The accounting equation and why the balance always balances


The accounting equation and why the balance always balances

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Are we talking about *assets = liability + equity*? It’s just what we define a company’s assets to be for the sake of proper bookkeeping. It’s as simple as what you are is what you have minus what you owe.

The accounting balance of assets = equity + liabilities is descriptive, not prescriptive

You can think of it as assets – liabilities = equity

Your gross worth is all of the assets you own (things that can provide value for you in the future).

Loans are obligations to others, of which settling may lead to you being forced to give up your assets (where through selling or through bankruptcy). And so liabilities threaten the security of your assets from providing value in the future.

Deducting value of liabilities from your assets therefore leaves you with asset value that isnt threatened by liabilities.

Hence this is considered by the company’s net value ie. Equity. And so the equation is just the above but backwards.

And so theoretically it should always balance (A = L+ E) with any financial movement.

Let’s use an example transaction. You sell an item for cash.

You get cash, which is an Asset account, and its balancing entry is an increase in revenue, which is in Owner’s Equity.

In addition, you have given up Invenfory (which is also an Asset account), and this is balanced by recognizing an expense in Owner’s Equity (ie Cost of Goods Sold).

This example has changes on one side affecting the other side. You can also have entries that don’t cross the equals sign. For example, if you buy inventory with cash, your cash Asset decreases but your inventory Asset increases. Or if you expect a future liability but you don’t pay out cash yet for it, the increase in Liability will decrease Owner Equity (by decreasing net income by increasing expense as recognized on the P&L).

All bachelors are unmarried, by definition. There is never an exception where you can have a married bachelor. The account equation always balances because it by definition has to. There is no other logical possibility.