Corporate Finance: Calculating Assets - dummies

Corporate Finance: Calculating Assets

Part of Corporate Finance For Dummies Cheat Sheet (UK Edition)

Everything that makes up a company and everything a company owns, including the building, equipment, office supplies, brand value, land, trademarks and everything else, are considered assets. Generally speaking, when you found a company you start off with cash, which you then use to purchase other assets.

The total value of assets a company holds is equal to its total liabilities and total equity. Here’s the most fundamental equation in corporate finance:

Assets = Liabilities + Equity

The total amount of debt a company incurs goes into purchasing equipment and supplies, and so increasing debt through loans increases a company’s liabilities and total assets. Just as owners contribute their own funding to the company’s usage, the total amount of company equity increases along with assets.

Unlike liabilities, equity represents ownership in the company. So if a company owns £100,000 in assets and £50,000 is funded by bank loans, the owner still holds claim over £50,000 in assets even if the company goes bust, requiring the owner to return the other £50,000 in assets to the bank. For limited companies, the equity funding varies a bit, however, because the owners of a company are the shareholders; the equity funding of companies comes from the initial sale of shares, which exchanges shares of ownership for cash to be used in the company.