Let’s understand the ratio of your transactions under the fundamentals of business.
You have had a great business idea, implemented the perfect business plan, and are successfully running your business. You think all’s sorted but, do you know your business numbers? What I mean by the business numbers is that do you know your business’s assets and liabilities, and what is the net income and expense you are incurring in your business? If your answer is YES, then good for you, and if your answer is NO then, this article is for you.
All the numbers in your business fall into one of these 4 categories. Each transaction you do result in any of the below four Fundamentals of Business.
- Business assets
- Business Liabilities
An asset is a resource held by anybody which has monetary value.
Business assets comprise fixed and current assets owned by the businesses and the benefit for which will be received in the future years.
Liability is an obligation that one holds for the resources that they own. Business liabilities comprise of owner’s equity/ capital, borrowings, and other penalties that the business will have to pay in the future years.
Assets and liabilities form a part of your Balance Sheet. Balance Sheet shows financial position as on a particular date.
Income is the monetary benefit received in exchange for work.
Business income represents all the invoices raised to your clients, and this also includes other income earned by businesses like interest income, exchange gain, capital gain, etc.
Expense is the price to pay in exchange for a good/service. It’s an exciting area. Business expenses represent direct expenses incurred to earn the income and also the administrative costs and depreciation (non-cash expenses)
Income and expenses form part of your Profit and Loss Statement. It’s drawn for a particular period such as a month, quarter, or year.
Profit = Income – Expenses
Important: In businesses, you pay tax on PROFIT and not on INCOME.
Once you have track of your business numbers, you’ll not have to worry about the financial aspect of your business is in place. In case of further queries, reach out to me on Instagram – @soniadawar