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THE ACCOUNTING EQUATION Assets = Liabilities + Owner’s Equity Assets – anything of value a business owns Cash, equipment, buildings Accounts Receivable – amount your customers owe you
LIABILITIES & OWNER’S EQUITY Debts of the business Most common is Accounts Payable What your company owes to creditors The total amount of assets minus liabilities gives you the net worth of the business or owner’s equity.
EXAMPLE Jenny has a store with assets of $64,000 Jenny has total liabilities of $21,000 Jenny’s equity in the business is $43,000 The net worth of Jenny’s business is $43,000 Assets ($64,000) = Liabilities ($21,000) + Owner’s Equity ($43,000)
DOUBLE ENTRY ACCOUNTING Debits are on the left Credits are on the right For assets/expense accounts Debits increase the balance Credits decrease the balance For liability and revenue accounts Debits decrease the balance Credits increase the balance