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What is Accounting Equation? | Example Problems

 What is Accounting Equation? Example Problems

What is The Accounting Equation?

It is a basic but also a very important accounting principle, so what is the accounting equation? LEARN MORE.

so what is the accounting equation? I’m Thomas Harwood and Welcome to The Accounting Student, where we create free and short videos

so that you can learn about accounting. Many do not know that accounting is based on a simple and significant principle, known as the accounting equation.

The equation uses basic mathematics, which was probably one of the first things you studied at school. It only involves adding and subtracting figures.

If you were to calculate the total accounting records that belong to a business and then subtract the accounting records that the business owes to others. You can compute what a business is worth according to the accounting records.

If an individual set up a business and wanted to trade then he or she would need resources to operate. Let’s assume the owner supplied the resources for the business.

Basic of Accounting Equation

Explanation of the basic and expanded accounting equations.

The basic accounting equation is the basis for all accounting transactions. In fact, this basic equation goes all the way back to the beginning of accounting in the 15th century.

So let's take a look at this special equation in videos.

The basic accounting equation balances assets against liabilities and stockholder's equity. Assets are resources for our company. Assets are things like cash, buildings, equipment, and also accounts receivable, which is money owed to the company by its customers.

Some people like to think of these as things you own in the company. Liabilities are claims against resources, which are usually money owed to others. Liabilities are things like loans payable, mortgages payable, and accounts payable, which is money owed by the company to its vendors or suppliers.

Stockholder's equity is the owner's claim on the resources of the company. Another way to look at the equation is the amount to be owned is balanced against what we owe, and what is owned by the investors.

If we have $1,000 cash and $750 liabilities, then our stockholder's equity must be $250 to balance the equation. Another way we can look at the equation is assets (or resources) minus liabilities (or amounts owed) equals the residual amount that is available to the owners of the company.

Accounting equation explained

How does the accounting equation work, and what are some examples of using the accounting equation?

The #accounting equation states that assets always equal liabilities plus equity. Assets are what a company owns, and they are recorded on the left-hand side of the balance sheet. 

What a company owes is recorded on the right-hand side of the balance sheet, and can be split between liabilities (what is owed to creditors) and equity (what is owed to shareholders). 

Assets equal liabilities plus equity. If assets go up, then liabilities and equity also must go up. If assets go down, then liabilities and equity also must go down.

The accounting equation is the foundation for double-entry bookkeeping. You could even see the accounting equation as the most important concept in the accounting – period! Assets equal liabilities plus equity.

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