Understanding the Accounting Equation Basics (chapter 1)

Hello and welcome to this session. Hello and welcome to the session. This is Professor Farhat. This is Professor Farhat. In this session we're going to be looking at the famous accounting equation. In this session we're going to be looking at the famous accounting equation. I'm going to cover the accounting equation as you would cover it in a financial accounting or introductory course. I'm going to cover the accounting equation as you would cover it in a financial accounting or introductory course. So you don't need any prior background. So you don't need any prior background. I'm going to go ahead and break the accounting equation for you and hopefully by the time you are done you'll be good to go. I'm going to go ahead and break the accounting equation for you. And hopefully by the time you are done, you will be good to go. This topic also could be used if you're studying for your CPA exam. This topic also could be used if you're studying for your CPA exam. This is basically basic. This is basically basic. You need to know this if you're studying for your exam. You need to know this if you're studying for your exam. As always, As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. YouTube is where you would need to subscribe. I have 1,600 plus accounting, I have 1,600 plus accounting, auditing, auditing, finance, finance, and tax lectures. and tax lectures. I don't only cover financial accounting, I don't only cover financial accounting. I cover all these courses as well. I cover all these courses as well. Please like this recording if you like it. Please like this recording if you like it. Share it with others. Share it with others. If you're benefiting from this recording, If you're benefiting from this recording, it means it might benefit other people. it means it might benefit other people. So share the wealth. So share the wealth. On my website, On my website, farhatlectures.com. farhatlectures.com. You will have access to additional resources if you're an accounting student or You will have access to additional resources if you're an accounting student or CPA candidate. CPA candidate. PowerPoint, PowerPoint, TrueFalse, TrueFalse, Multiple Choice, Multiple Choice, and 2000 plus CPA questions. and 2000 plus CPA questions. Check it out. Check it out. It's an investment in your career, It's an investment in your career, investment in your education. investment in your education. So let's take a look at the basic accounting equation. So let's take a look at the basic accounting equation. The basic accounting equation. The basic accounting equation, And here's the equation. and here's the equation. Let's state that assets are equal to liabilities plus equity. It states that assets are equal to liabilities plus equity. That's the accounting equation. That's the accounting equation. Okay. Okay, Now. now. It's very important, It's very important, very powerful equation. very powerful equation, And once you understand the accounting equation, and once you understand the accounting equation, it's easier to always see the big picture. it's easier to always see the big picture, And that's why that's the first thing we teach in accounting. and that's why that's the first thing we teach in accounting. So now you're going to learn about basic concepts that you need to have a good understanding about, So now you're going to learn about basic concepts that you need to have a good understanding about, because it's going to help you throughout your accounting courses, because it's going to help you throughout your accounting courses, throughout your accounting career. throughout your accounting career. So most likely there's a good chance this is the first time you are listening to this topic, So most likely, there's a good chance this is the first time you are listening to this topic, or you never learned it before. or you never learned it before, And this is the first time you're going to learn it and learn it well. and this is the first time you're going to learn it and learn it well. So let's get going. So let's get going. So... So. the first term is assets so you need to need to know what is an asset simply put asset is a resource asset is a resource asset is The first term is assets. So you need to know what is an asset. Simply put, asset is a resource. Asset is a resource that will provide a resource that will provide future future... benefit to the business. benefit to the business. So that's basically what is an asset and that's all you need to know for now. So that's basically what is an asset. And that's all what you need to know for now. It's a resource or assets are resources. It's a resource or assets or resources, resources that will provide future benefit for the business. Resources that will provide future benefit for the business. So what does that mean? So what does that mean? It means you have something, It means you have something, you have something. you have something, now you don't have to own it. Now you don't have to own it. It's good if you own it, It's good if you own it, own or control. own or control. You don't have to own an asset. You don't have to own an asset. Let's think about the real world or think about yourself personally. Let's think about the real world or think about yourself personally. What could you have What could you have that will benefit you in the future. that will benefit you in the future. What could you own or control? What could you own or control? Think about a car. Think about a car. If you own or control a car, If you own or control a car, if you could use the car, if you could use the car, you can go to work. you can go to work. Do you have a computer? Do you have a computer? Do you have a cell phone? Do you have a cell phone? Okay, Okay, those are all assets. those are all assets. Now, Now, we're not talking about personal assets, we're not talking about personal assets, we're talking about business. we're talking about business. Remember, Remember, when we do accounting, when we do accounting, we do accounting from a business perspective. we do accounting from a business perspective. Now, Now, That's what assets are. That's what assets are. But the most important asset that you could have or a company can have, But the most important asset that you could have or a company can have, and I'm hoping you are thinking about it, and I'm hoping you are thinking about it, and that is cash. and that is cash. Cash in your pocket. Cash in your pocket. If you have cash in your pocket, If you have cash in your pocket, it's the best resource that will do anything, it's the best resource that will do anything, that will provide future benefit for you in any way, that will provide future benefit for you in any way, shape, shape, or form. or form. What can you do with cash? What can you do with cash? You can pay bills. You can pay bills. You can pay your employees. You can pay your employees. You can buy supplies. You can buy supplies. You can pay dividend, You can pay dividend, which is some of the terms you may not understand now, which is some of the terms you may not understand now, but you can do anything. but you can do anything. Cash is an asset. Cash is an asset. Think about land. Think about land. If you own a piece of land, If you own a piece of land, it's an asset. it's an asset. If you own or control a building, If you own or control a building, that's an asset. that's an asset. If you have office supplies, If you have office supplies, it's an asset. it's an asset. If you have car or vehicle, If you have car or vehicle, it's an asset. it's an asset. If you have truck. If you have truck. it's an asset if you have a machinery it's an asset so notice all of those all these that i named cash land building office supplies truck machinery vehicle car all these all these items they fit that they fit the definition of providing future benefit you can use them in the business to get benefits so that's basically what an asset is in a nutshell and that's all what you need to know for now now there are many It's an asset. If you have a machinery, it's an asset. So notice all of those, all these that I named, cash, land, building, office supplies, truck, machinery, vehicle, car, all these items, they fit the definition of providing future benefit. You can use them in the business to get benefit. So that's basically what an asset is in a nutshell. And that's all what you need to know for now. Now, there are many other assets that we would learn about later many other assets but for the purpose of this session just we need to know what an asset is so that's what that's what's an asset so we are done with assets let's talk about liabilities if you want to use one word for liabilities to make it easy liabilities are debt now other assets that we would learn about later, many other assets. But for the purpose of this session, just we need to know what an asset is. So that's what's an asset. So we are done with assets. Let's talk about liabilities. If you want to use one word