> ## Documentation Index
> Fetch the complete documentation index at: https://docs.lerian.studio/llms.txt
> Use this file to discover all available pages before exploring further.

# Assets, liabilities & equity

> The accounting equation explained with everyday analogies: what you own, what you owe, what's yours, and why Assets = Liabilities + Equity always balances.

Every business (and honestly, every person) can describe its financial life with three words: **assets**, **liabilities**, and **equity**. Get these three and the accounting equation falls into place.

Let's use a house.

## The three words, in plain terms

***

* **Assets**: everything you **own** that has value. Your house, your car, the cash in your account, the money customers still owe you.
* **Liabilities**: everything you **owe** to someone else. Your mortgage, your car loan, an unpaid bill.
* **Equity**: what's **yours** after you pay off the debts. It's the leftover.

Say your house is worth \$300,000 (an asset). You still owe \$200,000 on the mortgage (a liability). The part that's truly yours (your **equity**) is \$100,000.

What you own, minus what you owe, is what's yours:

$$
Assets - Liabilities = Equity
$$

| Term          | Plain meaning            | House example              |
| ------------- | ------------------------ | -------------------------- |
| **Asset**     | What you own             | The \$300,000 house        |
| **Liability** | What you owe             | The \$200,000 mortgage     |
| **Equity**    | What's left over for you | The \$100,000 that's yours |

## The equation that ties them together

***

You just saw the equation one way. Move `Liabilities` to the other side and you see the same idea in reverse. This is the form accountants use, called the **accounting equation**:

$$
\underset{\$300{,}000\ \text{house}}{\text{Assets}} \:=\: \underset{\$200{,}000\ \text{mortgage}}{\text{Liabilities}} \:+\: \underset{\$100{,}000\ \text{yours}}{\text{Equity}}
$$

It's the same sentence written two ways. The first asks *what's truly mine?* The second asks *how did I fund everything I own?* Nothing changes but the order.

The business paid for everything it **owns** in one of two ways: with **money it borrowed** (liabilities) or with **money that's its own** (equity). So the total value of what you own always equals the sum of those two sources.

## Why it always balances

***

The equation can **never** be out of balance, by design. If something changes on one side, something else has to change to keep it even.

* **You buy a \$20,000 car with a loan.** Assets go up by \$20,000 (the car). Liabilities go up by \$20,000 (the loan). Still balanced.
* **You pay off \$5,000 of that loan with cash.** Assets drop by \$5,000 (cash leaves). Liabilities drop by \$5,000 (debt shrinks). Still balanced.
* **The business earns \$10,000 in profit.** Assets go up by \$10,000 (cash). Equity goes up by \$10,000 (it's yours to keep). Still balanced.

Every real-world event touches the equation in a way that keeps both sides equal. That is the rule that makes accounting trustworthy. If your books *don't* balance, you know immediately that something in the records is wrong.

## Next steps

***

<Note>
  **Next up**

  You've got what a business owns, owes, and keeps. The other half of the picture is what it earns and spends. See [Revenue, expenses & costs](/en/start-here/fundamentals/accounting/revenue-and-expenses), and how profit feeds back into equity.
</Note>