In a Balance Sheet we have three main headlines: Assets, Liabilities, Owner's Equity (aka Equity). In many countries, Assets are shown in the left of the page, while Owners' Equity to the top right and Liabilities to the lower right.
Now, it is a fundamental Accounting rule that "Assets = Owners' Equity + Liabilities". But why?
...If we use the "Capital Transformation" approach, we can understand why: "Assets" are of course what the word Assets means. But at the same time they show to us to what the company has transformed the capital given to it by... whom?
a) The Shareholders ("Owner's Equity"), and b) Everybody Else (Liabilities). In Equity we see the amount that is to be returned to the Shareholders, after all Assets are liquidated and all Liabilities are paid in full. In that sense, "Owners' Equity" is also a liability for the company: A company does not own anything - it owes all of its Assets to somebody, Third Parties or its Shareholders. A company is a separate entity from its owners.
In Liabilities, we see the amounts that the company owes to third parties - Suppliers, Banks, Internal Revenue Service, etc. At the same time they show to us "whence the capital came".
So the right side of a Balance Sheet shows how much capital and from whom the company has managed to get at the specific moment of the balance sheet (from third parties-"Liabilities" or from its own shareholders-"Equity"). On the left side of the Balance Sheet, we see to what the company has transformed this capital-"Assets". Again, we are talking about the same capital, the same quantity. So the "right side" (Equity + Liabilities) must equal the "left side" (Assets).
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