The accounting equation is the basic framework for recording financial transactions.
The equation is: assets equal liabilities plus equity.
Remember that this is the accounting equation not be accounting suggestion, so it must always be in balance.
The asset side must always equal the liability and equity side.
Assets are economic resources of a business.
They are items that have value
and will provide benefit into the future.
The slide shows some common examples that you'll see in the future.
Liabilities are claims against those assets from outside parties commonly known as creditors.
You might think of liabilities as debts.
Again. there are some common liabilities listed on the slide.
Stockholders' equity
are the owners claims on the assets. Stockholders always have secondary claim behind creditors.
Sometimes stockholders' equity is known as net worth or net assets.
Stockholders' equity is increased when a corporation issues additional stock to stockholders
and when it has net income.
It is decreased when it pays dividends to stockholders
and when it has a net loss.
Now let's recall that net income is revenues minus expenses
when revenues are greater than expenses.
Net loss is revenues minus expenses when expenses are greater than revenues.
So another way to think about the impact of net income, or net loss on the account equation,
is that revenues increase stockholders' equity
and expenses decrease stockholders' equity.
Dividends are a reduction in owner's equity.
It occurs when a corporation pays out some of its retained earnings to stockholders usually in the form of a cash payment.
Revenues are inflows that result from business activities entered into for the purpose of earning income.
So if a company performs service for customer it earns service revenue,
if it sells goods to a customer in earns sales revenue.
And you can see a few more examples on the slide.
Expenses are the cost of assets used up or the result of liabilities incurred in the process of earning revenues.
I like to think of expenses of a cost of doing business.
You can see some common examples of expenses here on the slide.
Now, let's look at a basic example of the accounting equation.
Let's say house is worth $200,000.
The house is an asset because it has value and will provide benefit into the future.
However, there's also a home loan called a mortgage.
Let's say that amount is 150,000
A mortgage is a liability because it's a claim against the asset from an outside party, which in this case is a bank.
So it's important to note that a house
or a home and a home mortgage are two different things.
At this point they accounting equation is not in balance because 200,000 does not equal 150,000.
The remainder is equity. The owner has $50,000 of equity in the home.
Equity represents the owner's claim on the asset.
And that concludes is brief overview
of the accounting equation.