Why Do Assets Equal Liabilities?

One of the subscribers to our free email newsletters sent a mail the other day. Why do assets equal liabilities? her message read.


To answer this question, you will first need an understanding of the most important equation in accounting as well as the elements of the financial statements.


The basic accounting equation tells us that the value of assets in a business must equal the value of the owners’ equity and liabilities. 


Assets = Liabilities + Equity


If any business deviates from this basic rule, then you will have an inaccurate financial statement and will inevitably invite the scrutiny of the government.


As I earlier stated you also need an understanding of the financial statements to get a full grasp of why assets equal liabilities, so let’s delve into that.


Understanding The Elements Of Financial Statements.

The elements of the financial statements can be summarized from the basic accounting equation earlier stated. They are assets, liabilities and equity.


  • Assets are resources that are owned and under the control of an entity as a result of a past event, the ownership of which is expected to birth future economic inflows to the entity e.g Land, Building, Motor Vehicle.


  • Liabilities are present obligations resulting from events in the past and which would require the outflow of economic benefits for its settlement e.g Account Payable, Bank loans, Debenture.


  • Equity is the value that an owner of a business has left over after liabilities are deducted. Equity may be in Retained Earnings, Ordinary Share Capital, Reserves.


Why Do Assets Equal Liabilities?

Although this is almost impossible. However, the only time when assets equal liabilities is when the entity has no equity. Meaning the entity lacks shareholders funding.


Yet, it is impossible to start a business without the business owner contributing funds in the form of equity. So what can cause an entity’s equity to be zero?


The most probable reason would be that the owner of the business has withdrawn all his capital in the form of private drawings which is most likely impossible. 


If such however happens, then it means the basic accounting information would be:


Assets = Liabilities + Equity,


(where Equity is Zero)


Assets = Liabilities + Zero. Therefore, Assets = Liabilities.


Wait — there’s more:


Check out this James video tutorial on the accounting equation for beginners to help you gain more understanding of this topic.



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