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What are Equities, Assets, Liabilities or Debts in Business Accounting Equations

In business accounting world, financial position of a company can show economic resources it has, and can also indicate claims against their resources under general accounting rules or principles. In this post, we will share with you what equities, assets, liabilities or debts should be in standard accounting equations.

What are Equities, Assets, Liabilities or Debts in Accounting Equations?

To start with, we shall firstly define what economic resources should be. Since claims are also named as equities, such company can thus be regarded as a combination of equities as well as economic resources. The basic equation for such economic resources and equities is:

Economic Resources = Equities.

Each company normally has two different kinds of equities, no matter what kind of business you are in. These two equity types are, by definition, owner's equity and also creditor's equity. Therefore, the above simple accounting equation about economic resources can be expressed as below:

Economic Resources = Owners Equities + Creditors Equities

Modern business accounting language defines, at a particular period of time, economic resources that a company owns should be regarded as its financial assets. In addition, creditor's equity that a company owns is called its liabilities. Therefore, the standard formula for company accounting (you can also called it an accounting equation about equities and liabilities) is:

Assets = Owner's Equities + Liabilities.

Just like any algebraic equation, two sides of above accounting equation must be balanced and mathematically equal. In fact, this equation is extremely useful for analyzing economic and financial conditions of any business activity.

With the above financial equations, we can now talk about one of the most vital concepts for any type of business. This important concept is about financial assets. By definition, assets are regarded as economic resources which a business owns and projects to generate income for it in the future. For example, real estate or any property-related resources that a business has are financial assets that it can rent them out to other people for income generation. If any business should be owed money, then it shall go into what is called accounts receivable. These accounts receivable should be some monetary items and financial assets which are non-physical. Patents, trademarks and copyrights and are some typical examples about financial assets. For any business type, however, these accounts receivable are still highly valuable.

On the other hand, what are liabilities or debts? Liabilities are, by definition, financial obligations which a business is subject to, such as transferring assets to other individuals, providing future products or services to other individuals, or just paying cash to others. These financial liabilities are typically defined as debts for a business or amount of money that the business has to owe. Normally, all such debts or liabilities should be recorded as accounts payable.

The above are only some basic definitions about economic resources and what equities, assets, liabilities or debts should be in standard business accounting equations. Next time, we will share with you more about liabilities or debts, and also definitions of other advanced financial terms in accounting equations.


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