Accounting Equation meaning and examples - Lesson 2 (Financial Accounting)
Every company has resources called assets, and these resources are owned by someone inside or outside the company. The accounting equation is a system that describes a business entity’s collection of assets (resources) and the corresponding claims against those assets.
Imagine you want to start a small restaurant business, you would need equipment like refrigerators, blenders, microwaves, chicken sliders, Onion cutters, and cash to rent or buy a building. If you buy all those things with yourself, you own everything in the company. However, if your dad lends you money to buy the refrigerator, he owns that refrigerator in the business until you pay off that money. On the other hand, if you take a loan from America First Credit Union (AFCU) to buy the building, AFCU owns the building until you pay off the loan.
In this example, AFCU can claim ownership of the building. It, therefore, becomes a responsibility of your company to pay off that loan. This responsibility is termed as LIABILITY. The remaining of the resources not owned by anyone can be claimed by the owner of the business. This is also term as “Owner’s Equity”
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