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 accounting – period! Assets equal liabilities plus equity.

⏱️TIMESTAMPS⏱️
0:00 Introduction to the accounting equation
0:08 Accounting equation definition
0:45 Accounting equation example: startup
1:25 Accounting equation example: purchases
1:53 Accounting equation example: sales
2:48 Accounting equation example: fixed assets

Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[KesronMcDonald]

This 3 minutes video offered more sense than a 300 page book. Thanks

[AUDJCHANNEL]

Always amazes me how all these YouTube videos can explain this stuff and make it make sense, but high school and sometimes college could never. Thank you for this playlist!

[utlbsgf]

This saves me 57m of reading just to get to know what is an accounting equation, thank you for your great work!

[shaimamohammed]

Thank you very much. I benefited from this simplified information. Best regards to you from Egypt

[markdenzer]

Clearest and most efficient videos on the Internet. Thanks.

[TheFinanceStoryteller]

Why and where are you learning about the accounting equation? Let me know by commenting below!

[annettekitamora]

this helped me so much- thank you! I take finance from a State School and I learned more in two videos from you than 3 weeks in the course (retained info)

[JoshCamacho]

I watched two of your videos and subscribed, you are UNDER RATED! THANK YOU!

[moulicherukuri]

Now you unlooped the clumsiness in my head regarding why are they equal

Thank you very much

[netbeagle]

awesome, so easily explained and understood!

[oneofmany]

Ahh, that makes sense now! I've understood this relationship before, but never the convention that dictates which terms are shown on each side of the equation. Thinking of equity as something that the company owes to shareholders was the missing piece for me.


As a sole proprietor, I always think of things in terms of my equity in my company - specifically, the value of the company to me (E) is whatever it has (A) minus whatever it owes to other people (L). Correspondingly, I internalized the accounting equation as E = A - L. That's "correct" in an algebraic sense, but only makes practical sense in the special case where there's one owner who has all of the equity. I can see the utility of expressing this "properly" in the A = L + E sense, because is more generally useful for companies with more than one equity holder. If I think of my company as "owing" me my equity, it makes sense for me, too. Thank you!


Now, on to understanding why we sometimes use the terms "debit" and "credit" in the seemingly opposite way to what they mean in normal English...

[sandramasuwa]

God will surely reward you for the knowledge shared. Well explained thanks

[manivannanarulalan]

Awesome! simple explanation... Thank you

[randipsingh]

Your all videos are very informative. Keep it up.

[amanshahjahan]

thankyou for this
loved the way u explained

[teachermaria]

Question to the storyteller: at 1:13, we meet the entrepreneurs who pool together 100K. Are those entrepreneurs also considered the shareholders? Meaning, the corporation now owes them this 100K? I'm just starting Accounting I, no idea what I'm doing yet. Thank you for sharing this video, can't wait to hear back from you.

[preagovender]

Thank you for these videos. Have been terrified of accounting all these years. Your videos are really putting it in perspective for me. Just have a question when Inv is sold to Customer on Cr AR is Dr 80K and Retained Earnings is Cr 30K why is it not going to Revenue?

[nandinis]

Assets are recorded on the right-hand side and Liabilities recorded on the left hand side

[aiman]

I have a question! So like accounts payable is something that the company has to pay back when its due.

So what happens after they pay when its due? Will the liabilities be back to 0 and the cash would increase?

[simpleman]

Is this applicable only for a company or does this apply to an individual as well??