for liabilities to make it easy, liabilities are debt. Now what is a debt? what is it that hopefully we are all familiar with that you might have hopefully we are not but we are okay so you might have credit card Hopefully we are all familiar with debt. You might have, hopefully we are not, but we are, okay? So you might have credit card. that you might have that you might have Student loan, Student loan, debt. debt. You might have, You might have, hopefully not, hopefully not, personal loan, personal loan, loan that you took out. loan that you took out. You might have a car loan. You might have a car loan. So notice you have debt or loans. So notice you have debt or loans. Those are all liabilities. Those are all liabilities. Now what is the definition for a liability? Now what is the definition for a liability? Well, Well, a liability is something that's going to use up a liability is something that's going to use up Resources to settle. Resources to settle. Simply put, Simply put, liabilities, liabilities, it's an obligation that will require the future sacrifice it's an obligation that will require the future sacrifice of assets, of assets, generally speaking cash. generally speaking cash. We need cash. we need cash we need to use cash to settle the obligation so obligation that would require future sacrifice of an asset usually cash liabilities something happened in the past liabilities occur liabilities We need to use cash to settle the obligation. So obligation that would require future sacrifice of an asset, usually cash. Liabilities, something happened in the past. Liabilities occur because something happened in the past. occur because something happened in the past what do i mean by What do I mean by this? Think about it. Think about it. When do you have a liability? When do you have a liability? It's when you did something in the past. It's when you did something in the past. Like what? Like what? You borrowed money. You borrowed money. If you borrowed money in the past, If you borrowed money in the past, you have a liability today that you have to pay in the future. do you have a liability today that you have to pay in the future? So basically, So basically, a liability is today a liability is today for something that happened in the past and in the future you have to pay. a liability is today a liability is today for something that happened in the past and in the future you have to pay. So it has a past effect. So it has a past effect. a current effect and a future effect and once you pay it it goes away once you pay the liability it goes away now we talked about personal liabilities like car loan credit card debt personal loan student loan so on and so forth now for businesses or a mortgage for a house for businesses you do have also that now for the purpose of today we're going to only cover two types of debts just kind of illustrate the point the a current effect and a future effect and once you pay it it goes away once you pay the liability it goes away now we talked about personal liabilities like car loan credit card debt personal loan student loan so on and so forth now for businesses or a mortgage for a house for businesses you do have also that now for the purpose of today we're going to only cover two types of debts just kind of illustrate the point the two debts that we're going to be defining today for businesses are two debts that we're going to be defining today for businesses are Accounts Accounts Payable. And what is Accounts Payable? Payable. And what is Accounts Payable? It's when the company buys goods or services on account. It's when the company buys goods or services on account. What does that mean? What does that mean? It means when the company buys goods and services. It means when the company buys goods and services. When we buy inventory, When we buy inventory, when we buy supplies, when we buy supplies, when we hire someone to do some work for us. when we hire someone to do some work for us, what we tell them, What we tell them, we tell them we're going to pay you later. we tell them we're going to pay you later. We're not going to pay you now. We're not going to pay you now. So the company buys those goods and services on account. So the company buys those goods and services on account. On account means we don't pay now. On account means we don't pay now. If we don't pay now, If we don't pay now, we have a liability called accounts payable. we have a liability called accounts payable. We have another liability. We have another liability. It's called notes payable. It's called notes payable. And what is notes payable? And what is notes payable? Notes payable is a fancy word, Notes payable is a fancy word for loan. is a fancy word for loan. so notes payable is a fancy word for a loan and what is a loan is when is when the company is when the company borrow money and the company always borrows always borrow money company borrows money they always borrow money most So notes payable is a fancy word for a loan. And what is a loan? It's when the company borrow money. And the company always borrows money. The company borrows money. They always borrow money. Most companies, companies as far as i know uh you know it's borrowing money is is part of doing business so that's those are two liabilities okay that's what a liability is now we know what a liability is we know what assets are as far as I know, borrowing money is part of doing business. So those are true liabilities. That's what a liability is. Now we know what a liability is. We know what assets are. Let's see if we can determine what is an equity. Let's see if we can determine what is an equity. So let's use some numbers to start to kind of explain equity here. So let's use some numbers to start to kind of explain equity here. Let's assume as a company Let's assume as a company, I have I have 200,000 worth of assets. 200,000 worth of assets. So I have So I have 200,000 worth of assets and we know what assets are. 200,000 worth of assets. And we know what assets are. We have all sorts of assets and we have 200,000 worth of those, We have all sorts of assets. And we have 200,000 worth of those, a list of many things. a list of many things. And we happen to have And we happen to have... 80,000 of liabilities. 80,000 of liabilities. We have We have 80,000 of liabilities. 80,000 of liabilities. Now, Now, can you complete this accounting equation? can you complete this accounting equation? If I told you we have assets of 200, If I told you we have assets of 200, liabilities of 80, liabilities of 80, well, well, I can kind of find out my equity is 120. I can kind of find out my equity is 120. Why? Why? Because if assets equal to liabilities and equity, Because if assets equal to liabilities and equity, you're telling me I have 80,000 of liabilities. you're telling me I have 80,000 of liabilities. Therefore, Therefore, I can fairly assume my equity should be 120. I can fairly assume my equity should be 120. Now let's rearrange this formula and make a little bit more sense of this equation. Now let's rearrange this formula and make a little bit more sense of this equation. Another way to look at the equation is to say equity equal to assets minus liabilities. Another way to look at the equation is to say equity equal to assets minus liabilities. That's what equity equal to. That's what equity equal to. If I rearrange the formula, If I rearrange the formula, simply put, simply put, if I say my equity is 120, if I say my equity is 120. equal to assets of 200,000 minus 80,000 of liabilities, equal to assets of 200,000 minus 80,000 of liabilities, all is fine and dandy. all is fine and dandy. That's what equity is. That's what equity is. So what does that mean? So what does that mean? Well, Well, another way to look at equity, another way to look at equity, we can call equity net assets. we can call equity net assets. We can call equity on a personal level, We can call equity on a personal level net worth. net worth. We can call equity residual. We can call equity residual. Value Value, All these words can be used for equity. all these words can be used for equity. Net asset means the difference between asset and your liabilities. Net asset means the difference between asset and your liabilities. Net worth means after you liquidate your asset and pay off your liabilities, Net worth means after you liquidate your asset and pay off your liabilities, you are left with 120. you are left with 120. Residual value is what's left after you pay off your liabilities. Residual value is what's left after you pay off your liabilities. Those are three words for equity, Those are three words for equity, but that doesn't help us. but that doesn't help us. So what is equity, So what is equity really? really? Well, Well, equity is what's left in the company, equity is what's left in the company, the value of the company after you pay off your liabilities. the value of the company after you pay off your liabilities. The question becomes, The question becomes, we know how you... we know how you... We know