From the course: Accounting Foundations: Bookkeeping

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The accounting equation

The accounting equation

From the course: Accounting Foundations: Bookkeeping

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The accounting equation

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- Let's begin our analysis of transactions by reviewing some of the basics. First, remember the fundamental accounting equation, assets must equal liabilities plus owner's equity. That is a company's resources can be financed using two sources, creditors or owners. As we said previously, the accounting equation must always remain in balance. To see how this balance is maintained when accounting for business transactions, consider the following activities. In the first transaction, $50,000 is invested by owners. This would cause our assets, specifically cash to increase and our equity, specifically capital stock to increase both by $50,000. In the second transaction we borrow $25,000 from a bank, again our assets, cash, increased by $25,000 and our liabilities since we will have to repay this notes payable increased by $25,000 as well. Note that so far our accounting equation balances after each transaction and in fact, we can always count on that. The accounting equation will always…

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