I am taking a “finance for non-finance managers” mini training for my job (so I can better understand the corporate nonsense jargon presented during quarterly meetings), but I’m already stuck on the first part of the training, which is about the “accounting equation”.

The equation in the training is listed as Assets = Liabilities + Owner’s Equity.

Why is this equation written this way? It doesn’t make sense. A company has assets, and it owes liabilities. Whatever *is left over* is equity. So shouldn’t it be written as:

**Assets – Liabilities = Owner’s Equity**

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I understand, mathematically, that it’s all the same thing. But as far as messaging goes (syntax, context, etc), why would the equation be specifically written in this way?

In: Economics

accounting is done from the perspective of the business, not the owner. while the two equations you have are equivalent. they are used to calculate different things. when calculating the business’s assets you have the first equation. when you’re calculating the owner’s equity, you can use the second.

It can be written however you want but it’s generally shown in order of presentation on the financial statements. First assets, then liabilities, then equity.

The company needs stuff to run its business (assets). To fund those assets, it can either raise debt (liabilities) or raise equity. Showing the equation that way makes you think in terms of how you fund the stuff the business needs to run.

You may have noticed that accountants don’t like negative numbers, and they don’t like to do subtraction. They even write negative numbers funny (like this).

So they write the equation in the only way that doesn’t need to include a subtraction, or an admission that liabilities are just negative assets.

A mathematician would probably write it as Assets – Liabilities – Equity = 0

They also like to balance equations by adding the same amount to both sides of the equals sign, rather than adding some amount to one term and subtracting the same amount from another term on the same side. In other words, they like assets and liabilities (or debits and credits) to be on opposite sides of an equals sign.

Also most assets have a normal debit balance while most liabilities/OE have a normal credit balance.

The basic structure of accounting was invented by people who carefully structured the entire system so that they could always add values and compare sums, they never subtract them.

The basic identity compares the two halves of the balance sheet the sum of Assets equals the sum of Liabilities plus the sum of owners equity.

>But as far as messaging goes (syntax, context, etc), why would the equation be specifically written in this way?

This may sound pity, but it’s the truth: You’re taking an accounting class, not a marketing class. They don’t care about the “messaging”. They’re doing math. They’re going to plug all of this into a spreadsheet, and what’s important in accounting is that the equations are formulated in such a way as to make the math flow more easily (which, generally speaking, means that your equations will be written with a view of the whole system in mind, not just how each individual equation looks).

> A company has assets, and it owes liabilities. Whatever is left over is equity.

The concept is that if the company has a liability then they presumably gained something of equivalent value so their assets should rise by that amount. If they took out a loan for $50 million then they should have some asset worth that $50 million; their assets *rise* by that $50 million because of the thing they have, they don’t *lower* by the $50 million because they owe it.