how we can obtain assets, We know how we can obtain assets, or kind of, or kind of, we know how to obtain assets, we know how to obtain assets, how to obtain liabilities. how to obtain liabilities. If we borrow money, If we borrow money, we have assets and liabilities. we have assets and liabilities. But what affects equity? But what affects equity? So what can, So what can, think about it, think about it, what can increase my net asset? what can increase my net asset? What can increase my net worth? What can increase my net worth? What can increase my residual value? What can increase my residual value? What can increase my equity? What can increase my equity? Oh, Oh, well, well, let's think about it. let's think about it. There are four things that you need to be aware of. There are four things that you need to be aware of. Four things you need to be familiar with. Four things you need to be familiar with. Four. Four. Four. Four. Four things we need to be familiar with. four things we need to be familiar with. Those four, Those four, two of them, two of them, two of those four will increase equity, two of those four will increase equity, okay, okay, and two of them they would reduce equity. and two of them, they would reduce equity. So we need to know about the account that increases equity and the account that reduces equity. So we need to know about the account that increases equity and the account that reduces equity. So now we are working only with equity. So now we are working only with equity. We are only working with this part of the equation. We are only working with this part of the equation. What are those two things that increase equity and the two things that reduce equity? What are those two things that increase equity and the two things that reduce equity? Well, Well, think about it for a moment. think about it for a moment. If you want to increase your net worth, If you want to increase your net worth, if you want to have more assets than liabilities, if you want to have more assets than liabilities, what would you do? what would you do? Well, Well, I need to get more assets without increasing my liabilities. I need to get more assets without increasing my liabilities. What can I do? What can I do? How can I get more assets? How can I get more assets? Well, Well, guess what? guess what? If I work, If I work, if I get a second job or a better job, if I get a second job or a better job, or if I can generate more income for myself, or if I can generate more income for myself, I can increase my assets without increasing my liabilities. I can increase my assets without increasing my liabilities. So, So what do we call this? what do we call this? We call this a new term called revenues. We call this a new term called revenues. What is a revenue? What is a revenue? A revenue is what the company does to generate more assets. A revenue is what the company does to generate more assets. Each company does something different. Each company does something different. For example, For example, your university where you are attending, your university where you are attending generate income by tuition. generate income by tuition. So they charge you tuition and that's your revenue. So they charge you tuition and that's their revenue. If you go on amazon.com and you buy If you go on Amazon.com and you buy... That's sales for Amazon. That's sales for Amazon. If you go to your local shop and you buy something from your local shop, If you go to your local shop and you buy something from your local shop, that's sales revenue for your local shop. that's sales revenue for your local shop. If you are, If you are, let's assume you are an engineer and someone hires you, let's assume you are an engineer and someone hires you, then they pay you. then they pay you. That's your revenue, That's your revenue, engineering revenue. engineering revenue. So each individual, So each individual, they'll have a different type of revenue. they'll have a different type of revenue. So revenue is what the company does to generate assets. So revenue is what the company does to generate assets. What does on a day-to-day basis, What does on a day-to-day basis, like that's what they do for a living. like that's what they do for a living. Basically what the company does for a living. Basically what the company does for a living. So revenues increase equity. So revenues increase equity. Now, Now, that's good so revenues are good so let's look at something that decrease equity what could decrease equity well think about it if you have a business you're going to generate revenues but as you're generating revenues you're going to have to incur expenses That's good. So revenues are good. So let's look at something that decrease equity. What could decrease equity? Well, think about it. If you have a business, you're going to generate revenues. But as you're generating revenues, you're going to have to incur expenses. well what are expenses well expenses reduces equity expenses reduces equity revenues increases equity Well, what are expenses? Well, expenses reduces equity. Expenses reduces equity. Revenues increases equity. So what are expenses? So what are expenses? Expenses is the cost to run your business. Expenses is the cost to run your business. Cost to run your business. Cost to run your business. So no company can generate revenues without incurring expenses. So no company can generate revenues without incurring expenses. It'll be great. It'll be great. It will be excellent. It will be excellent. It will be excellent if I can just generate revenues without incurring expenses. It will be excellent if I can just generate revenues without incurring expenses. For example, For example, when I teach at the university, when I teach at the university, I have to drive my car over there. I have to drive my car over there. So yes, So yes, I am generating revenue. I am generating revenue. But I also have to pay for gasoline, But I also have to pay for gasoline. I have to pay for parking. I have to pay for parking, I have to pay for other expenditure I have to pay for other expenditure. So those are expenses. So those are expenses for example a company might have to pay for their utilities For example, a company might have to pay for their utilities, They have to pay for their cell phone. they have to pay for their cell phone, they have to pay for the internet service, They have to pay for the internet service. They have to pay for insurance They have to pay for rent. they have to pay for insurance, they have to pay for rent. So what is an expense? So what is an expense? It's the cost to run the business It's the cost to run the business. So that's the second item that affect equity and it's kind of think of it is the opposite of revenue now Here's what we need to know about revenues and expenses So that's the second item that affect equity. And it's kind of think of it as the opposite of revenue. Now here's what we need to know about revenues and expenses. We have a formula that says if we take our revenues minus our expenses, We have a formula that says if we take our revenues minus our expenses, it's going to give us the difference between those. it's going to give us the difference between those. It's going to give us net income or net loss for that matter, It's going to give us net income or net loss for that matter, or net income. net income. So that's the first thing I want you to learn, So that's the first thing I want you to learn. or loss. or loss simply put if we have revenues of 80 Simply put, if we have revenues of $80,000. 000 expenses of 30 Expenses of 30,000 000 we have a net income of 50 000 and that's what net income is okay net income is the difference between revenues and expenses they are both equity account both revenue is equity and expenses are equity one We have a net income of 50,000. And that's what net income is. Okay, net income is the difference between revenues and expenses. They are both equity account. Both revenues, equity, and expenses are equity. One increases equity, increases equity the other one decreases equity the other one decreases equity. Now, Now those are the two equity accounts. those are the two equity account. Now, Now I said there are four so we have to look for the other two. I said there are four, so we have to look for the other two. Let's think about if you like a company. Let's think about if you like a company. What can you do if you like a company? What can you do if you like a company? If you like a company, If you like a company you can invest. you can invest, you can contribute capital. You can contribute capital. So, So you can give the company money. you can give the company money. So, So if you like my company you would like I like your company. if you like my company, you would like, I like your company, great. Great if you like my company invest in my company. If you like my company, invest in my company, give me money, Give me money. give the company money and I will give you shares in the company. Give the company money and I'll give you