When starting a business the owner (also called proprietor)
introduces assets such as cash and office equipment used within the
business to generate more assets... such as cash and office equipment!
Equity is the ownership of the assets of the business by the proprietor.
So the start of the accounting equation is :
Mr Grey contributes $600 in cash to his business so that it can
operate, the entry in the accounting books would change both the asset
account and the equity account, increasing each by $600. The asset
account is the business part and the equity account is Mr Grey’s part.
Grey may at any time introduce more assets in which case the asset and
equity accounts will equally increase, thus maintaining the equation
Mr Grey may also chose to withdraw an asset (such as
taking out cash for personal use) in which case the two accounts will
decrease equally. Assets withdrawn for personal use by the owner are
Another name for equity is capital. So if you
see either of these words anywhere there is no need to be confused...
they mean the same thing.
The true equity value is calculated after liabilities are factored in.