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
CASH  
10,000  
0
Capital Stock Retain. Earnings
10000  

The Accounting Equation is still in balance!!!

3. The business purchases 900 of supplies on account:

Assets Liabilities Stockholders' Equity
CASH SUPPLIES
10,000 900
Accounts Payable
900
Capital Stock Retain. Earnings
10000  

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
CASH SUPPLIES
15,000 900
Accounts Payable
900
Capital Stock Retain. Earnings
10000 5,000

5. Then, the business pays 700 in rent.  THIS IS AN EXPENSE!  Expenses reduce retained earnings!

Assets Liabilities Stockholders' Equity
CASH SUPPLIES
14,300 900
Accounts Payable
900
Capital Stock Retain. Earnings
10000 4,300

The Accounting Equation is still in balance!  15200=15,200

Questions??
1. What is the Net Income or Profit of this business so far?

Answer

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

Accounting Equation Quiz