Hi! This is Dan O'Brien and I am an accounting instructor at north central Technical College.
And right now we're going over the accounting equation.
Accounting equation or defining assets, liabilities, and equity.
This is where it all starts, and in accounting, everything balances.
We'll have trial balances that balance, we'll have
transactions that balance,
when we do something to one, we can't stop doing that transaction until we do
something to something else.
Okay, if you look at the accounting equation,
assets equal liability plus equity. are basically by have an asset where'd it
Or basically, if I have an asset, where'd it come from?
Did the owner give you the asset?
Well then it was an investment in the business, and so it'll be part of your
capital or part of your equity.
If you got an asset by borrowing money from a bank to buy it,
then it came from liability.
So, it is always in balance. If you look at it anything that happens to a company,
assets will always equal liability plus owner's equity.
Now, understanding what assets are -
assets are gonna be something
that has epic economic resource to the company that can be used either now or
in the future.
Cash is a big one. Everyone understands cash right? It's in your pocket.
There's some other things - for companies especially land.
Inventory, inventory is product that you sell to your customer.
So you can be a merchandise company, you buy and sell it,
that's what you're in business for, or you can be a manufacturer -
you buy material, you produce it, you make it into something else,
and then you sell it to your customer.
Now you can have furniture,
you can have capital equipment, fixed assets
fixed assets, machinery to make some products, or you can have a building
to have people come to your building to buy your product,
or for office space. Those are all typical type of assets.
Supplies that's another type an asset.
Liabilities. Liabilities are what you owe someone.
Where they can come and say, "Please give me money."
Or they can go to a judge and say, "They didn't pay me. Tell them to give me money."
So you have typical liabilities,
Accounts Payable - these are the normal utility bills and things like that,
that come in that the company will pay for.
Notes payable - formal instrument that you signed off saying, "I do or someone something,"
and then you have liabilities,
these are certain debt that you owe to other creditors.
It can be, you know, a bond
then you sell bonds to people.
And that you give them a certain amount of interest
You can have salaries payable - what you owe your employees for wages.
Equity? Equity is basically a company's net worth.
This is the owner's residual claim on the assets.
If an asset is worth a $100,000,
you owe $80,000 to people for liabilities,
the owners claim as $20,000.
We put in owner's capital account for a sole proprietor,
or it will be common stock and retain earnings if it is a corporation.
Now, if an owner takes money
out of the company, that will be an owner's withdrawal.
That will decrease their capital account. So you look at it -
what increases the capital account?
Investment. Owner gives the company more money.
Net Income.
Revenue minus expenses. Net income will increase
the equity account, and then
withdrawal will decrease the capital account.
And that's pretty much how you determine what is your ending capital.
This accounting equation is the basis for all accounting.
Understanding the accounting equation gives you the right focus for everything
that we're going to be covering in accounting.