Assets and liabilities guide: Definitions


Capital investments and revenues increase owner’s equity, while expenses and owner withdrawals decrease owner’s equity. In a partnership, there are separate capital and drawing accounts for each partner. Property, plant, and equipment is the title given to long-lived assets the business uses to help generate revenue. Examples include land, natural resources such as timber or mineral reserves, buildings, production equipment, vehicles, and office furniture. With the exception of land, the cost of an asset in this category is allocated to expense over the asset’s estimated useful life. ABC Company sells $120,000 of its shares to investors.

shareholders equity

She plans on paying off the laptop in the near future, probably within the next 3 months. The $1000 she owes to her credit card company is a liability. This transaction reduces cash and income (i.e., retained earnings), as shown in the Case D illustration. If your accounting software is rounding to the nearest dollar or thousand dollars, the rounding function may result in a presentation that appears to be unbalanced. This is merely a rounding issue – there is not actually a flaw in the underlying accounting equation.

What Is the Accounting Equation?

To see if everything is, the totals are simply plugged in to the accounting equation. Once the math is done, if one side is equal to the other, then the accounts are balanced.

Each can be described by its impact on, liabilities, and equity. Note that no properly recorded transaction will upset the balance of the accounting equation. If Edelweiss Corporation purchased $30,000 of equipment, agreeing to pay for it later (i.e. taking out a loan), then the balance sheet would be further revised. The Case B illustration shows that equipment increased from $250,000 to $280,000, and loans payable increased from $125,000 to $155,000. As a result, both total assets and total liabilities increased by $30,000.

Liability accounts

He received a $400 insurance bill for his shop two days later. On a sheet, liabilities are listed according to the time when the obligation is due. To debit an account means to enter transactions on the left side of a T- account. It is a list of all ledger accounts which exist in a business and includes an identification number assigned to each account.

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