Question

Explain in details the essential Characteristics, Definition, Measurement values and of as follows:

A. Owner’s Equity

B. Liabilities

Answer 1

Definition of Owner's Equity

Owner's equity is one of the three main sections of a sole proprietorship's balance sheet and one of the components of the accounting equation: Assets = Liabilities + Owner's Equity.

Owner's equity represents the owner's investment in the business minus the owner's draws or withdrawals from the business plus the net income(or minus the net loss) since the business began.

Owner's equity is viewed as a residual claim on the business assets because liabilities have a higher claim. Owner's equity can also be viewed (along with liabilities) as a source of the business assets.

Example of Owner's Equity

If a sole proprietorship's accounting records indicate assets of $100,000 and liabilities of $70,000, the amount of owner's equity is $30,000.

Due to the cost principle (and other accounting principles) the amount of owner's equity should notbe considered to be the fair market value of the business.

Definition of Liability

A liability is an obligation arising from a past business event. It is reported on a company's balance sheet.

Liabilities are also part of the basic accounting equation: Assets = Liabilities + Stockholders' Equity. Liabilities are often viewed as claims against the company's assets. However, liabilities can also be viewed as sources of the company's assets.

Examples of a Liability

Examples of a liability include:

accounts payable

loans payable

wages payable

interest payable

customer deposits

deferred revenues