The general accounting equation: Assets = Liabilities + Equity is an important equation for a small business owner, or any business owner to understand. It is relatively simple and makes sense when you think about an asset, or assets and their related liabilities and thus your equity. The equation can thus be stated in terms of ownership equity in a business. For example, a corporation may look at the following: Assets = Liabilities + Shareholders Equity. Thus, the greater the asset(s) value(s) or the lesser the corporate liabilities, the greater the equity a corporate shareholder will have in their stock, which is their equity interest in the corporation.
For example, think about a business buying a piece of property. A business buys a $1M property and puts $200,000 down. The asset would equal $1M, liabilities would equal $800,000 and equity would be $200,000. These figures plugged into the equation would appear as follows: $1M = $800,000 + $200,000.
This equation is further discussed in the video below that has been created by Denver tax attorney John McGuire. Mr. McGuire founded The McGuire Law Firm to assist individuals and businesses with their tax issues and questions, and work with businesses regarding their transactions, business contracts and other legal matters. You can schedule a free consultation with a tax attorney and business attorney by contacting The McGuire Law Firm.