Three Interesting Questions On Finance!

Here is what I find something really interesting and weird in the world of finance. To start with, it is the relation between assets, debt and equity.

As you might be knowing, or if you are unaware better get to know this very basic equation,

Assets = Debt + Equity

Sure, it can be found replicated all over the internet and finance books start with this basic equation in their introductory chapters.

Please note this is applicable at the corporate level and not at your personal level. At a personal level, you do not have any equity. So, removing equity from the equation, it makes it

Assets = Debt

:P :P
If you can read it, that is the surest way to bankruptcy!! Buy your assets on debt! Jokes apart, the point that I am trying to drive home is that there is a large difference between corporate perspective and an individual's perspective. Sometimes, the things can be absolutely upside down as well.
At corporate level, debt increases financial leverage. At a personal level, having high debt absolutely reduces your leverage!

That is fine. But, as usual, my critical mind has a very trivial query.

Image Credit: themillionairesecret.net

Why is it that a company has to fund its assets by opting for debt or using money raised through equity? Both, debt as well as equity are not owned by the company! Can't the company use its own money for funding its assets???


I really cannot understand that! Why has the company got to use others' money for building/constructing/buying its assets? And there is one more from my side.



Earnings, Cash Surplus are a liability in balance sheet.


Ohh, the very basic fundamental of a business is to earn profits, right? Then, why is it that earnings or cash surplus is seen as a liability! For those not from a finance background, a balance sheet should have sum of assets equal to sum of liabilities. I honestly think that earnings, the very purpose of a company's creation, are a 'liability' just because some odd financial analyst found it an eureka moment discovering that the equation, sum of assets = sum of liabilities would always be solved by putting earnings in liability!

As I type this, my mind has got one more query.



Why is it that in a balance sheet, the sum of assets should always equal sum of liabilities?


Well, that is the rule of a balance sheet, you can get it confirmed by checking a balance sheet of any year of a company. Going by definition, an asset is what you 'own', whereas a liability is what you 'owe'. If I am an owner of a company, from my company's perspective, it is quite obvious that I want to 'own' more than what I 'owe'. That is why companies are built, to own more money and not equal it by owing to someone else!
So, why the hell do we equal it every time as if it is a mandate? It is time rules of the world changed and not follow blindly what some finance guru in the '60s found something to be an eureka moment!

On a serious note, please comment through the answers section if you know the answer for the questions that I have posed up in bold. Please, or else my critical mind won't be satisfied!