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So the basic equation is "assets = capital + liabilities". Capital+liabilities explain how your assets are "covered". Either you owe someone for the assets (li
by 0x0 10y ago
So the basic equation is "assets = capital + liabilities".
Capital+liabilities explain how your assets are "covered". Either you owe someone for the assets (liabilities), or you own the assets yourself (capital).
Sometimes it's easier to think of this as
"assets - liabilities = capital".
I.e. whatever is left after considering what you owe, you own.
If you have some cash (an asset), then you need to also list it either as a liability or capital, simply because you must always be able to answer "where did this cash from? did we borrow it (liability), or do we own it (capital)?"
- rubberstamp 10y agoThanks for explaining it well. I was caught up in the parent post's example and tried to equate it with the equation given in it. How would the parent's example look like in balance sheet? I looked at small business example given in wikipedia, but failed at writing down parents example into assets and liabilities balance sheet. (https://en.wikipedia.org/wiki/Balance_sheet https://en.wikipedia.org/wiki/Balance_sheet).