The Accounting Equation Know it!

Just make it easy on your self. Get this little gem in your head and leave it there.

Then you might as well remember the other way it is commonly shown,

But really it doesn't take more than a 5th grade math education to see that those are the same. Lets work through why this is basically what double entry accounting is built around.

First thanks to M.T., J.F. and R.C. for providing ideas and feedback! 

For those that are a couple weeks into their first upper division accounting class, plug through. It was Intro to External Reporting that I first experienced grown adults breaking down into tears following an exam. I got an A, she got tissues soaked in tears, oh memories... 

Assets equal Liabilities plus Owners Equity (or shareholders equity) or Assets minus Liabilities equals Owners Equity or Assets minus Owners Equity equals Liabilities.

Assets equal to Liabilities plus Owners Equity will probably be the most useful. 

What is an asset? Being technical, it is something identifiable, from which the owner expects a future economic benefit and that was acquired through an underlying transaction. This is the stuff the company owns.

Liabilities? These are the opposite of assets. They are identifiable, result from a transaction but the owner expects an economic payable amount in the future. The stuff a company owes.

Owners Equity is sometimes the sticky part. This is basically what is left over. This is what the owners of the company have contributed to get things going, this is also where earnings retained inside the company will build up (you see what I did there?).

Think about buying a car. You buy a $20,000 car with a $5,000 down payment. What is the Asset? $20,000. What is the liability? $15,000 and what is your equity? $5,000.

Over time as you make payments (ignoring the decrease in the value of the car) you build equity. If in the first year you pay down the amount of the loan by $5,000 what has happened? The asset stays the same (again ignoring depreciation) but liabilities and owners equity change. You have $5,000 less liabilities and since A=L+OE, Equity must have increased. Equity would then be $10,000.

Companies do pretty much the same thing just on a bigger scale. 

Keep this in mind when you are working with journal entires and other double entry stuff. If an asset goes up, either a liability went up or owner's equity went up, or some combination of both (take on debt for a new piece of machinery). If a liability went down an asset went down or owners equity went up (cash is used to pay a liability).

Good luck!