What is the Accounting Equation? A = L + OE
Assets = Liabilities + Owner’s Equity
A = L + OE
What you owned = What you owed + What you have
Imagine you want to buy a Ferrari Sports Car that costs $500,000. You save up for 2 years and you have gotten $280,000. Hence, you borrowed $220,000 from your parents to pay for the car.
After buying the car:
Asset: $500,000 (What you owned – Ferrari)
Liabilities: $220,000 (What you owed – borrowings from your parents)
Owner’s Equity: $280,000 (What you have – your savings)
Therefore, the accounting equation:
• Expresses the relationship between assets of an entity and how those assets are financed
• Assets are resources controlled by an entity
• They can financed in two ways:
– By outside fund providers or liabilities
– By inside funds or equity
What you owned = What you owed + What you have
Imagine you want to buy a Ferrari Sports Car that costs $500,000. You save up for 2 years and you have gotten $280,000. Hence, you borrowed $220,000 from your parents to pay for the car.
After buying the car:
Asset: $500,000 (What you owned – Ferrari)
Liabilities: $220,000 (What you owed – borrowings from your parents)
Owner’s Equity: $280,000 (What you have – your savings)
Therefore, the accounting equation:
• Expresses the relationship between assets of an entity and how those assets are financed
• Assets are resources controlled by an entity
• They can financed in two ways:
– By outside fund providers or liabilities
– By inside funds or equity
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