Exploring the elements of the accounting equation is a crucial step toward developing a sustainable approach for using the available resources and introducing the principles of cost-efficient management of an organization’s assets (Warren, Reeve, & Duchac, 2017). Herein lies the importance of learning about the definition of assets, liabilities, and equity as the crucial constituents of the equation. However, to create a sustainable method of arranging and using the corporate resources, one must not only be able to identify the essential components of the accounting equation but also study the unique characteristics of the target market. thus, the factors that will contribute to the further development of the corporate financial strategy, including the approach toward reducing possible expenses, the framework for managing possible risks, and the design of the appropriate exist strategies in case of the further failure to introduce the company successfully to the target market, can be identified (Gaudecker, 2014).
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The existing classification of the concepts listed above, in turn, allows for an in-depth insight into the nature thereof. Consequently, a more elaborate framework for allocating the available resources can be designed. For example, by drawing a line between fixed and current assets, one can explore the opportunities for developing a specific strategy for spending and allocating the available resources (Onut, 2017).
The exploration of the types and forms of liabilities, in turn, sheds light on the issue of possible expenditures and the risks to which a company may be exposed in the realm of the global market. The classification based on the maturity of liabilities, in turn, helps design a sustainable approach toward managing the corporate expenses (Poledna & Thurner, 2016). Furthermore, the connection between the length of a particular liability and the company’s operating cycle can be drawn. The specified step will allow designing the approach toward managing the corporate liabilities based on the principles of responsibility, at the same time making sure that the available corporate assets are allocated appropriately and that every domain of the firm’s operations is funded accordingly. For instance, it may be required to focus on financing R&D-related and marketing processes within the organization while the current liabilities mature. Thus, the premises for a reasonable allocation of the company’s financial assets are created. Finally, the concept of equity needs to be addressed as a crucial component of the accounting equation (Juarez, 2015).
Therefore, Simini’s statement concerning the use of a balance sheet as a tool for identifying both problems and opportunities seems quite legitimate. Since a balance sheet not only incorporates the elements mentioned above, i.e., provides a detailed account of the available assets, corporate liabilities, and the company’s equity, but also shows the connection between the specified elements, it serves as the foundation for making financial forecasts and defining both problem areas and the issues that require further exploration for gaining benefits in the future, such as possible investment options. The information that a balance sheet gives offers extensive opportunities for designing an elaborate plan for the next steps to be taken in the target market (Bobryshev, Uryadova, Lyubenkova, Yakovenko, & Alekseeva, 2014).
When considering the benefits of using equity, liabilities, and assets as the indicators of a company’s opportunity for succeeding in the target economic environment, one must admit that the specified components of the accounting equation and a comprehensive balance sheet allow taking both internal and external factors into account. Thus, a company is prepared for the threats that it may face in the context of the target economic environment. Consequently, the foundation for success is built.
Bobryshev, A. N., Uryadova, T. N., Lyubenkova, E. P., Yakovenko, V. S., & Alekseeva, O. A. (2014). Analytical and management approaches to modeling of the accounting balance sheet. Life Science Journal, 11(8), 502-506.
Gaudecker, H. M. V. (2015). How does household portfolio diversification vary with financial literacy and financial advice? The Journal of Finance, 70(2), 489-507.
Juárez, F. (2015). The accounting equation inequality: A set theory approach. Global Journal of Business Research, 9(3), 97-104.
Onut, M. (2017). Economic consequences of fair value reclassifications of financial assets according to IAS 39: An emprical analysis. Berlin, Germany: GRIN Verlag.
Poledna, S., & Thurner, S. (2016). Elimination of systemic risk in financial networks by means of a systemic risk transaction tax. Quantitative Finance, 16(10), 1599-1613.
Warren, C. S., Reeve, J. M., & Duchac, J. (2017). Accounting (27th ed.). Boston, MA: Cengage Learning.