shares in the company. So, So we need to understand is we have something called what we need to understand is we have something called contributed capital. contributed capital or we're going to see it the account is called common stock Or we're going to see it. The account is called common stock. What is that account? what is that account well if you like a company and this is going to increase equity this is going to increase equity so we already identified the two accounts that increase equity revenue and common stock Well, if you like a company and this is going to increase equity, this is going to increase equity. So we already identified the two accounts that increase equity revenue and common stock. What does the common stock represent? What does the common stock represent? It represents how much the investors invested in the business. It represent how much the investors invested in the business. What does that mean? What does that mean? If we want the investors give you money when the investors give you money. When the investors give you money, Okay. they invest in your business. They invest in your business. It means they want to be owners. It means they want to be owners. If they want to be owners, If they want to be owners, they have to give you money. they have to give you money. When they give you money, When they give you money, your assets go up. your assets go up when they give you cash, When they give you cash, and your common stock goes up. your common stock goes up. So that's another way to increase your equity, So that's another way to increase your equity, is to try to convince people to invest with you. is to try to convince people to invest with you, to invest in your company not invest in you it's the company that's what contributed capital is now why would people invest in your company so why would you like a company well you like a company for one reason it's because the company is good good in a sense that it's making a profit and to invest in your company, not invest in you, it's the company. That's what contributed capital is. Now, why would people invest in your company? So why would you like a company? Well, you like a company for one reason. It's because the company is good. Good in a sense that it's making a profit, and when it makes that profit, when it makes that profit they're going to give you part of the profit so what's going to happen is this we have another account that they're going to give you part of the profit. So what's going to happen is this. We have another account that when they make a profit, when they get when they make a profit let's go back to this actually to this example you remember this fictitious company here they made 80 000 of revenues 30 000 of expenses the company made 50 000. let's go back to this, actually to this example. You remember this fictitious company here, they made 80,000 of revenues, 30,000 of expenses. The company made 50,000. well the company might decide to give Well, the company might decide to give 30 30,000 to the owners. 000 to the owners when they give 30 000 to the owners this is called the term is called dividends so we're going to say we're going to say dividend 30 When they give $30,000 to the owners, this is called, the term is called dividends. So we're going to say, we're going to say dividend $30,000. so they pay dividend of 30 000 well if they pay dividend of 30 000 it means they take they took the cash from the business and they gave it to the owners well guess what the equity of the business will go down the equity of the business will go down so when the company pays out dividend the equity of the business will go down now let's So they pay dividend of $30,000. Well, if they pay dividend of $30,000, it means they took the cash from the business and they gave it to the owners. Well, guess what? The equity of the business will go down. The equity of the business will go down. So when the company pays out dividend, the equity of the business will go down. Now. Let's go back here and expand this a little bit further. go back here and expand this a little bit further let's go back so we made an income of 50 000 then we paid dividend Let's go back. So we made an income of fifty thousand, then we paid dividend of thirty thousand. of 30 000 we paid dividend of 30 000 no reason why i'm putting put in a parenthesis what's left in the company is 20 000 well what's left after we pay out the dividend is called retained earnings We paid dividend of thirty thousand, no reason why I'm putting in parentheses. What's left in the company is twenty thousand. Well what's left after we pay out the dividend is called retained earnings retained earnings it's what the company kept after after they pay out the dividend so the company made a profit of 50 000 they paid 30 000 in dividend what they left is 20 000. retained earnings It's what the company kept after they pay out the dividend. So the company made a profit of $50,000. They paid $30,000 in dividend. What they left is $20,000. So net income minus dividend is retained earning. so net income minus dividend is retained earning and but all of those all these accounts revenues expenses common stock and dividend they're all under the umbrella of equity now let's look at what we called And but all of those, all these accounts, revenues, expenses, common stock, and dividend, they're all under the umbrella of equity. Now let's look at what we called the expanded accountant equation. the expanded accountant equation. I'm going to erase everything that's on the board. I'm going to erase everything that's on the board. So let's look at the expanded accountant equation. So let's look at the expanded accountant equation. Assets equal to liabilities minus equity, Assets equal to... Liabilities minus equity. Common stock minus dividends. common stock minus dividends. So remember equity. So remember, equity. So now we have the umbrella of equity. So now we have the umbrella of equity. Under equity we have contributed capital and contributed capital is common stock. Under equity, we have contributed capital. And contributed capital is common stock. Then we have revenues minus expenses. Then we have revenues minus expenses. Remember everything under equity here. Remember, everything under equity here. Everything under equity, Everything under equity. Revenues and expenses. revenues and expenses, gives us net income. gives us net income and remember what we were doing we said revenues are 80 expenses are 30 and for the purpose of our example we had income of 50 And remember what we were doing. We said revenues are 80, expenses are 30. And for the purpose of our example, we had income of 50,000. 000 then we paid dividend of 30. Then we paid dividend of 30. I should have used a different number. i should have used a different number that's fine and what happened after we pay out the dividend retained earning is 20. That's fine. And what happened? After we pay out the dividend, retained earning is 20. So notice, so notice dividend revenue and expenses they are all retained earnings account then we have common stock dividend, revenue, and expenses, they are all... retained earnings account, then we have common stock. So simply put, So simply put, all in all, all in all, equity is composed of contributed capital, equity is composed of contributed capital, one, one, retained earnings, retained earnings, two. two. Now, Now retained earnings can be broken down further into revenues minus expenses. retained earnings can be broken down further into revenues minus expenses, which is net income net income minus dividend equal to retained earnings so this is basically the expanded accounting equation now the only the only reason you're going to learn how to do this is to first understand the big picture and what we're going to do in the next session we are going to analyze business transaction using this accounting equation now which is net income, net income minus dividend, equal to retained earnings. So this is basically the expanded accounting equation. Now, the only reason you're going to learn how to do this is to first understand the big picture. And what we're going to do in the next session, we are going to analyze business transaction using this accounting. equation. Now, as always, as always i would like to invite you to connect with me also like this video if you like it share it I would like to invite you to connect with me. Also, like this video if you like it. Share it. Please visit my website if you're looking for additional resources and serious about your accounting education, Please visit my website if you're looking for additional resources and serious about your accounting education, especially if you're studying for your CTA exam. especially if you're studying for your CPA exam. Study hard. Study hard, Good luck. good luck, and like the videos and share them. And like the videos and share them. If they benefit you, If they benefit you, it might mean they might benefit other people. it might mean they might benefit other people. Good luck. Good luck.

