The Accounting Equation: Assets = Liabilities + Owners’ Equity

Your business is built on the accounting equation:

Assets = Liabilities + Owners’ Equity

Assets are what your business owns.  Liabilities are what your business owes.  The difference between these what you – the owner – actually own: owner’s equity.

Suppose your business has $100,000 in assets and $30,000 in liabilities.  Then $70,000 of your company ($100,000 – $70,000) actually belongs to you.

balance sheet ok

balance sheet ok by Philippe Put, on Flickr

This is similar to computing net worth (also, assets minus liabilities).

Suppose that you personally own $100,000 in assets (car, house, boat, etc.) and owe $30,000 in debt.  Then your personal net worth is $70,000.

In either scenario, if liabilities exceed assets, then your owners’ equity or net worth could actually be negative.

The accounting equation is used to organize the balance sheet.

It is important to pay careful attention to the balance between liabilities and owners’ equity.  How much of your company has been financed with liabilities ($30,000) versus owners’ equity ($70,000)?  The more liabilities, the greater the financial risk.

12 thoughts on “The Accounting Equation: Assets = Liabilities + Owners’ Equity

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  3. that is so amazing iwould like to learn more of it and how to reconcile bank statements,know more about the spreadsheet and others related to accounts
    thanks really interested .God bless you.

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