The accounting equation

Assets: anything that is owned by or owed to a business organization, e.g., machinery, trade receivables, etc. There are two types: current assets and non-current assets.

• Current assets: short-term assets that only stay within the business / can be turned into cash (liquidated) within 1 year, e.g., inventory, trade receivables, etc.

• Non-current assets: long-term assets that stay within the business for over a year, e.g., machinery.

  Liabilities: anything that is owed by the business. E.g., trade payables, loans, etc.

• Current liabilities: short-term liabilities that only exist/ will be repaid within a year, e.g., bank overdraft, trade payables, etc.

• Non-current liabilities: long-term liabilities that will take longer than 1 year to be repaid, e.g., long-term loans, debentures, etc.

Owner’s Equity:

Also known as capital, it is, in simple terms, anything the owner has invested in the business. It is anything that the business owes to the owner of the business, as they are treated as two separate entities.

EQUATION: 

OWNER’S EQUITY + LIABILITIES = ASSETS

This equation’s direct application can be visible in the statement of financial position, where the total assets equal the sum of the capital and liabilities.

Written by Caroline