Classify assets, liabilities and owner's equity
Identify the resources and claims that appear in the accounting equation.
Section 1.2 · The accounting equation
Cambridge IGCSE Accounting 0452 / (9–1) 0985, 2027–2029 Version 1. These lessons follow the 2027–2029 syllabus only; the separate 2026 syllabus update is not yet mapped. Written practice is self-checked, not an official Cambridge grade. Full timed-paper practice and human subject-teacher review remain pending.
Before you begin
- No previous accounting study is assumed. Keep the business, transaction and accounting period in view, and distinguish a resource, a claim and a performance result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which is a liability for a business?
What you will learn
- Classify business assets and liabilities
- Explain owner's equity as the residual claim
- Distinguish financial position from period performance
Resources and obligations
An asset is a resource of value controlled by a business, such as cash, inventory, equipment or money owed by a customer. A liability is an amount the business owes, such as a bank loan or supplier balance.
Classify an item by its role and the business's rights or obligation, not only by its name. Cash is an asset; a loan received creates cash and a liability to repay.
Owner's equity is the residual claim
Owner's equity is the owner's claim after liabilities are deducted from assets. For a sole trader, capital introduced increases equity; profit generally increases it and drawings reduce it.
The equation describes financial position at a point in time. Profit measures performance over a period, so do not use the terms as if they were interchangeable.
Pause and explain
Assets are $14,000 and liabilities are $4,600. Find owner's equity.
Worked example
A sole trader has cash $2,400, inventory $1,100, equipment $5,000 and a bank loan $3,000. Classify the items and calculate owner's equity.
Show the worked solution
- Cash, inventory and equipment are assets: 2,400 + 1,100 + 5,000 = $8,500.
- The bank loan is a liability of $3,000.
- Equity = assets − liabilities = 8,500 − 3,000 = $5,500.
Answer Assets are $8,500, the liability is $3,000 and owner's equity is $5,500.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Classify cash $700, inventory $900, a bank loan $2,000 and an unpaid electricity bill $120 as assets or liabilities.
Give me a hint
Ask whether each item is a resource or an obligation.
Compare my reasoning
- Cash and inventory are resources controlled by the business.
- The bank loan must be repaid.
- The unpaid bill is an obligation to the supplier.
Assets: cash $700 and inventory $900. Liabilities: bank loan $2,000 and unpaid electricity $120.
Look for these in your work
- Resources classified
- Loan classified
- Unpaid bill classified
A business reports assets of $22,500 and liabilities of $8,750. Calculate owner's equity and explain what the amount represents.
Give me a hint
Rearrange assets = liabilities + equity.
Compare my reasoning
- Equity = assets − liabilities.
- 22,500 − 8,750 = $13,750.
- The amount is the owner's residual claim at that date.
Owner's equity is $13,750. It is the residual claim after liabilities are deducted from assets, not a cash balance or the profit for the period.
Look for these in your work
- Rearrangement correct
- Calculation correct
- Meaning explained
A lender offers a business a $5,000 loan. Explain why receiving the money does not create $5,000 of owner's equity.
Give me a hint
Consider both the resource received and the new obligation.
Compare my reasoning
- Cash increases by $5,000.
- A liability to repay the lender also increases by $5,000.
- The increase in assets is matched by a liability, not by an owner contribution.
Cash and liabilities both rise by $5,000. Because the lender's claim also increases, the loan does not add $5,000 to owner's equity.
Look for these in your work
- Asset change stated
- Liability change stated
- Owner's claim distinguished
Common mistakes
- Treating a loan as owner's equity
- Calling a customer's unpaid balance a liability of the business
- Confusing equity at a date with profit for a period
What can you explain now?
A supplier invoice is unpaid. How should the amount owed be classified?
Compare with the explanation
A liability
The business has an obligation to pay the supplier.
After trying it yourself, choose your next review. This is your self-assessment.
Your review choice appears on Today. Sign in to sync it across devices.
Make it stick
State the accounting relationship between assets, liabilities and owner's equity.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.