Accounting equation

Assets = Liabilities + Owners equity

ASSETS = Anything in the business that has a value and can be converted into cash. Comes in two flavours:

  1. Current Assets: Items that are convertible to cash in less than one year (a.k.a. Liquid assets) Cash, Tools, Inventory, Office Equipment, Accounts receivable.
  2. Fixed Assets: Items that take more than one year to convert into cash. Custom made equipment, Real Estate

LIABILITIES = Anything that the enterprise owes, to other parties involved in a business transaction, with the enterprise. They also come in two flavours:

  1. Current Liabilities: Those outstanding debts that are to be repaid within one year. Salaries, short term loans, Accounts payable
  2. Fixed Liabilities: debts to be repaid in more than one year. Company Cars, leaseholds, mortgages

OWNERS EQUITY = The Net worth of the business (after all deductions have been made) ASSETS – LIABILITIES = OWNERS EQUITY

  1. Paid In Capital: Money that people invest i a company. A business that offers to sell shares of stocks to investors in a secondary offering (“go public for the first time”), investors provide the paid in capital to the companies when they pay money to buy stocks
  2. Retained earnings: A company’s earnings that are held within the company. The money is often reinvested, not paid out to shareholders as dividends

See balance sheet


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