Accounting – 1.2 The accounting equation | e-Consult

Assets are resources owned by a business that have future economic value. They are things the business controls and expects to benefit from. Examples of assets include: cash (money in the bank), inventory (goods held for sale), property, plant, and equipment (PPE) such as buildings, machinery, and vehicles, and accounts receivable (money owed to the business by customers). Assets are listed on the balance sheet.

Liabilities represent what a business owes to others – these are obligations to external parties. Examples include: accounts payable (money owed to suppliers), loans (money borrowed from a bank), salaries payable (wages owed to employees), and deferred tax liabilities. Liabilities are also listed on the balance sheet.

Owner's Equity (also known as shareholders' equity or capital) represents the owners' stake in the business. It's the residual interest in the assets after deducting liabilities. It's essentially what would be left for the owners if all the assets were sold and all the liabilities were paid off. Owner's equity is calculated as: Owner's Equity = Assets - Liabilities. Examples include: capital contributed by owners, and retained earnings (profits that have been kept in the business rather than distributed to owners).

The accounting equation illustrates the relationship between these three elements: Assets = Liabilities + Owner's Equity. This equation must always balance.