ASSETS, LIABILITIES, AND OWNER’S EQUITY

M A N A G E M E N T I N F O R M A T I O N S Y S T E M S I I - F I N A N C I A L S

DEFINITION OF ASSETS

Assets are all things of value owned by an individual or business.

• Personal assets may include cash on hand, as well as savings and checking accounts, an automobile, and a home.

• Business assets may include similar items, as well as amounts due from customers called Accounts Receivables and a building owned, not rented.

EXAMPLES OF ASSETS

P E R S O N A L

• Cash on hand and in a savings or checking account

• Clothing

• Sporting equipment

• Jewelry

• Home owned, not rented

• Furniture and furnishings

B U S I N E S S

• Cash on hand and in checking accounts

• Building owned, not rented

• Equipment

• Supplies

• Delivery truck

• Land

DEFINITION OF LIABILITIES

Liabilities are the debts owned by an individual or business. Personal liabilities may include unpaid charge account balances, as

well as amounts owed on a home and/or automobile loan. Business liabilities may include similar items: amounts owed to

creditors, and are called Accounts Receivable.

EXAMPLES OF LIABILITIES

P E R S O N A L

Loan from parents to purchase a car

Balanced owed on school yearbook or class ring

Balance owed on home mortgage

Balance owed on installment purchases

Unpaid household bills – gas, electric, telephone

B U S I N E S S

Truck Loan

Unpaid Electric Bill

Mortgage on Building

DEFINITION OF OWNER’S EQUITY

Owner’s Equity is the net worth or capital of an individual or business. It refers to the amount of assets remaining after all liabilities are paid. To determine owner’s equity, total all assets, then deduct all liabilities. The difference is the owner’s equity.

THE FUNDAMENTAL BOOKKEEPING EQUATIONAssets = Liabilities + Owner’s Equity

Assets – Liabilities = Owner’s Equity

Assets – Owner’s Equity = Liabilities

BUSINESS TRANSACTIONS

A business always results in at least two changes in the fundamental bookkeeping equation. This is called double-entry bookkeeping. Since both sides of this equation must be equal, a transaction that changes total assets must also change either total liabilities or total owner’s equity.

Each item listed as either an asset, a liability, or an owner’s equity is referred to as an Account and is given a title.

These accounts must be referred to by their exact title.

EXAMPLES OF COMMONLY USED ACCOUNTSAssets Cash – cash on hand and in checking or savings accounts Accounts Receivable – amounts due from customers Supplies – office supplies Equipment – computers and other office machines Land – specifically for land used in the operations of the business Buildings – a building owned by the company

Liabilities Accounts Payable – amounts owed to creditors, generally due in 30 – 60 days Notes Payable – a bank loan Mortgage Payable – a long-term loan for the purchase of a building

Owner’s Equity Capital – the owner’s investment in the business