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Liability Example

Previous lesson: Equity Example
Next lesson: Asset Example

Okay, onto our next example.

b) George realizes that he needs more money to create a really high-quality catering business. Yet he does not have any more personal funds available to invest in the business. He decides to take a loan from the bank to the value of $5,000.

As you can see, $5,000 more cash is available. This cash was obtained by creating a liability (debt). External parties (the bank) now have a $5,000 claim to the total assets of the business. George’s Catering will have to pay back the $5,000 in the future.

George’s Catering now consists of assets (cash) of $20,000.

Assets (money) increased (from $15,000 to $20,000). On what side do assets increase? The debit side (left). So, assets are again debited.

The owner’s equity (capital) does not change. But liabilities (a loan) increases. On what side do liabilities increase? The credit side (right).

So, liabilities (a loan) is credited.

The accounting entry is:

Not bad, eh?

I think that big scary monster called debits and credits is a little overrated.

We do still have a few more examples though, so let's not get ahead of ourselves... There is still a monster to slay, we've only just made a few scratches...

Previous lesson: Equity Example
Next lesson: Asset Example

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