The Basic Accounting Equation kicks assets
In our quest to help you perform your business evaluation better, Datacraft has another installment of our accounting basics. 
This time around we're going to focus on the "Basic Accounting Equation". It's a simple equation that is easy to use and important to understand
Basic Accounting Equation
Here's what it looks like:
Assets = Liabilities + Equity
(Owned) = (Owed) + (Net worth)
The accounting equation helps you to better understand how your assets were financed. It shows whether the assets were financed by borrowing money (liabilities) or contributed by the company (equity).
Here's a quick and easy example:
Daisy May decides that she wants to start up her own company called May, Inc.
Transaction 1: Daisy May invests $10,000 into Daisy May Inc. :
| Transaction |
Assets
(owned) |
= |
Liabilities
(owed) |
+ |
Owner's Equity
(net worth) |
| 1 |
$10,000 |
= |
$0 |
+ |
$10,000 |
| Total |
$10,000 |
= |
$0 |
+ |
$10,000 |
Daisy invested $10,000 of her own money into May, Inc., this transaction only effects the assets and equity because Daisy invested her own money to start the company. Since she didn't rely on a lender, May, Inc.'s liability remains at "0"
Transaction 2: Daisy withdrawals $150 from business accounts to pay for supplies:
| Transaction |
Assets
(owned) |
= |
Liabilities
(owed) |
+ |
Owner's Equity
(net worth) |
| 1 |
$10,000 |
= |
$0 |
+ |
$10,000 |
| 2 |
-$150 |
= |
$0 |
+ |
-$150 |
| Total |
$9,850 |
= |
$0 |
+ |
$9,850 |
Daisy used May Inc.'s money to order business supplies. Again, because she did not borrow from a lender the liability remains at "0" while both the equity and assets are affected.
Transaction 3: May Inc. borrows $3,000 from the bank to help pay for new computers:
| Transaction |
Assets
(owned) |
= |
Liabilities
(owed) |
+ |
Owner's Equity
(net worth) |
| 1 |
$10,000 |
= |
$0 |
+ |
$10,000 |
| 2 |
-$150 |
= |
$0 |
+ |
-$150 |
| 3 |
$3,000 |
= |
$3,000 |
+ |
$0 |
| Total |
$12,850 |
= |
$3,000 |
+ |
$9,850 |
This time, liabilities were affected because she is borrowing from a lender. The $3,000 given to May, Inc. is liability because the company doesn't own that money and has to pay it back to its lenders.
Transaction 4: May, Inc. sells $545 worth of goods to a customer:
| Transaction |
Assets
(owned) |
= |
Liabilities
(owed) |
+ |
Owner's Equity
(net worth) |
| 1 |
$10,000 |
= |
$0 |
+ |
$10,000 |
| 2 |
-$150 |
= |
$0 |
+ |
-$150 |
| 3 |
$3,000 |
= |
$3,000 |
+ |
$0 |
| 4 |
$545 |
= |
$0 |
+ |
$545 |
| Total |
$13,395 |
= |
$3,000 |
+ |
$10,395 |
Assets and equity were effected this time because May, Inc. sold goods to a customer. Once again, liabilities were not affected because the money coming in was not from a lender.
We could go on all day but we're pretty sure that you have the hang of it
May, Inc.'s assets equal $13,395 and there are two places where that money came from; liabilities and equity. May, Inc. has $3,000 in liabilities, which is the money borrowed from the bank (also considered the lenders money), and $10,395 that the company contributed through either investments made by Daisy or by selling goods.
Even though this is a fairly simple example, it can be put to practice for any business no matter how large or small.
We promised it would be easy didn't we? That's why they named it the Basic Accounting Equation.
