Explain what the * represents in the accounting equation.

Assets * Liabilities = Capital

Not only are the owners of a business interested in what their business is worth, they are also interested in how much their business is earning for them. They are interested in the profitability of their business.

We cannot tell whether a business is profitable by analysing a balance sheet. After all, it can only tell us what the business has in the way of assets and liabilities at one particular time. It may help to think of a balance sheet as being rather like a photograph—it only captures the moment when the balance sheet was prepared.

However, over a financial year it is likely that a balance sheet will change. Assets may increase or decrease. Liabilities may increase or decrease. These changes will take place due to business activity.