1. The Accounting Equation

Let's talk about the accounting equation. The accounting equation is pretty simple. It's just assets equals liabilities plus owner's equity. So let's go ahead and put names on these. Assets equals liabilities plus owner's equity. And some of your teachers may say shareholders' equity. Doesn't matter, same thing.

And so we'll have videos on each of these components, on assets, on liabilities, and on owner's equity. But I first just wanna talk about this equation in general and a couple of things about equations. So let's think about super basic equations. Let's say we have an equation, 4 equals 3 plus 1, right? We know that that is true because 3 plus 1 equals 4. Now, if we do something like this, we take that same equation and add 1 to the right side, well, that's no longer true because 3 plus 1 plus 1 is 5, and 5 and 4 aren't equal. And so in the accounting equation, we always have to keep things in balance.

And so we can do that if we take this simple equation here. We can do that by adding 1 to both sides, so 5 equals 5. Or you can take 1 away and add 1. So you can do the opposite thing to the same side because that just cancels out, right?

So when you're looking at the accounting equation, you have to remember, this is an equation. It must always balance. So you can't just go adding assets to one side and not doing anything to the other side because then it's not gonna stay in balance. So if you have the accounting equation, assets equals liabilities plus owner's equity, whatever you do to one side, you have to do to the other.

Or like I said earlier, if you do add $1,000 in assets, you have to take away $1,000 in assets so that these two things still balance out. And what that gives us is something called double entry accounting.

And we'll have a video on this specifically later. But for now, you need to know that double entry means you have to make two entries, at least two entries for every event. So if you paid $1,000 cash, but you got $1,000 of inventory or something like that, then you have these two events. Or if you got $1,000 of inventory, but you didn't pay for it, you took a loan for it, then you have a $1,000 note payable and $1,000 of inventory. And don't worry right now if you don't know what liabilities are and what assets are and what equities are because we'll go over that.

But you need to know that these should always stay in balance, and you must memorize this equation. It is vitally important.