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A breakdown of the basic accounting equation:
Assets = Liabilities + Equity.
It explains the equation and provides an example to illustrate how it works.
The Equation:
The core of the explanation states that Assets (what a business owns) are equal to Liabilities (what a business owes) plus Equity (what belongs to the owners). This is presented as the foundation of all accounting.
Example:
Initially, a business starts with $1000 cash, which is recorded as $1000 in Assets and $1000 in Equity (capital).
When the business borrows $500, the Assets increase to $1500 (cash), Liabilities increase to $500 (loan), and Equity remains at $1000.
The example shows that the equation remains balanced: $1500 (Assets) = $500 (Liabilities) + $1000 (Equity).
Importance:
The explanation highlights that every journal entry affects this equation, and if the equation doesn\'t balance, there is an error. It emphasizes mastering this equation as a fundamental step for anyone new to accounting.
Apr 29, 2025
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