Question

What do the following words mean?

Accounting, Asset, Liability, Owner’s Equity

Answer 1

- Accounting: The process of recording, classifying, summarizing and reporting a business’s financial transactions so that users (owners, managers, investors, regulators) can understand its financial position and performance.

- Asset: A resource controlled by a business that is expected to provide future economic benefit (examples: cash, accounts receivable, inventory, equipment, buildings).

- Liability: A present obligation the business must settle in the future because of past events, typically requiring payment of cash or transfer of assets (examples: loans payable, accounts payable, accrued expenses, taxes payable).

- Owner’s equity (also called shareholders’ or owners’ capital): The residual interest in the business after liabilities are subtracted from assets — in other words, what belongs to the owners. It includes contributed capital and retained earnings.

Key relationship (accounting equation): Assets = Liabilities + Owner’s Equity.
Example: If assets = $100,000 and liabilities = $60,000, owner’s equity = $40,000.