Accounting equation

Assets equal liabilities plus equity. Everything a business controls was funded by somebody, and that somebody is either a lender or an owner. The equation holds at every instant, in every set of accounts, in every country.

Read it as a sentence about funding. A company with ₹8,400 crore of assets, ₹5,100 crore of liabilities and ₹3,300 crore of equity is telling you that outsiders put up about three-fifths of what it controls and the owners the rest.

The identity also explains something that puzzles readers new to accounts: why a company can be profitable and insolvent at the same time. Profit adds to equity, but the assets that profit created may be receivables nobody has paid and inventory nobody wants, while the liabilities are real and dated. Rearranged, the equation says equity is assets minus liabilities, so equity falls the moment an asset is written down. A single impairment can therefore erase years of retained profit without any change in the business's trading.

The equation also explains why profit lands on the balance sheet. Profit that is not paid out raises retained earnings, which sits inside equity, and the asset side rises by the cash or receivable that the profit came in as. Both sides move together, which is why the sheet balances.

Every ratio about leverage is a way of reading this one line.

Assets, liabilities, equity. Nothing else fits.