The Accounting Equation
If you understand the Accounting Equation very well, this course will seem logical to you.
The Accounting Equation is:
ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY (Capital Stock and Retained Earnings)
Sometimes it is expressed:
ASSET = LIABILITIES + OWNER'S EQUITY
1. Let's say there is a brand new business, therefore:
Assets | Liabilities | Stockholders' Equity |
0 | 0 | 0 |
2. Then the owner gives the business $10,000
Assets | Liabilities | Stockholders' Equity | ||||||||
|
0 |
|
The Accounting Equation is still in balance!!!
3. The business purchases 900 of supplies on account:
Assets | Liabilities | Stockholders' Equity | ||||||||||
|
|
|
Still in balance! 10,900 = 10,900
4. Next, the business provides services and earns $5000 in cash. THIS IS REVENUE! Revenues increase retained earnings!
Assets | Liabilities | Stockholders' Equity | ||||||||||
|
|
|
5. Then, the business pays 700 in rent. THIS IS AN EXPENSE! Expenses reduce retained earnings!
Assets | Liabilities | Stockholders' Equity | ||||||||||
|
|
|
The Accounting Equation is still in balance! 15200=15,200
Questions??
1. What is the Net Income or Profit of this business so far?
So - No matter what - it is ALWAYS TRUE that Assets = Liabilities + Stockholders' Equity
Here is a quiz over the accounting equation. Please come and see me if you need more help with this