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Introduction to bookkeeping and accounting
Introduction to bookkeeping and accounting

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2.3 Definitions of assets, capital and liabilities

A business when it starts has no money. The owner puts money in (known as owner’s capital) and perhaps borrows money as well, and this money is used to buy assets that are expected to bring financial benefits for the business in the future. If it were a retail business, these assets might be premises, equipment and goods for resale. A service business might only need an office, furniture and computers.

The accounting records separate out the finance put into the company by the owner (owner’s capital) and the finance borrowed (a liability or debt that needs to be repaid). The accounting records also separate out the assets bought from the finance used to buy the assets. The firm can only have as many assets as it has finance available. The accounting records consequently will always reflect that:

Assets = finance put into the business either from the owner or borrowed

or

Assets = capital + liabilities (i.e. finance from the owner/s + finance borrowed)