Assets are everything that the company owns. Liabilities are everything that the company owes. Here are more detailed examples of assets and liabilities:
Assets
Found on the left side of the balance sheet, assets are listed from top to bottom in the order of their liquidity. Liquidity is the ease with which they can be converted into cash. Current assets may be converted to cash within a year and are listed first at the top of the list. This is followed by fixed assets and assets that are not readily convertible to cash within a year.
Here is a list of the most common examples of assets:
- cash and cash-equivalents like Treasury bills and short-term investments
- accounts receivables
- inventory
- investments
- PPE ( property, plant and equipment )
- vehicles
- furniture
- patents or intangible assets
Liabilities
On the right side of the balance sheet is the list of liabilities. Liability is defined as money that the company owes to other businesses. Here are the examples of liabilities a company may be showing on their balance sheets:
- bank loans
- interest payables
- wages payables
- dividends payables
- accounts payables
- pensions for employees
The owner's equity is calculated by adding up all the business assets and deducting all the liabilities. The difference between assets and liabilities is calculated using the owner's equity formula:
To unlock this lesson you must be a Study.com Member.
Create your account
The following examples will show how to find owner's equity with step-by-step solutions:
Example 1:
SDCouture Art has assets of $133,000 and liabilities of $93,000. What is the owner's equity?
Solution:
- Step 1. Identify the given information: total assets: = $133,000 and total liabilities = $93,000
- Step 2. Use the formula: Owner's Equity = Assets - Liabilities = $133,000 - $93,000
- Step 3. Calculate the owner's equity = $40,000
SDCouture Art has owner's equity of $40,000.
Example 2:
Norman wants to know his equity in the business, so he gets his balance sheet for the previous year. The balance sheet shows that the factory premises are valued at $2 million, the plant equipment is valued at $1 million, and inventory is valued at $700,000. The balance sheet also shows that Norman owes DCBank $400,000, owes creditors $900,000, and the wages and salaries are $600,000.
Solution:
- Step 1. Identify the assets: Factory premises, plant equipment, and inventory
- Step 2. Identify the liabilities: bank loan, creditors, wages, and salaries
- Step 3. Determine the sum of all assets: $2 million + $1 million +$700,000 = $3.7 million
- Step 4. Determine the sum of all liabilities: $400,000 + $900,000 + $600,000 = $1.9 million
- Step 5. Use the formula: Owner's Equity = Assets - Liabilities = $3.7 million - $1.9 million = $1.8 million
The owner's equity for Norman's business = $1.8 million
Total liabilities are calculated by rearranging the owner's equity formula:
Total Liabilities = Total Assets - Owner's Equity
Example 3:
Alex's company has total assets of $600,000 and owner's equity of $230,000. Calculate Alex's company's total liabilities.
Solution:
- Step 1. Identify the given information: total assets = $600,000 and owner's equity = $230,000
- Step 2. Use the formula: Liabilities = Assets - Owner's Equity
- Step 3. Calculate the total liabilities = $600,000 - $230,000 = $370,000
Alex's company's total liabilities = $370,000
Total assets may also be calculated by rearranging the owner's equity equation:
Total Assets = Owner's Equity + Total Liabilities
Example 4:
Paul owns a software business. He has owner's equity of $125,000 and total liabilities of $95,000. Calculate the total assets of Paul's software business.
Solution:
- Step 1. Identify the given information: total liabilities = $95,000 and owner's equity = $125,000
- Step 2. Use the formula: Assets = Owner's Equity + Liabilities
- Step 3. Calculate the total assets = $125,000 + $95,000 = $220,000
Total assets for Paul's software business = $220,000.
To unlock this lesson you must be a Study.com Member.
Create your account
Assets are everything that a company owns. _Liabilities_ are everything the company owes to banks and creditors plus wages and salaries. A company can calculate its owner's equity by deducting its liabilities from its assets. Owner's equity gives an overall picture of the company's financial stability at a particular time. Information about a company's assets, liabilities, and owner's equity can be found in a type of financial statement called a _balance sheet_.
The owner's equity equation is Owner's Equity = Assets - Liabilities.
A positive owner's equity means the company has enough assets to cover its liabilities. A negative owner's equity means the assets cannot cover the debts and could indicate an impending bankruptcy. Knowing the owner's equity helps a company assess its financial status and make decisions regarding growth and expansion. Analyzing the total owner's equity over time also helps determine if the company is gaining or losing value.
To unlock this lesson you must be a Study.com Member.
Create your account
Video Transcript
Owner's Equity: A Real-Life Scenario
Sue has recently opened her own store, called Sue's Seashells. As the shop is based right on the beach, Sue stays busy with locals and tourists all year. In fact, she's so busy that she's been contemplating opening a second store a few miles north of her existing location.
When Sue goes to the bank to discuss financing, the loan officer asks about her owner's equity in Sue's Seashells. Luckily, Sue brought her balance sheet, which is a document that details a company's assets and liabilities. The balance sheet shows her owner's equity. Let's take a deeper look at owner's equity and how Sue was able to calculate it.
Sue is the sole owner of Sue's Seashells. Therefore, all of its assets and liabilities are also Sue's. The difference between the shop's assets and liabilities is called owner's equity. As a formula, it looks like this:
Owner's Equity = Assets - Liabilities
It's important to understand that owner's equity changes with the assets and liabilities of the company. For example, if Sue sells $25,000 of seashells to one customer, her assets increase by the $25,000. Her owner's equity increases, too. The balance sheet, which shows the owner's equity, is prepared for a specific point in time. For instance, a balance sheet may be prepared every December 31. As a result, it would show the assets, liabilities, and owner's equity as of December 31.
Balance Sheets: Examples
Sue is right on the middle of Florida's busy season, the winter. She has snowbirds from all across the northern states flying in to buy her seashells. Since it is January, she prepares a balance sheet listing her assets, liabilities, and owner's equity as of December 31 of the previous year.
The simplified version of the balance sheet looks like this:
Assets: $378,000
Liabilities: $78,000
What is her owner's equity? Using our formula (Owner's Equity = Assets - Liabilities) we see that $378,000 - $78,000 = $300,000.
It was just a year ago that the simplified balance sheet for Sue's Seashells looked like this:
Assets: $178,000
Liabilities: $78,000
What was her owner's equity then? Once again, using our formula (Owner's Equity = Assets - Liabilities) we find that $178,000 - $78,000 = $100,000.
What can we discover from the different balance sheets? For one thing, Sue's owner's equity has increased drastically. Without seeing all of the details, it is hard to tell what drove this increase. But we can also see that the assets increased by $200,000. Perhaps Sue's Seashells had a large increase in their checking or savings account balance. It's also possible that Sue bought equipment or the value of other assets the shop owns, such as the building, increased in value.
What about the liabilities, which were unchanged? It's possible that this number fluctuated throughout the year. Keep in mind that we are looking at balance sheets for two very specific points in time: December 31 for two years in a row.
The bank saw that Sue's owner's equity was increasing throughout time and felt she was eligible for the loan to open another location.
Lesson Summary
Let's review. Owner's equity is used to explain the difference between a company's assets and liabilities. The formula for owner's equity is: Owner's Equity = Assets - Liabilities.
Assets, liabilities, and subsequently the owner's equity can be derived from a balance sheet, which shows these items at a specific point in time. Business owners and other entities, such as banks, can look at a balance sheet and owner's equity to analyze a company's change between different points in time.
To unlock this lesson you must be a Study.com Member.
Create your account
