Chapter 1, Section 1 The Accounting Equation
Commutative Property • The “Commutative Laws” say you can swap numbers over and still get the same answer when you add or multiply. EXAMPLES: 2 + 3 = 5 is the same as 3 + 2 = 5 or 5 = 2 + 3 3 X 2 = 6 is the same as 2 X 3 = 6 or 6 = 3 X 2 • This is known in mathematics as the commutative property
The Accounting Equation • Core mathematical concept: the total value on one side of any equation must equal the total value on the opposite side. • Values may be manipulated in any way. • The accounting equation MUST ALWAYS BALANCE.
A = L + OE • Assets are anything of values owned by a person or business • “A” in the accounting equation represents a business’s TOTAL ASSETS; its property, cash, supplies, and prepaid insurance policies • Liabilities is an amount (of money) OWED (to another person or business) • “L” in the accounting equation represents a business’s TOTAL DEBT
Owner’s Equity • To find the OWNER’S EQUITY, or the business owner’s financial rights to the business’s assets, one totals the business’s ASSETS (value of all things owned) and subtracts the business’s total LIABILITIES (total amounts owed; debt) and whatever remains belongs to the owner or owners personally. A – L = OE
Calculating/Finding Values Using the Accounting Equation • Using core mathematical principles, owners and investors can track the effect of business transactions on a business’s assets, liabilities and the owner’s equity. • Furthermore it is possible to calculate an unknown value if necessary. EXAMPLE A = L + OE: A is 10,000 and L is 3,000. What is OE?
Solving for an “Unknown” Variable A = L + OE (Given) A = 10,000 and L = 3,000 (Substitute) 10,000 = 3,000 + OE (Isolate Unknown Variable – Keep equation in balance!) 10,000 – 3,000 = 3,000 – 3,000 + OE 10,000 – 3,000 = 0 + OE 7,000 = OE The value of the Owner’s Equity is 7,000
Manipulating the Accounting Equation • The core algebraic concept that applying the same mathematical principle to bothsides of an equation simultaneously allows the equation to remain balanced makes it possible to solve for a variety of “unknowns”. • The accounting equation expressed as A=L+OE can be manipulated as A – L = OE or A – OE = L to find a value of liabilities or owner’s equity as needed.
Practice • Solve for the following unknown variables based on the accounting equation (A = L + OE) 5,000 = 2,000 + OE What is OE? A = 1,500 + 3,500 What is A? 8,000 = L + 5,000 What is L? A = 6,000 + 12,500 What is A? 11,000 = 2,900 + OE What is OE? 15,500 = L + 11,000 What is L?