Like Humans, Businesses do need balance! Part - I

If you haven't read the previous article, please read it here. In this article let us balance the business by creating it.

Remember, ALOE

Assets = Liabilities + Owner's Equity


What business own = Assets

What business owe = Equity

Before starting further, Owner equity (OE) is a broader term that includes Capital(Amount from the owner) and Retained Profits(Profit not taken out and reinvested again or held for future use).

So for starting a business,

Assets = Liabilities + Capital


Let us start a tea shop business with an amount Rs.1 lakh.

Therefore Capital = 1 lakh. Now I need to increase the assets by 1 lakh because the equation must be balanced. Therefore I increase the Cash in assets by 1 lakh

Next, I deposit Rs.50,000 in the bank. Now the only asset changes and not owner money.

I purchase furniture and equipment worth Rs.30000 and gave payment in cash. Here also only asset changes.

I bought milk from a milk supplier worth Rs.5000 and promised him to pay after 1 week through a bank cheque. This is called Credit purchase.

Note: It is 1.08 lakhs

Next, I purchase tea powder and pay it in cash for Rs.5000.Therefore decrease in cash and increase in another asset

Note: It is 1.08 lakhs

I pay the milkman through cheque.

I sold tea for Rs.6000.For this, I used Rs.3000 value of milk and Rs.1500 value of tea powder.

Therefore Profit = 6000 - 3000 -1500 = Rs.1500

This is a simple illustration on how to balance each transaction in businesses.We will complicate transactions in the next article.Stay tuned !

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Disclaimer: This article is me speaking to me through this blog! Short Intro: If you want to innovate in a particular field, you need to understand how things work in the first place. Innovation is a