Assets, liabilities, and net worth are part of the language of finance. As such, it is important to understand
both their composition and how they fit together. Short definitions appear below, followed by examples.
Assets
Assets are economic resources that have expected future benefits to the business. In other words, assets
are what the organization owns and/or controls.
Liabilities
Liabilities are “outsider claims” consisting of economic obligations, or debts, payable to outsiders. Thus,
liabilities are what the organization owes, and the outsiders to whom the debts are due are creditors of the
business.
Net Worth
“Insider claims” are also known as owner’s equity, or net worth. These are claims held by the owners of the
business. An owner has a claim to the entity’s assets because he or she has invested in the business. No
matter what term is used, the sum of these claims reflects what the business is worth, net of liabilities
—thus
“net worth.”
The Three-Part Equation
An accounting equation reflects a relationship among assets, liabilities, and net worth as follows: assets
equal liabilities plus net worth. The three pieces must always balance among themselves because this is
how they fit together. The equation is as follows:
