Accounting 101: Chapter 1 The Accounting Formula

This is the first installment of accounting 101 where I will attempt to break down accounting concepts taught in the classroom. This course is completely free and will give you all the skills and knowledge necessary to be successful in accounting 101 (If you insist on paying please leave your email and credit card number in the comments below). At the end of the course you will receive three credits on your transcript; just make sure to mention to the registrar’s office you took an online course that was totally legit and definitely not some blog.

The Magical Accounting Formula

If you only learn one thing it accounting it should be this: Assets = Liabilities + Equity. This will be the cornerstone for everything you learn in accounting 101. One more time: Assets = Liabilities + Owners Equity. Got it? Good!

So lets break this down further. Assets are the stuff you need for your business (buildings, cars, machinery), you get liabilities  when you don’t have the money to buy assets so you take out loans (credit cards, bank loans, line of credits) and equity is your own money that you put in the business and the profits and losses from operations. Of course I am over simplifying this but it is important to really understand this concept. So lets look at an example.

Bob wants to start a pizza business out of his house. He wants to buy an oven so he puts down $10,000 in cash and finances the remaining $40,000. Therefore, Bob has $50,000 in assets (the cost of the oven) $40,000 in liabilities ($40,000 loan) and $10,000 in equity (the money he put in himself). Remember your handy dandy formula. Assets = Liabilities + Equity. $50,000 = $40,000 + $10,000.

Practice Question

Bill the Uber driver buys a $20,000 car for his business. He puts $2,000 down and finances the remaining balance. What is Bills total assets, liabilities and equity? Hint, your assets should equal your liabilities plus your equity.

Answer

$20,000 car = $18,000 loan + $2,000 equity.