Every transaction has two sides

Every asset has a claimant

Morrow Bikes begins with one bank transfer. The owner moves $20,000 of personal savings into a new business account, and from that moment the money is the shop's cash, not the owner's savings. It arrives with a string attached: an owner who has a claim on it. Every resource a business holds is spoken for by someone, and the balance sheet is the list of who.

An asset is a resource the business controls: cash, a customer's unpaid invoice, a bike lift. A liability is what the business owes to others. Equity is what is left for the owners once every liability is covered. Assets = liabilities + equity, always, because the right side is nothing more than the list of claims on the left side. This is a Snapshot (balance sheet) lesson, and the reflex it builds is the third question: whose claim?

Three transactions, one balance sheet

The owner contributes $20,000. Cash rises by 20,000 and contributed equity rises by 20,000. Morrow then borrows $10,000 from the bank. Cash rises to 30,000 and a loan of 10,000 appears among the claims. Borrowing is not revenue, because the lender has a claim to repayment.

The shop buys a bike lift for $12,000 cash. Cash falls to 18,000 and equipment rises by 12,000. Buying an asset with cash swaps one asset for another, so total assets stay at 30,000 at that moment.

Cash 18,000 + lift 12,000 = $30,000 of assets. Loan 10,000 + equity 20,000 = $30,000 of claims. Notice what the loan did not do. The owner still owns all of the shop. The bank holds a contract to be repaid with interest, and that is a different kind of claim from ownership.

What moves equity

Revenue raises equity and expenses lower it, because profit belongs to the owners. A dividend lowers equity too, but it is not an expense: a dividend is the owners taking part of their claim out. Equity can even turn negative when accumulated losses and distributions exceed what the owners put in plus every other equity balance. The equation still holds; the claims simply exceed the resources.

Any one term follows from the other two. If assets are 950 and liabilities are 370, equity is 950 − 370 = 580. If assets are 640 and equity is 210, liabilities are 640 − 210 = 430.