Accounting Equation and Problem Solving

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Core Concept: Accounting Equation

• Accounting Equation: Assets = Liabilities + Shareholders' Equity
• Revisit prior video for definitions of:
  • Assets: Resources owned and controlled by the business
  • Liabilities: Debts owed by the business
  • Shareholders' Equity: Owners' claim on assets
  • Revenues, Expenses, and Dividends: Additional financial terms

Problem Solving Examples

Business 1

• Given:
  • Liabilities = $181,000
  • Equity = $212,000
• Calculate Assets:
  • Assets = 181,000 + 212,000 = $393,000
  • Explanation: If the business liquidates, all debts paid with assets, remaining amount to shareholders = $212,000.

Business 2

• Given:
  • Assets = $75,000
  • Equity = $36,000
• Calculate Liabilities:
  • Liabilities = 75,000 - 36,000 = $39,000
  • Double check: 39,000 + 36,000 = 75,000

Business 3

• Given:
  • Assets = $30,000
  • Liabilities = $21,000
• Calculate Shareholders' Equity:
  • Shareholders' Equity = 30,000 - 21,000 = $9,000
  • Explanation: Post liquidation, remaining value to shareholders = $9,000.

Business 4 (Accumulated Deficit)

• Given:
  • Assets = $25,000
  • Equity = -$10,000 (negative equity/accumulated deficit)
• Calculate Liabilities:
  • Liabilities = 25,000 + 10,000 = $35,000
  • Explanation: Debt exceeds asset value, resulting in negative equity or "underwater" situation.

Conclusion

• Problem 1 1a solved, next video previewed.