Hello and welcome to this session. Hello and welcome to the session. This is Professor Farhat. This is Professor Farhat.

In this session we're going to be looking at the famous accounting equation. In this session we're going to be looking at the famous accounting equation. I'm going to cover the accounting equation as you would cover it in a financial accounting or introductory course.

I'm going to cover the accounting equation as you would cover it in a financial accounting or introductory course. So you don't need any prior background. So you don't need any prior background.

I'm going to go ahead and break the accounting equation for you and hopefully by the time you are done you'll be good to go. I'm going to go ahead and break the accounting equation for you. And hopefully by the time you are done, you will be good to go. This topic also could be used if you're studying for your CPA exam.

This topic also could be used if you're studying for your CPA exam. This is basically basic. This is basically basic.

You need to know this if you're studying for your exam. You need to know this if you're studying for your exam. As always, As always, I would like to remind you to connect with me on LinkedIn if you haven't done so.

I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. YouTube is where you would need to subscribe. I have 1,600 plus accounting, I have 1,600 plus accounting, auditing, auditing, finance, finance, and tax lectures. and tax lectures.

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Share it with others. If you're benefiting from this recording, If you're benefiting from this recording, it means it might benefit other people. it means it might benefit other people. So share the wealth. So share the wealth.

On my website, On my website, farhatlectures.com. farhatlectures.com. You will have access to additional resources if you're an accounting student or You will have access to additional resources if you're an accounting student or CPA candidate. CPA candidate.

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Check it out. It's an investment in your career, It's an investment in your career, investment in your education. investment in your education. So let's take a look at the basic accounting equation.

So let's take a look at the basic accounting equation. The basic accounting equation. The basic accounting equation, And here's the equation. and here's the equation.

Let's state that assets are equal to liabilities plus equity. It states that assets are equal to liabilities plus equity. That's the accounting equation. That's the accounting equation. Okay.

Okay, Now. now. It's very important, It's very important, very powerful equation.

very powerful equation, And once you understand the accounting equation, and once you understand the accounting equation, it's easier to always see the big picture. it's easier to always see the big picture, And that's why that's the first thing we teach in accounting. and that's why that's the first thing we teach in accounting.

So now you're going to learn about basic concepts that you need to have a good understanding about, So now you're going to learn about basic concepts that you need to have a good understanding about, because it's going to help you throughout your accounting courses, because it's going to help you throughout your accounting courses, throughout your accounting career. throughout your accounting career. So most likely there's a good chance this is the first time you are listening to this topic, So most likely, there's a good chance this is the first time you are listening to this topic, or you never learned it before.

or you never learned it before, And this is the first time you're going to learn it and learn it well. and this is the first time you're going to learn it and learn it well. So let's get going. So let's get going. So...

So. the first term is assets so you need to need to know what is an asset simply put asset is a resource asset is a resource asset is The first term is assets. So you need to know what is an asset. Simply put, asset is a resource.

Asset is a resource that will provide a resource that will provide future future... benefit to the business. benefit to the business. So that's basically what is an asset and that's all you need to know for now. So that's basically what is an asset.

And that's all what you need to know for now. It's a resource or assets are resources. It's a resource or assets or resources, resources that will provide future benefit for the business. Resources that will provide future benefit for the business. So what does that mean?

So what does that mean? It means you have something, It means you have something, you have something. you have something, now you don't have to own it. Now you don't have to own it.

It's good if you own it, It's good if you own it, own or control. own or control. You don't have to own an asset.

You don't have to own an asset. Let's think about the real world or think about yourself personally. Let's think about the real world or think about yourself personally.

What could you have What could you have that will benefit you in the future. that will benefit you in the future. What could you own or control?

What could you own or control? Think about a car. Think about a car. If you own or control a car, If you own or control a car, if you could use the car, if you could use the car, you can go to work. you can go to work.

Do you have a computer? Do you have a computer? Do you have a cell phone?

Do you have a cell phone? Okay, Okay, those are all assets. those are all assets.

Now, Now, we're not talking about personal assets, we're not talking about personal assets, we're talking about business. we're talking about business. Remember, Remember, when we do accounting, when we do accounting, we do accounting from a business perspective.

we do accounting from a business perspective. Now, Now, That's what assets are. That's what assets are. But the most important asset that you could have or a company can have, But the most important asset that you could have or a company can have, and I'm hoping you are thinking about it, and I'm hoping you are thinking about it, and that is cash. and that is cash.

Cash in your pocket. Cash in your pocket. If you have cash in your pocket, If you have cash in your pocket, it's the best resource that will do anything, it's the best resource that will do anything, that will provide future benefit for you in any way, that will provide future benefit for you in any way, shape, shape, or form.

or form. What can you do with cash? What can you do with cash?

You can pay bills. You can pay bills. You can pay your employees.

You can pay your employees. You can buy supplies. You can buy supplies. You can pay dividend, You can pay dividend, which is some of the terms you may not understand now, which is some of the terms you may not understand now, but you can do anything. but you can do anything.

Cash is an asset. Cash is an asset. Think about land.

Think about land. If you own a piece of land, If you own a piece of land, it's an asset. it's an asset. If you own or control a building, If you own or control a building, that's an asset. that's an asset.

If you have office supplies, If you have office supplies, it's an asset. it's an asset. If you have car or vehicle, If you have car or vehicle, it's an asset.

it's an asset. If you have truck. If you have truck.

it's an asset if you have a machinery it's an asset so notice all of those all these that i named cash land building office supplies truck machinery vehicle car all these all these items they fit that they fit the definition of providing future benefit you can use them in the business to get benefits so that's basically what an asset is in a nutshell and that's all what you need to know for now now there are many It's an asset. If you have a machinery, it's an asset. So notice all of those, all these that I named, cash, land, building, office supplies, truck, machinery, vehicle, car, all these items, they fit the definition of providing future benefit.

You can use them in the business to get benefit. So that's basically what an asset is in a nutshell. And that's all what you need to know for now.

Now, there are many other assets that we would learn about later many other assets but for the purpose of this session just we need to know what an asset is so that's what that's what's an asset so we are done with assets let's talk about liabilities if you want to use one word for liabilities to make it easy liabilities are debt now other assets that we would learn about later, many other assets. But for the purpose of this session, just we need to know what an asset is. So that's what's an asset. So we are done with assets.

Let's talk about liabilities. If you want to use one word for liabilities to make it easy, liabilities are debt. Now what is a debt?

what is it that hopefully we are all familiar with that you might have hopefully we are not but we are okay so you might have credit card Hopefully we are all familiar with debt. You might have, hopefully we are not, but we are, okay? So you might have credit card.

that you might have that you might have Student loan, Student loan, debt. debt. You might have, You might have, hopefully not, hopefully not, personal loan, personal loan, loan that you took out. loan that you took out.

