From the course: Financial Accounting Foundations
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The accounting equation
From the course: Financial Accounting Foundations
The accounting equation
- The balance sheet is built around one of the most awesome creations of the human mind, the accounting equation. There it is. Assets equal liabilities plus equity. Now, I can tell you're underwhelmed, you were expecting a little bit more, something like Einstein's famous equation E equals MC-squared, well, in it's own way, the accounting equation is just as great as E equals MC-squared. Let me tell you where this accounting equation comes from. First, the asset side. People have been listing assets for thousands of years. There's primitive written evidence that farmers were keeping lists of assets 7000 years ago in Ancient Mesopotamia. The great insight behind the accounting equation was created a little bit over 500 years ago in Italy. The traders in Venice and other traders in Italy had this insight. Listen, let's keep a list of our assets like we've always been doing, but in addition, every time we get an asset…
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