Why Owner Equity is a Liability

Why is Owner Equity considered a liability?

Those wacky accountants consider Owner Equity as a liability. This often causes confusion-- many people think it should be an asset, since it's something that the owners "own".

Look at it from the point of view of the business, itself. From the company's point of view, equity is a "guilt trip" burden that the business owes to its founders for the money or effort they put in to start the business. Some day the business really ought to repay that to the Owners, so it's sort of like a loan. A liability.

This viewpoint also makes the basic balance sheet math easier, since assets = liabilities + equity. That makes sense, because equity is what's left over, after you subtract liabilities from assets.

NOTE-- If you put equity on the asset side while using Goldenseal accounting software, you'd have to subtract it to make the equation work. That's just as hard to explain as putting it on the liability side.

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