You might have a car loan. You might have a car loan. So notice you have debt or loans. So notice you have debt or loans.

Those are all liabilities. Those are all liabilities. Now what is the definition for a liability?

Now what is the definition for a liability? Well, Well, a liability is something that's going to use up a liability is something that's going to use up Resources to settle. Resources to settle.

Simply put, Simply put, liabilities, liabilities, it's an obligation that will require the future sacrifice it's an obligation that will require the future sacrifice of assets, of assets, generally speaking cash. generally speaking cash. We need cash.

we need cash we need to use cash to settle the obligation so obligation that would require future sacrifice of an asset usually cash liabilities something happened in the past liabilities occur liabilities We need to use cash to settle the obligation. So obligation that would require future sacrifice of an asset, usually cash. Liabilities, something happened in the past.

Liabilities occur because something happened in the past. occur because something happened in the past what do i mean by What do I mean by this? Think about it. Think about it. When do you have a liability?

When do you have a liability? It's when you did something in the past. It's when you did something in the past. Like what? Like what?

You borrowed money. You borrowed money. If you borrowed money in the past, If you borrowed money in the past, you have a liability today that you have to pay in the future.

do you have a liability today that you have to pay in the future? So basically, So basically, a liability is today a liability is today for something that happened in the past and in the future you have to pay. a liability is today a liability is today for something that happened in the past and in the future you have to pay.

So it has a past effect. So it has a past effect. a current effect and a future effect and once you pay it it goes away once you pay the liability it goes away now we talked about personal liabilities like car loan credit card debt personal loan student loan so on and so forth now for businesses or a mortgage for a house for businesses you do have also that now for the purpose of today we're going to only cover two types of debts just kind of illustrate the point the a current effect and a future effect and once you pay it it goes away once you pay the liability it goes away now we talked about personal liabilities like car loan credit card debt personal loan student loan so on and so forth now for businesses or a mortgage for a house for businesses you do have also that now for the purpose of today we're going to only cover two types of debts just kind of illustrate the point the two debts that we're going to be defining today for businesses are two debts that we're going to be defining today for businesses are Accounts Accounts Payable.

And what is Accounts Payable? Payable. And what is Accounts Payable? It's when the company buys goods or services on account.

It's when the company buys goods or services on account. What does that mean? What does that mean?

It means when the company buys goods and services. It means when the company buys goods and services. When we buy inventory, When we buy inventory, when we buy supplies, when we buy supplies, when we hire someone to do some work for us.

when we hire someone to do some work for us, what we tell them, What we tell them, we tell them we're going to pay you later. we tell them we're going to pay you later. We're not going to pay you now.

We're not going to pay you now. So the company buys those goods and services on account. So the company buys those goods and services on account. On account means we don't pay now. On account means we don't pay now.

If we don't pay now, If we don't pay now, we have a liability called accounts payable. we have a liability called accounts payable. We have another liability. We have another liability. It's called notes payable.

It's called notes payable. And what is notes payable? And what is notes payable?

Notes payable is a fancy word, Notes payable is a fancy word for loan. is a fancy word for loan. so notes payable is a fancy word for a loan and what is a loan is when is when the company is when the company borrow money and the company always borrows always borrow money company borrows money they always borrow money most So notes payable is a fancy word for a loan.

And what is a loan? It's when the company borrow money. And the company always borrows money. The company borrows money.

They always borrow money. Most companies, companies as far as i know uh you know it's borrowing money is is part of doing business so that's those are two liabilities okay that's what a liability is now we know what a liability is we know what assets are as far as I know, borrowing money is part of doing business. So those are true liabilities. That's what a liability is. Now we know what a liability is.

We know what assets are. Let's see if we can determine what is an equity. Let's see if we can determine what is an equity. So let's use some numbers to start to kind of explain equity here. So let's use some numbers to start to kind of explain equity here.

Let's assume as a company Let's assume as a company, I have I have 200,000 worth of assets. 200,000 worth of assets. So I have So I have 200,000 worth of assets and we know what assets are. 200,000 worth of assets.

And we know what assets are. We have all sorts of assets and we have 200,000 worth of those, We have all sorts of assets. And we have 200,000 worth of those, a list of many things.

a list of many things. And we happen to have And we happen to have... 80,000 of liabilities. 80,000 of liabilities. We have We have 80,000 of liabilities.

80,000 of liabilities. Now, Now, can you complete this accounting equation? can you complete this accounting equation?

If I told you we have assets of 200, If I told you we have assets of 200, liabilities of 80, liabilities of 80, well, well, I can kind of find out my equity is 120. I can kind of find out my equity is 120. Why? Why? Because if assets equal to liabilities and equity, Because if assets equal to liabilities and equity, you're telling me I have 80,000 of liabilities. you're telling me I have 80,000 of liabilities.

Therefore, Therefore, I can fairly assume my equity should be 120. I can fairly assume my equity should be 120. Now let's rearrange this formula and make a little bit more sense of this equation. Now let's rearrange this formula and make a little bit more sense of this equation. Another way to look at the equation is to say equity equal to assets minus liabilities. Another way to look at the equation is to say equity equal to assets minus liabilities. That's what equity equal to.

That's what equity equal to. If I rearrange the formula, If I rearrange the formula, simply put, simply put, if I say my equity is 120, if I say my equity is 120. equal to assets of 200,000 minus 80,000 of liabilities, equal to assets of 200,000 minus 80,000 of liabilities, all is fine and dandy. all is fine and dandy. That's what equity is. That's what equity is.

So what does that mean? So what does that mean? Well, Well, another way to look at equity, another way to look at equity, we can call equity net assets. we can call equity net assets.

We can call equity on a personal level, We can call equity on a personal level net worth. net worth. We can call equity residual.

We can call equity residual. Value Value, All these words can be used for equity. all these words can be used for equity. Net asset means the difference between asset and your liabilities. Net asset means the difference between asset and your liabilities.

Net worth means after you liquidate your asset and pay off your liabilities, Net worth means after you liquidate your asset and pay off your liabilities, you are left with 120. you are left with 120. Residual value is what's left after you pay off your liabilities. Residual value is what's left after you pay off your liabilities. Those are three words for equity, Those are three words for equity, but that doesn't help us.

but that doesn't help us. So what is equity, So what is equity really? really? Well, Well, equity is what's left in the company, equity is what's left in the company, the value of the company after you pay off your liabilities. the value of the company after you pay off your liabilities.

