Wednesday, November 29, 2006

The Accounting Equation

The very essence of accounting can be broken down to what is called the Accounting Equation. This equation has 3 major parts. They are:

Assets - which are things of value , such as cash, equipment, supplies, buildings, and land.

Liabilities - which are the debts that you owe.

Equity - is what is left after you subtract liabilities from assets.

So the equation is:

Assets = Liabilities + Equity

If you know any of the 2 parts of the equation, you can solve for the third part. Here is an example:

Assets (?) = Liabilities (3,500) + Equity (10,000)

? = 3,500 + 10,000

13,500 = Assets

Pretty simple stuff, but one thing that is not stressed enough in beginning accounting courses. If you know this equation you then should be able to figure out most of your entries. Why? Because everything has to equal.

Here are a couple of variations on the equation that you can work on.

Assets (10,000) - Liabilities (5000) = Equity (?)

Assets (15,000) = Liabilities (?) + Equity (5000)

Assets (12,500) = Liabilities (3500) + Equity (?)

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