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chinkstaz_123 · Apr 11, 2008, 05:21 AM

Hi there,
I am asked the question "Explain why this equation should balance"
Assets=Liabilities+Owner's Equity
Thanks

morgaine300 · Apr 12, 2008, 06:16 PM

We are not here to answer your homework questions for you. Why do you think it should balance? And then we'll let you know if you're on the right track.

(The real truth is that it balances because it was made that way on purpose.)

I think the question is a bit ambiguous, like I can think of several points they might be trying to get at. But at least make an attempt at answering it yourself. Think about what the parts of the equation mean.

chinkstaz_123 · Apr 14, 2008, 04:04 AM

Wow Ok
It didn't hurt to ask.
My guess is that the value of the assets is dependent on what values are included in a report under the headings of assets and liabilities.

Nazib · May 3, 2008, 03:28 AM

this equation will balance always bcoz... the assets are bought or they arise bcoz of a corresponding credit for liability.. for e.g.. Assume a furniture is bought for cash... then v will debit furniture and credit cash... this cash will b either brought as capital or by loan which is a liability... and furniture is an asset here... I believ I have made it clear for you

if u need further help I'll b glad 2 help u

morgaine300 · May 3, 2008, 10:23 PM

Hmm... well, this question is quite old now. But since it got posted to and thrown back to the top of the list, I'll post on it. (Sorry, chink, I meant to come back and check your attempt, but I just got really busy trying to finish up my taxes, and then catching up other stuff that got behind while doing taxes.)

Assets are the resources of the company, the stuff the company uses in order to run their business. (Even if indirectly.) It's the stuff they own.

Liabilities and Equity are how they financed everything. They either financed it with ownership (equity) or with borrowing (debt). Since everything that is owned must have been financed in some way, the two sides have to equal.

Another way to look at it is that "equity" means a right or claim to something. Someone has a claim to everything the company owns. Some of them are creditors. And whatever is leftover belongs to the owners. That whole right side is actually equity by that definition. Creditor equity and owner's equity. So what is owned must equal the amount that has a claim on it.

Nazib · May 5, 2008, 06:13 PM

Yeah that's it morgaine