Understanding the Basic Elements of Accounting

Assets are not like manna from the heavens. They come from borrowing money on the basis of loans that have to be paid back at a later date, and from

owners' investment of capital (usually money) in the business. Also, making profit increases the assets of the business; profit retained in the business is the third basic source of assets. If a business has, say, $2.5 million in total assets (without knowing which particular assets the business holds), then the total of its liabilities, plus capital invested by its owners, plus its retained profit, adds up to $2.5 million.

This basic equality between total assets and total sources of assets is the foundation of double-entry bookkeeping and is the reason that the statement of financial condition is called the balance sheet. If students remember one thing from their introductory accounting course, it's that

Assets = Liabilities + Owners' Equity