| The most basic tool of the account is
the accounting equation. This equation presents the assets of the business and
the claims to those assets. Assets are economic resources of a business that are
expected to be of benefit in the future. Cash, office supplies merchandise,
furniture, land and buildings are examples; Claims to those assets come from two
sources. Liabilities are "outside claims", which are economic obligations, debts payable to outsiders. These outside parties are called creditors. For example a creditor who has loaned money to a business has a claim-- a legal right -- to a part of the assets until the business pays the debt, "insider claims" are called owners' equity or capital. These are the claims held by the owners of the business. Owners' equity is measures by subtracting liabilities from assets. |