The relation between assets, liabilities and owner’s
equity is: Assets = Liabilities + Owner’s Equity.
So
Owner’s equity= Assets – Liabilities.
It is therefore
essential to calculate the assets and subtract the liabilities to arrive at the value of
the owner’s equity.
An asset is defined as anything which
has a value and which is owned by the owner. Assets
include:
- Current assets: cash, inventory, raw
material, account
receivables
- Investments: stocks,
bonds, property, etc.
- Capital
assets: Land, buildings,
equipment
- Intangible assets.
Patents, copyrights and other non-material
assets
Liabilities
include:
- Current liabilities: short-term loans,
accounts payable and any other liability that has to be paid within a
year
- Long-term liabilities:
long-term loans, mortgages, etc. which can be paid over a period that extends beyond one
year
After calculating the assets and the
liabilities, subtract the liabilities from the assets, what you are left with is the
owner’s equity.
For more details check the links
provided.
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