Accounting equation: Equity

- There are two general ways to get money to buy assets. If you borrow the money, the source of the financing is called liability. If the money is invested by the owners, the source of the financing is called owners' equity. Now, owners' equity is the amount that owners have invested in a company for the company then to use to buy assets. So there are two ways for owners to invest in a business. One, the simplest way to visualize, is that the owners just say, "Okay, my business needs some money to buy assets, so I'm going to pull the money out of my personal pocket from my personal savings. I've done some work elsewhere. I've been prudent. I've saved my money. I'm now going to pull it out of my pocket and put it into my business, and the business will then use the invested money to buy business assets." We call this paid in capital, which is the amount that owners take out of their personal savings and invest in their…