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    chileksu's Avatar
    chileksu Posts: 1, Reputation: 1
    New Member

    Feb 17, 2007, 01:30 PM
    Why must assets always equal liabilities+owners equity?
    Could you please answer this question?

    Why must assets always equal liabilities+owners equity:confused: :confused:
    dmatos's Avatar
    dmatos Posts: 204, Reputation: 26
    Full Member

    Feb 18, 2007, 10:33 AM
    Because it's forced to be so by double-entry accounting.

    Consider a business with only cash assets (for a simple case). How can the business increase the amount of cash they have?

    1. Borrow $10. Assets increase by $10, but liabilities also increase by $10
    2. Owner invests $10. Assets increase by $10, but owner's equity also increases by $10

    And now the tricky one:

    3. Make $10 by providing a service. Assets increase by $10, but owner's equity also increases by $10.
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
    Ultra Member

    Feb 18, 2007, 02:35 PM
    What assets do you have?

    Cash, a car, computer, stereo, iPod?

    Let's say all the above is valued at $7,000

    Does that mean you are worth $7,000?

    NO. Becaucse you owe money to.

    Let' say you owe me $1,000 and you owe the bank $3,000 for a person car loan.

    That means you owe $4,000.

    So you own $7,000 in assets but owe $4,000 (liabilities).

    Therefore, you are only really work (7,000-4,000) $3,000 (owner's equity).

    Therefore, we can say that:
    Assets Liabilities = Owner's Equity

    Or we can re-write that to read:
    Assets = Liabilities + Owner's Equity

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