible assets which means you can convert them into cash when you need it, an example of the asset includes business vehicles, business premises, and real estate. Liabilities, on the other hand, means that something that you owe other people, for example, loan mortgages credit card debts, medical bills, student loans and utilities.
How to arrive at the equity in the balance sheet is you take the assets then subtract the liabilities. The results expected to get the net equity can be either negative or positive. Your net worth is negative if your liabilities exceed your assets which means you owe more than what you own. When your net worth is positive, that is after you have subtracted the abilities from the asset, it means that your athletics since the liabilities answer can be able to pay for the liabilities and still remain with something in your business.
Calculating the net equity of the business is very important, this is because it directs you on where you are going after clearly showing you the picture of where you stand financially as per the current financial statement report.Information can help you make important decisions, for example, to reduce the debt level while on the other hand, you are increasing your assets level. One of the best ways to reduce your debts is by stopping to invest cash in unnecessary things.