The question becomes, The question becomes, we know how you... we know how you... We know how we can obtain assets, We know how we can obtain assets, or kind of, or kind of, we know how to obtain assets, we know how to obtain assets, how to obtain liabilities.

how to obtain liabilities. If we borrow money, If we borrow money, we have assets and liabilities. we have assets and liabilities.

But what affects equity? But what affects equity? So what can, So what can, think about it, think about it, what can increase my net asset? what can increase my net asset?

What can increase my net worth? What can increase my net worth? What can increase my residual value? What can increase my residual value?

What can increase my equity? What can increase my equity? Oh, Oh, well, well, let's think about it.

let's think about it. There are four things that you need to be aware of. There are four things that you need to be aware of.

Four things you need to be familiar with. Four things you need to be familiar with. Four.

Four. Four. Four.

Four things we need to be familiar with. four things we need to be familiar with. Those four, Those four, two of them, two of them, two of those four will increase equity, two of those four will increase equity, okay, okay, and two of them they would reduce equity. and two of them, they would reduce equity. So we need to know about the account that increases equity and the account that reduces equity.

So we need to know about the account that increases equity and the account that reduces equity. So now we are working only with equity. So now we are working only with equity.

We are only working with this part of the equation. We are only working with this part of the equation. What are those two things that increase equity and the two things that reduce equity? What are those two things that increase equity and the two things that reduce equity? Well, Well, think about it for a moment.

think about it for a moment. If you want to increase your net worth, If you want to increase your net worth, if you want to have more assets than liabilities, if you want to have more assets than liabilities, what would you do? what would you do? Well, Well, I need to get more assets without increasing my liabilities.

I need to get more assets without increasing my liabilities. What can I do? What can I do?

How can I get more assets? How can I get more assets? Well, Well, guess what?

guess what? If I work, If I work, if I get a second job or a better job, if I get a second job or a better job, or if I can generate more income for myself, or if I can generate more income for myself, I can increase my assets without increasing my liabilities. I can increase my assets without increasing my liabilities.

So, So what do we call this? what do we call this? We call this a new term called revenues.

We call this a new term called revenues. What is a revenue? What is a revenue?

A revenue is what the company does to generate more assets. A revenue is what the company does to generate more assets. Each company does something different.

Each company does something different. For example, For example, your university where you are attending, your university where you are attending generate income by tuition. generate income by tuition. So they charge you tuition and that's your revenue.

So they charge you tuition and that's their revenue. If you go on amazon.com and you buy If you go on Amazon.com and you buy... That's sales for Amazon. That's sales for Amazon.

If you go to your local shop and you buy something from your local shop, If you go to your local shop and you buy something from your local shop, that's sales revenue for your local shop. that's sales revenue for your local shop. If you are, If you are, let's assume you are an engineer and someone hires you, let's assume you are an engineer and someone hires you, then they pay you. then they pay you.

That's your revenue, That's your revenue, engineering revenue. engineering revenue. So each individual, So each individual, they'll have a different type of revenue. they'll have a different type of revenue. So revenue is what the company does to generate assets.

So revenue is what the company does to generate assets. What does on a day-to-day basis, What does on a day-to-day basis, like that's what they do for a living. like that's what they do for a living.

Basically what the company does for a living. Basically what the company does for a living. So revenues increase equity.

So revenues increase equity. Now, Now, that's good so revenues are good so let's look at something that decrease equity what could decrease equity well think about it if you have a business you're going to generate revenues but as you're generating revenues you're going to have to incur expenses That's good. So revenues are good.

So let's look at something that decrease equity. What could decrease equity? Well, think about it.

If you have a business, you're going to generate revenues. But as you're generating revenues, you're going to have to incur expenses. well what are expenses well expenses reduces equity expenses reduces equity revenues increases equity Well, what are expenses? Well, expenses reduces equity.

Expenses reduces equity. Revenues increases equity. So what are expenses? So what are expenses? Expenses is the cost to run your business.

Expenses is the cost to run your business. Cost to run your business. Cost to run your business. So no company can generate revenues without incurring expenses.

So no company can generate revenues without incurring expenses. It'll be great. It'll be great. It will be excellent. It will be excellent.

It will be excellent if I can just generate revenues without incurring expenses. It will be excellent if I can just generate revenues without incurring expenses. For example, For example, when I teach at the university, when I teach at the university, I have to drive my car over there. I have to drive my car over there.

So yes, So yes, I am generating revenue. I am generating revenue. But I also have to pay for gasoline, But I also have to pay for gasoline.

I have to pay for parking. I have to pay for parking, I have to pay for other expenditure I have to pay for other expenditure. So those are expenses.

So those are expenses for example a company might have to pay for their utilities For example, a company might have to pay for their utilities, They have to pay for their cell phone. they have to pay for their cell phone, they have to pay for the internet service, They have to pay for the internet service. They have to pay for insurance They have to pay for rent. they have to pay for insurance, they have to pay for rent. So what is an expense?

So what is an expense? It's the cost to run the business It's the cost to run the business. So that's the second item that affect equity and it's kind of think of it is the opposite of revenue now Here's what we need to know about revenues and expenses So that's the second item that affect equity.

And it's kind of think of it as the opposite of revenue. Now here's what we need to know about revenues and expenses. We have a formula that says if we take our revenues minus our expenses, We have a formula that says if we take our revenues minus our expenses, it's going to give us the difference between those.

it's going to give us the difference between those. It's going to give us net income or net loss for that matter, It's going to give us net income or net loss for that matter, or net income. net income. So that's the first thing I want you to learn, So that's the first thing I want you to learn. or loss.

or loss simply put if we have revenues of 80 Simply put, if we have revenues of $80,000. 000 expenses of 30 Expenses of 30,000 000 we have a net income of 50 000 and that's what net income is okay net income is the difference between revenues and expenses they are both equity account both revenue is equity and expenses are equity one We have a net income of 50,000. And that's what net income is.

Okay, net income is the difference between revenues and expenses. They are both equity account. Both revenues, equity, and expenses are equity.

One increases equity, increases equity the other one decreases equity the other one decreases equity. Now, Now those are the two equity accounts. those are the two equity account. Now, Now I said there are four so we have to look for the other two. I said there are four, so we have to look for the other two.

Let's think about if you like a company. Let's think about if you like a company. What can you do if you like a company?

What can you do if you like a company? If you like a company, If you like a company you can invest. you can invest, you can contribute capital. You can contribute capital.

So, So you can give the company money. you can give the company money. So, So if you like my company you would like I like your company. if you like my company, you would like, I like your company, great.

