Chapter 1: The Accounting Equation

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A = L + E

  • Assets: All property owned by the company
  • Liabilities: All debts the company has outstanding to lenders
  • Equity: The company's ownership interest in assets after debts are paid

For example if you own a $300k home with a mortgage of $230k then your equity is $70k.

A   = L   + E
300 = 230 + 70

If you pay off $15k of your mortgage then your accounting equation becomes

A   = L   + E
300 = 215 + 85

Your liability (your mortgage) is actually an asset for the bank! Similarly your savings account (asset) is a liability for the bank

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  • 10 months ago by vince