The basic accounting equation brings the balance to the balance sheet. Essentially it depicts where the funding for assets came from.
Assets = Liabilities + Equity
For example, a new homeowner buys a house for $100,000. $10,000 is paid with cash (equity) and $90,000 is a loan from the bank (liabilities). $100,000house = $10,000cash + $90,000loan.
The equation can be expanded by breaking down equity into contributed capital (owner’s equity) and revenue.
A variance in accounting terminology is the difference between an expected value and an actual value.
It is important for a company to look at variances in their processes and conduct variance investigation and analysis to see why the variance occured. If the variance is positive the company can then note why it was positive and try and repeat that action. If the variance is negative the company can see why it was negative and try and correct their mistake(s).
An asset in business terms is anything of value owned by somebody or a company. Cash is an asset. Securities, such as stocks and bonds, are assets. Land and buildings are assets. Equipment and invetory are assets. I’m sure you are getting the picture. An asset does not even need to be tangible, there are intangible assets. These include things such as copywrights and goodwill. Intangible assets are explained in further detail here.
Assets can be divided into quite a few categories.
There are Current Assets:
Long Term Investments
Fixed Assets: All of these are used in the operation of the business and are therefore fixed assets instead of simply assets that are an investment. In accounting they are written off each year against profits from their depreciation over their life, this is referred to as accumulated depreciation in the balance sheet. In managerial accounting fixed assets are called capital assets.
Intangible Assets:
Sorry, this turnover isn’t apple turnover. Turnover in this case measures the amount of dollars of sales that result from the amount of the average operating assets. This is a useful measure to observe as it shows how efficiently assets are being used to generate sales dollars. Increasing the turnover ratio is what many firms will attempt to do to maximize profits, and investors will look for businesses with higher turnover ratios.
The turnover ratio is calculated as follows:
Turnover = Sales / Average operatng assets
Average operating assets is the average of the assets used in an operation over a period. Once the period begins the value of the operating assets is then called beginning assets. Through the period assets may be added, or subtracted. For example, if you make donuts and you buy a new creamer so that you can get more cream into one donut, the price of the creamer is added to the value of your operating assets. On the flip side if you sell a creamer because you have too many and the proceeds from that sale do not go back into the operation, then the value of the creamer is subtracted from the value of your operating assets. At the end of the period the operating assets are called ending assets.
The calculation for finding the average operating assets is as follows:
Average operating assets = (Beginning assets + Ending assets)/2
Knowing the value of average operating assets is valuble for computing such things as turnover and ROI.