Great if you like my company invest in my company. If you like my company, invest in my company, give me money, Give me money. give the company money and I will give you shares in the company. Give the company money and I'll give you shares in the company. So, So we need to understand is we have something called what we need to understand is we have something called contributed capital.

contributed capital or we're going to see it the account is called common stock Or we're going to see it. The account is called common stock. What is that account?

what is that account well if you like a company and this is going to increase equity this is going to increase equity so we already identified the two accounts that increase equity revenue and common stock Well, if you like a company and this is going to increase equity, this is going to increase equity. So we already identified the two accounts that increase equity revenue and common stock. What does the common stock represent? What does the common stock represent?

It represents how much the investors invested in the business. It represent how much the investors invested in the business. What does that mean? What does that mean? If we want the investors give you money when the investors give you money.

When the investors give you money, Okay. they invest in your business. They invest in your business.

It means they want to be owners. It means they want to be owners. If they want to be owners, If they want to be owners, they have to give you money.

they have to give you money. When they give you money, When they give you money, your assets go up. your assets go up when they give you cash, When they give you cash, and your common stock goes up. your common stock goes up. So that's another way to increase your equity, So that's another way to increase your equity, is to try to convince people to invest with you.

is to try to convince people to invest with you, to invest in your company not invest in you it's the company that's what contributed capital is now why would people invest in your company so why would you like a company well you like a company for one reason it's because the company is good good in a sense that it's making a profit and to invest in your company, not invest in you, it's the company. That's what contributed capital is. Now, why would people invest in your company?

So why would you like a company? Well, you like a company for one reason. It's because the company is good. Good in a sense that it's making a profit, and when it makes that profit, when it makes that profit they're going to give you part of the profit so what's going to happen is this we have another account that they're going to give you part of the profit.

So what's going to happen is this. We have another account that when they make a profit, when they get when they make a profit let's go back to this actually to this example you remember this fictitious company here they made 80 000 of revenues 30 000 of expenses the company made 50 000. let's go back to this, actually to this example. You remember this fictitious company here, they made 80,000 of revenues, 30,000 of expenses. The company made 50,000.

well the company might decide to give Well, the company might decide to give 30 30,000 to the owners. 000 to the owners when they give 30 000 to the owners this is called the term is called dividends so we're going to say we're going to say dividend 30 When they give $30,000 to the owners, this is called, the term is called dividends. So we're going to say, we're going to say dividend $30,000. so they pay dividend of 30 000 well if they pay dividend of 30 000 it means they take they took the cash from the business and they gave it to the owners well guess what the equity of the business will go down the equity of the business will go down so when the company pays out dividend the equity of the business will go down now let's So they pay dividend of $30,000. Well, if they pay dividend of $30,000, it means they took the cash from the business and they gave it to the owners.

Well, guess what? The equity of the business will go down. The equity of the business will go down. So when the company pays out dividend, the equity of the business will go down.

Now. Let's go back here and expand this a little bit further. go back here and expand this a little bit further let's go back so we made an income of 50 000 then we paid dividend Let's go back.

So we made an income of fifty thousand, then we paid dividend of thirty thousand. of 30 000 we paid dividend of 30 000 no reason why i'm putting put in a parenthesis what's left in the company is 20 000 well what's left after we pay out the dividend is called retained earnings We paid dividend of thirty thousand, no reason why I'm putting in parentheses. What's left in the company is twenty thousand. Well what's left after we pay out the dividend is called retained earnings retained earnings it's what the company kept after after they pay out the dividend so the company made a profit of 50 000 they paid 30 000 in dividend what they left is 20 000. retained earnings It's what the company kept after they pay out the dividend.

So the company made a profit of $50,000. They paid $30,000 in dividend. What they left is $20,000.

So net income minus dividend is retained earning. so net income minus dividend is retained earning and but all of those all these accounts revenues expenses common stock and dividend they're all under the umbrella of equity now let's look at what we called And but all of those, all these accounts, revenues, expenses, common stock, and dividend, they're all under the umbrella of equity. Now let's look at what we called the expanded accountant equation.

the expanded accountant equation. I'm going to erase everything that's on the board. I'm going to erase everything that's on the board.

So let's look at the expanded accountant equation. So let's look at the expanded accountant equation. Assets equal to liabilities minus equity, Assets equal to...

Liabilities minus equity. Common stock minus dividends. common stock minus dividends.

So remember equity. So remember, equity. So now we have the umbrella of equity.

So now we have the umbrella of equity. Under equity we have contributed capital and contributed capital is common stock. Under equity, we have contributed capital.

And contributed capital is common stock. Then we have revenues minus expenses. Then we have revenues minus expenses.

Remember everything under equity here. Remember, everything under equity here. Everything under equity, Everything under equity. Revenues and expenses.

revenues and expenses, gives us net income. gives us net income and remember what we were doing we said revenues are 80 expenses are 30 and for the purpose of our example we had income of 50 And remember what we were doing. We said revenues are 80, expenses are 30. And for the purpose of our example, we had income of 50,000. 000 then we paid dividend of 30. Then we paid dividend of 30. I should have used a different number. i should have used a different number that's fine and what happened after we pay out the dividend retained earning is 20. That's fine.

And what happened? After we pay out the dividend, retained earning is 20. So notice, so notice dividend revenue and expenses they are all retained earnings account then we have common stock dividend, revenue, and expenses, they are all... retained earnings account, then we have common stock. So simply put, So simply put, all in all, all in all, equity is composed of contributed capital, equity is composed of contributed capital, one, one, retained earnings, retained earnings, two.

two. Now, Now retained earnings can be broken down further into revenues minus expenses. retained earnings can be broken down further into revenues minus expenses, which is net income net income minus dividend equal to retained earnings so this is basically the expanded accounting equation now the only the only reason you're going to learn how to do this is to first understand the big picture and what we're going to do in the next session we are going to analyze business transaction using this accounting equation now which is net income, net income minus dividend, equal to retained earnings.

So this is basically the expanded accounting equation. Now, the only reason you're going to learn how to do this is to first understand the big picture. And what we're going to do in the next session, we are going to analyze business transaction using this accounting. equation.

Now, as always, as always i would like to invite you to connect with me also like this video if you like it share it I would like to invite you to connect with me. Also, like this video if you like it. Share it.

Please visit my website if you're looking for additional resources and serious about your accounting education, Please visit my website if you're looking for additional resources and serious about your accounting education, especially if you're studying for your CTA exam. especially if you're studying for your CPA exam. Study hard.

Study hard, Good luck. good luck, and like the videos and share them. And like the videos and share them.

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Transcript for:Understanding the Accounting Equation Basics (chapter 1)

Transcript for:
Understanding the Accounting Equation Basics (chapter 1)