1.16 owner's equity
TRANSCRIPT
1.16
OWNER’S EQUITY
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© Michael Allison. Author’s permission required for external use.
1.16 OWNER’S EQUITY
Assets
Liabilities
Owner’s Equity
Revenues
Elements of Accounting
Expenses
© Michael Allison. Author’s permission required for external use.
1.16 OWNER’S EQUITY
Owner’s Equity
Definition:
Owner’s equity is:
• The owner’s residual interest in the Assets of the firm after the
deduction of Liabilities
© Michael Allison. Author’s permission required for external use.
Example: you need $800 for a new phone but you only have $600 in your bank
account
To make up the dif ference, your parents give you $200 as a loan to buy the
phone to be repaid by the end of the year
Owner’s Equity
How much are
your Assets?
Assets
Liabilities
Owner’s
Equity
$800
How much are
your Liabilities?$200
So what is your
“residual interest”
in the Asset? $600Owner's
Equity,
$600
Liabilities
, $200
Your $800 Asset is made up of…
1.16 OWNER’S EQUITY
© Michael Allison. Author’s permission required for external use.
This relationship between Assets, Liabilit ies and Owner’s Equity is
expressed as the “Accounting Equation”
Assets LiabilitiesOwner’s
Equity= +
$800 $200 $600= +
1.16 OWNER’S EQUITY
© Michael Allison. Author’s permission required for external use.
The “Accounting Equation” can also be expressed another way…
Assets LiabilitiesOwner’s
Equity= +
Owner’s
EquityAssets Liabilities= —
$600 $800 $200= —
1.16 OWNER’S EQUITY
© Michael Allison. Author’s permission required for external use.
The “Accounting Equation” also applies in your personal life… Example: you
decide to buy a house worth $500,000:
You have $100,000 in cash in the bank
You will need to borrow the remaining $400,000 from the bank
How much do you “own”
of the house?
How much does the bank
“own”?
$100,000 $400,000
House value
$500,000
The $100,000 is your
Owner’s Equity in the
house
The $400,000 is your
Liability or how much you
owe on the house
Assets LiabilitiesOwner’s
Equity= +$500,000 $400,000 $100,000
1.16 OWNER’S EQUITY
© Michael Allison. Author’s permission required for external use.
The “Accounting Equation” will change over time…
This year you pay off $50,000 from the loan
Next year you pay off $70,000 from the loan
$500,000 $400,000 $100,000= +$500,000 $350,000 $150,000$500,000 $280,000 $220,000
1.16 OWNER’S EQUITY
© Michael Allison. Author’s permission required for external use.
You buy $200,000 of shares in JB Hi-Fi with a $150,000 loan and $50,000
cash of your own…
A year later, there’s a rise in the share market and your shares are now
worth $250,000
Assets LiabilitiesOwner’s
Equity= +$200,000 $150,000 $50,000$250,000 $150,000 $100,000
1.16 OWNER’S EQUITY
© Michael Allison. Author’s permission required for external use.
How do people and businesses go broke? They end up with a negative
balance in Owner’s Equity…
So being broke happens when you have Negative Owner’s Equity
In other words…
Assets LiabilitiesOwner’s
Equity= +$100,000 $110,000 —$10,000
BROKE=<Assets Liabilities
1.16 OWNER’S EQUITY
© Michael Allison. Author’s permission required for external use.
You buy a $900,000 house with a $800,000 loan and $100,000 cash of
your own…
A year later, there’s a crash in the property market and your property is
now worth only $600,000
Assets LiabilitiesOwner’s
Equity= +$900,000 $800,000 $100,000$600,000 $800,000 —$200,000
1.16 OWNER’S EQUITY
© Michael Allison. Author’s permission required for external use.
TASK
In-class Homework
Cambridge Exercise 1.6 –
Owner’s Equity X