Lessons · Accounting · assets, liabilities and equity in plain words
Assets, liabilities, equity: the three words in plain English
An asset is something the business has that is worth money. A liability is money the business owes. Equity is what would be left for the owner if everything were sold and every debt paid.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
What it is for
Every invoice that lands on the desk asks the same question: is this something we have, something we owe, or something that is ours? A customer's deposit filed as income, or a loan counted as money we made, and the statements tell the owner a story that is not true.
How to think about it
For each balance ask: could we sell it or spend it? Then it is an asset. Will we have to pay it or deliver it? Then it is a liability. Neither, and it belongs to the owner? Equity.
Worked example
Cash in the bank, 4,000 → assetWe can spend it.
Unpaid invoice from a supplier, 1,500 → liabilityWe will have to pay it.
The owner's original investment, 10,000 → equityNobody outside the business is owed it; it is the owner's stake.
A customer's deposit for work not yet done, 600 → liabilityWe owe them either the work or their money back. Money in the bank is not the same as money earned.
Your turn
The business still owes 8,000 on a bank loan. Write which of the three it is: asset, liability or equity.
Bank loan, 8,000 →
Solve one, graded on the server
The trap
Calling loan money ours because it is sitting in the bank. The cash is an asset; the loan beside it is a liability of the same size; equity has not moved at all.