Lets consider a start up company which has initial capital investment/liabilities of £2.5 million (equity £0.5million and a start up loan of £2million). It uses the entire £2.5mil to buy assets (lets say £2.0mil) and cover P&L expenses (£0.5mil). Given that a portion of the initial funds has been absorbed in expenses, wouldn't the total assets always be less than total liabilities especially when any operating profits are added to liabilities bringing the total liabilities to now say £3mil?
why liabilities will always exceed assets
- Thread starter trisha
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In your example, there are .5mil of expenses and no revenue. So, that amount is part of equity (not "added to liabilities") and we now have Assets of 2.0, liabilities of 2.0 mil and equity of zero (initial capital of .5 and negative .5 from operating losses) . So at this point the total assets are NOT less than the total liabilities. Anyway, "liabilities will always exceed assets" is not a given, else you have a deficit in equity.
Assets always equal liabilities + stockholders' equity; it is the fundamental accounting equation. Every transaction that occurs is reflected by this equation. Whether assets were actually sacrificed in order to pay expenses or liabilities were created, the decrease in assets or increase in liabilities is offset by the reduction in stockholders' equity (expenses lower equity). So, in your case, assets would decrease by the .5, as would stockholders' equity (Assets of 2, Liabilities of 2, and equity of 0).