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Module 4 of 11 12 min

Assets, Liabilities, and Equity

What a business owns, what it owes, and what's left for the owners.

Course lessons

Step 1

The lesson

Key term

Assets

Things the business owns that have value: cash, inventory, equipment, buildings, and money customers owe it (accounts receivable).

Key term

Liabilities

What the business owes others: loans, unpaid bills to suppliers (accounts payable), and wages owed.

Key term

Equity

What's left for the owners after subtracting liabilities from assets. It includes money owners put in plus profits kept in the business.

These three are always connected by the accounting equation: Assets = Liabilities + Equity. Everything a business owns was paid for either with borrowed money or with the owners' money.

You already know this idea from personal finance. Your net worth is what you own minus what you owe. A business's equity is its net worth.

Step 2

See it

A lemonade stand's assets, liabilities, and equityHypothetical example

A hypothetical lemonade stand has $150 in cash, $50 in supplies, and $300 in equipment: $500 of assets. It owes $200 on a loan from a parent. Equity is $500 minus $200, or $300.

Cash
$150
Lemons, sugar, cups
$50
Stand, cooler, and pitchers
$300
Total assets
$500
Loan from a parent
$200
Total liabilities
$200
Equity (assets − liabilities)$500 = $200 + $300
$300

Step 3

Real-world example

One purchase, both sides

The lemonade stand borrows $100 more to buy a second cooler. What changes?

  • Assets go up $100 (the cooler).
  • Liabilities go up $100 (the loan).
  • Equity stays the same: $600 = $300 + $300.

Every transaction keeps the equation balanced. That's why it's called a balance sheet — the topic of the next lesson.

Step 4

Knowledge check

Answer each question, then check your answer to see the explanation. Retake it as many times as you like.

Question 1 of 3

ScenarioA business has $800,000 in assets and $500,000 in liabilities.What is its equity?

Choose an answer.

Step 5

Summary

Assets are what a business owns, liabilities are what it owes, and equity is what's left for the owners. They always satisfy Assets = Liabilities + Equity, because everything a business owns was paid for with either borrowed money or owners' money.

Step 6

What you should remember

  • Assets = what you own. Liabilities = what you owe.
  • Equity = assets − liabilities.
  • Assets = Liabilities + Equity, always.
  • Equity is a business's net worth.

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