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The Accounting Equation

The accounting equation is pretty simple...

Assets = Liabilities + Equity

...and serves as the basis of all accounting work that you'll do in this course!

Let's run through a quick scenario to see how this might work.

Lemonade stand scenario

Imagine you run a lemonade stand and that you currently have $500 in assets. This includes your table, the lemon-squeezer, pitcher, cups, etc.

$500 = Liabilities + Equity

This means that our liabilities and equity must equate to $500 as well!

In our case, we currently have $100 in payment we made on credit for the table that we still need to pay off. This can be represented as a liability...

$500 = $100 + Equity

...and the remaining $400 is ours as equity. In other words, if we sold off our assets and evened-up on our liabilities, we'd receive $400.

$500 = $100 + $400

Your assets must always equal your liabilities + equity! If they don't... you've done something wrong!