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What is an 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 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 are 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.
FAQs Related Questions & Answers :)
Introduction to Accounting. | What is accounting?
Accounting is a useful way of recording and summarizing financial information. Businesses use accounting to keep their financial information organized which helps them in making sense of their financial data and also keeps them compliant with financial regulations. Learn More.
A House An Asset Or A Liability? [ Finally Explained ]
Is a house an asset or a liability? That is one of the biggest questions many people have when they think about buying a house.
It is important to understand real estate in terms of assets and liabilities and the different ways you can buy a house so you will no longer wonder Should I buy a house? Learn more.
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 Learn more.
What is Revenue Expenditure? | ACCOUNTING
A company will have different types of expenditure, how will revenue expenditure be treated in the accounts?
what is revenue expenditure? Usually, a business will have cash coming in, which can be known as income, and cash going out which can be referred to as expenditure. Learn more.
Accounting Equation
The accounting equation is one of the fundamental elements of double-entry accounting and the foundation for all of the concepts learned in introductory accounting. In this short video, you will learn what the equation is and what each part represents.
This video was created about the Utah State CTE standards for the Accounting I High School course. Specifically, this video prepares students to complete Strand 2, Standard 2: Demonstrate an understanding of the fundamental accounting equation. Learn more.
Accounting Process for Transaction Analysis - WorldWide Webster
On the accounting process, you'll recall from class the accounting process has three major steps. Learn more.
Journal Definition - What is a Journal?
The Journal definition includes a breakdown of areas in the definition. Analyzing the definition of key terms often provides more insight into concepts.
The term journal can be defined as a Record in which transactions are entered before they are posted to ledger accounts; also called the book or original journal. Learn more.
What is a General Ledger? (Recording Nonprofit Transactions)
What is a general ledger? A general ledger is a list of transactions by account. In this lesson, you’ll learn what transactions are, how and when to record them, and how they impact your nonprofit's accounting system. Learn more.
Depreciation explained
What is depreciation? How to calculate depreciation? Depreciation, amortization, and CapEx tutorial.
Overview of depreciation accounting (concept and application), and related topics such as accumulated depreciation, book value, residual value, historical cost, fixed assets, amortization, useful life, capital expenditures (CapEx), and capitalization. Intended for students and business people at both entry and advanced levels. Learn more.
The TRIAL BALANCE Explained (Full Example!)
Learn how to prepare a Trial Balance using T Accounts and Journal Entries. The Trial Balance is made easy in this episode of Accounting Stuff - Accounting Basics for Beginners Lesson 5 - you will learn: Learn more.
Introduction to Accounting. | What is accounting?
Accounting is a useful way of recording and summarizing financial information. Businesses use accounting to keep their financial information organized which helps them in making sense of their financial data and also keeps them compliant with financial regulations. Learn More.
A House An Asset Or A Liability? [ Finally Explained ]
Is a house an asset or a liability? That is one of the biggest questions many people have when they think about buying a house.
It is important to understand real estate in terms of assets and liabilities and the different ways you can buy a house so you will no longer wonder Should I buy a house? Learn more.
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 Learn more.
What is Revenue Expenditure? | ACCOUNTING
A company will have different types of expenditure, how will revenue expenditure be treated in the accounts?
what is revenue expenditure? Usually, a business will have cash coming in, which can be known as income, and cash going out which can be referred to as expenditure. Learn more.
Accounting Equation
The accounting equation is one of the fundamental elements of double-entry accounting and the foundation for all of the concepts learned in introductory accounting. In this short video, you will learn what the equation is and what each part represents.
This video was created about the Utah State CTE standards for the Accounting I High School course. Specifically, this video prepares students to complete Strand 2, Standard 2: Demonstrate an understanding of the fundamental accounting equation. Learn more.
Accounting Process for Transaction Analysis - WorldWide Webster
On the accounting process, you'll recall from class the accounting process has three major steps. Learn more.
Journal Definition - What is a Journal?
The Journal definition includes a breakdown of areas in the definition. Analyzing the definition of key terms often provides more insight into concepts.
The term journal can be defined as a Record in which transactions are entered before they are posted to ledger accounts; also called the book or original journal. Learn more.
What is a General Ledger? (Recording Nonprofit Transactions)
What is a general ledger? A general ledger is a list of transactions by account. In this lesson, you’ll learn what transactions are, how and when to record them, and how they impact your nonprofit's accounting system. Learn more.
Depreciation explained
What is depreciation? How to calculate depreciation? Depreciation, amortization, and CapEx tutorial.
Overview of depreciation accounting (concept and application), and related topics such as accumulated depreciation, book value, residual value, historical cost, fixed assets, amortization, useful life, capital expenditures (CapEx), and capitalization. Intended for students and business people at both entry and advanced levels. Learn more.
The TRIAL BALANCE Explained (Full Example!)
Learn how to prepare a Trial Balance using T Accounts and Journal Entries. The Trial Balance is made easy in this episode of Accounting Stuff - Accounting Basics for Beginners Lesson 5 - you will learn: Learn more.
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