{"id":2614,"date":"2020-08-25T22:18:39","date_gmt":"2020-08-25T22:18:39","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=2614"},"modified":"2020-11-22T22:13:20","modified_gmt":"2020-11-22T22:13:20","slug":"the-accounting-equation","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/the-accounting-equation\/","title":{"raw":"The Accounting Equation","rendered":"The Accounting Equation"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Explain the basic accounting question<\/li>\r\n<\/ul>\r\n<\/div>\r\nOne of the cornerstones of financial accounting is the accounting equation, which in its simplest form, looks like this:\r\n<p style=\"padding-left: 30px\">[latex]\\text{A}=\\text{L}+\\text{OE}[\/latex]<\/p>\r\nThis equation has to always stay in balance.\r\n<div class=\"textbox examples\">\r\n<h3>Balancing a New Business<\/h3>\r\nAn owner registers their new company with the state department of business licensing. They take their business license down to the bank and transfer $20,000 of their own money into a new business account. They have now \u201ccapitalized\u201d their business, which means they made a contribution to capital, which increases owner\u2019s equity.\r\n\r\nAt the same time, they have increased the balance in their checking account. From a bookkeeping perspective, you have to make two entries for this one business transaction, and these two entries balance each other out.\r\n<p style=\"padding-left: 30px\">[latex]\\text{A}=\\text{L}+\\text{OE}[\/latex]<\/p>\r\n<p style=\"padding-left: 30px\">[latex]\\$20,000=\\$0+\\$20,000[\/latex]<\/p>\r\n<img class=\"aligncenter wp-image-2803\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/08\/04211119\/Scales20.png\" alt=\"balanced scales with $20,000 on each side\" width=\"401\" height=\"399\" \/>\r\n\r\nNow, suppose the owner also borrows $5,000 from the bank, which is then deposited into their account. A loan will not increase their equity. It is not a capital contribution. It is debt, which is a liability.\r\n\r\nNow, the equation looks like this:\r\n<p style=\"padding-left: 30px\">[latex]\\text{A}=\\text{L}+\\text{OE}[\/latex]<\/p>\r\n<p style=\"padding-left: 30px\">[latex]\\$25,000\\left(\\text{cash}\\right)=\\$5,000\\left(\\text{bank loan}\\right)+\\$20,000\\left(\\text{original capital contribution}\\right)[\/latex]<\/p>\r\n<img class=\"aligncenter wp-image-2804\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/08\/04211553\/Scales25.png\" alt=\"balanced scales with $25,000 on each side\" width=\"400\" height=\"397\" \/>\r\n\r\nAssets are what the business owns. Liabilities are what it owes, and equity is the amount of the company that belongs to the business owner.\r\n\r\n<\/div>\r\n<div class=\"textbox examples\">\r\n<h3>Balance in a Home Loan<\/h3>\r\nThink of the equation in terms of a house. Say the house costs $250,000 and you owe $200,000 to the bank. Your equity in the home is $50,000.\r\n<p style=\"padding-left: 30px\">[latex]\\text{A}=\\text{L}+\\text{OE}[\/latex]<\/p>\r\ncan also be stated as:\r\n<p style=\"padding-left: 30px\">[latex]\\text{A}-\\text{L}=\\text{OE}[\/latex]<\/p>\r\n<p style=\"padding-left: 30px\">[latex]\\text{Assets}=\\text{Liabilities}+\\text{Owner's Equity}[\/latex]<\/p>\r\nIn the case of the house cited above, the equation is [latex]\\$250,000 - \\$200,000 = \\$50,000[\/latex].\r\n\r\n<\/div>\r\nCommit this important accounting concept to memory: Assets = Liabilities + Owner\u2019s Equity\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23333\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Explain the basic accounting question<\/li>\n<\/ul>\n<\/div>\n<p>One of the cornerstones of financial accounting is the accounting equation, which in its simplest form, looks like this:<\/p>\n<p style=\"padding-left: 30px\">[latex]\\text{A}=\\text{L}+\\text{OE}[\/latex]<\/p>\n<p>This equation has to always stay in balance.<\/p>\n<div class=\"textbox examples\">\n<h3>Balancing a New Business<\/h3>\n<p>An owner registers their new company with the state department of business licensing. They take their business license down to the bank and transfer $20,000 of their own money into a new business account. They have now \u201ccapitalized\u201d their business, which means they made a contribution to capital, which increases owner\u2019s equity.<\/p>\n<p>At the same time, they have increased the balance in their checking account. From a bookkeeping perspective, you have to make two entries for this one business transaction, and these two entries balance each other out.<\/p>\n<p style=\"padding-left: 30px\">[latex]\\text{A}=\\text{L}+\\text{OE}[\/latex]<\/p>\n<p style=\"padding-left: 30px\">[latex]\\$20,000=\\$0+\\$20,000[\/latex]<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-2803\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/08\/04211119\/Scales20.png\" alt=\"balanced scales with $20,000 on each side\" width=\"401\" height=\"399\" \/><\/p>\n<p>Now, suppose the owner also borrows $5,000 from the bank, which is then deposited into their account. A loan will not increase their equity. It is not a capital contribution. It is debt, which is a liability.<\/p>\n<p>Now, the equation looks like this:<\/p>\n<p style=\"padding-left: 30px\">[latex]\\text{A}=\\text{L}+\\text{OE}[\/latex]<\/p>\n<p style=\"padding-left: 30px\">[latex]\\$25,000\\left(\\text{cash}\\right)=\\$5,000\\left(\\text{bank loan}\\right)+\\$20,000\\left(\\text{original capital contribution}\\right)[\/latex]<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-2804\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/08\/04211553\/Scales25.png\" alt=\"balanced scales with $25,000 on each side\" width=\"400\" height=\"397\" \/><\/p>\n<p>Assets are what the business owns. Liabilities are what it owes, and equity is the amount of the company that belongs to the business owner.<\/p>\n<\/div>\n<div class=\"textbox examples\">\n<h3>Balance in a Home Loan<\/h3>\n<p>Think of the equation in terms of a house. Say the house costs $250,000 and you owe $200,000 to the bank. Your equity in the home is $50,000.<\/p>\n<p style=\"padding-left: 30px\">[latex]\\text{A}=\\text{L}+\\text{OE}[\/latex]<\/p>\n<p>can also be stated as:<\/p>\n<p style=\"padding-left: 30px\">[latex]\\text{A}-\\text{L}=\\text{OE}[\/latex]<\/p>\n<p style=\"padding-left: 30px\">[latex]\\text{Assets}=\\text{Liabilities}+\\text{Owner's Equity}[\/latex]<\/p>\n<p>In the case of the house cited above, the equation is [latex]\\$250,000 - \\$200,000 = \\$50,000[\/latex].<\/p>\n<\/div>\n<p>Commit this important accounting concept to memory: Assets = Liabilities + Owner\u2019s Equity<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23333\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23333&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23333\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-2614\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>The Accounting Equation. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":17,"menu_order":11,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"The Accounting Equation\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-2614","chapter","type-chapter","status-publish","hentry"],"part":3,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/2614","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/users\/17"}],"version-history":[{"count":8,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/2614\/revisions"}],"predecessor-version":[{"id":6489,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/2614\/revisions\/6489"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/parts\/3"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/2614\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/media?parent=2614"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=2614"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/contributor?post=2614"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/license?post=2614"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}