The Accounting Equation

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In this video we're gonna talk about the accounting equation.

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This is another video from accounting101.org.

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If you'd like to see more accounting videos and tutorials and explanations, you can go to our website at
accounting101.org.

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The accounting equation, now, every transaction that happens within a business has an effect on its financial position.

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And the accounting equation is what we can use that basically keeps all the transactions in balance and helps users of the
information make sense of what areas each transaction affects.

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The financial position of any company is based on the following items, the assets or what the company owns, the
liabilities, which is what the company owes, and the owners' equity, which is the difference between assets and liabilities.

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So the accounting equation is this, Assets = Liabilities + Owners' Equity.

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If the books are balanced correctly, then assets will always equal the liabilities plus the owners' equity.

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So, on our balance sheet, on the left side of the balance sheet you have assets, and on the right side of the balance sheet
you have liabilities, and below that you have owners' equity.

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Now, just as an example, let's say that under our assets we have cash of $1,000.

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We also have accounts receivable or notes of what people owe us for $1,000.

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Inventory worth $2,000, and land with a value of $1,000.

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Under liabilities we might have accounts payable for 1,000, notes payable for 1,000, and under owners' equity we'll have
common stock for 1,000 and retained earnings for 1,000 as well.

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So as you can see, on the left side of the balance sheet you have the assets, and on the right side of the balance sheet
you have the liabilities and the owners' equity.

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And if you add those up on the left side, the assets total $4,000, on the right side of the balance sheet, the liabilities all
together equal $2,000 and the owners' equity also equals $2,000.

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The liabilities plus the owner's equity will also equal $4,000.

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And that's why the balance sheet is called the balance sheet, the left side of the balance sheet will always equal the right
side of the balance sheet.

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And so, again, the accounting equation is assets equals liabilities plus owners' equity.

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And we'll go into more detail about assets and liabilities and owners' equity and what they all mean.

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We'll go more in-depth in some of the other videos on accounting101.org.

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So this has been another video from accounting101.org and, again, you can visit our site for more accounting videos,
tutorials, and explanations at accounting101.org

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