Accounting Basics: The Accounting Equation

For our next accounting basics video we discussed the accounting equation. The basic accounting equation is:

Assets = Liabilities + Owner's Equity

This equation always needs to balance. The accounting equation can be expanded to include a few additional accounts:

Assets = Liabilities + (Equity - Drawings + Revenue - Expenses)

This equation expands the equity portion of our accounting equation. Drawings and expenses decrease equity while revenue increases it.

After going over the accounting equation we went over debits and credits. Many people think of debiting an account as decreasing the account and crediting the account will increase it. That is not true in accounting. Accounts in accounting are assigned a normal credit or normal debit balance. An account with a normal debit balance is increased with a debit balance and decreased with a credit balance. Accounts with a normal debit balance are assets, expenses, and drawings. An account with a normal credit balance are increased with a credit and decreased with a debit. Accounts with a normal credit balance are liabilities, equity, and revenue. Check out the video for a trick on how to remember normal balances.

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We do not provide assurance services and therefore do not meet the definition of a public accounting firm in the state of Ohio.

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