The Accounting equation Im just not getting, please someone help

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ElBloggy
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Hi guys

As title suggests, Im just not getting it, or more accurately variations of it.

So I understand: Assets – liabilities =capital(or equity), but what I cannot understand, no matter how much I read is how:
Assets=capital + liabilities means the same thing as the first equation.

Like I said, I get the top version clear as day, but the second way of writing it, I cannot see how on earth that is the same..?

Can someone please help, I feel like a complete dummy as I just can't see it. Ive read loads about this, but I feel Im missing a very simple detail, and its doing my head in.

Thanks guys
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GabiAbi84
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Think of it as numbers

100-60 = 40

When we take the 60 over to the other side of the equation you add them together.

100 = 40 +60
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ElBloggy
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(Original post by GabiAbi84)
Think of it as numbers

100-60 = 40

When we take the 60 over to the other side of the equation you add them together.

100 = 40 +60
Thanks for your reply.

That is actually a really helpful way to look at it, thank you, however, I think I may need to understand why/how a liability is classed as an asset though.
I thought a liability was a debt? If so, is the accounting equation stating that liabilities are an asset?
That means salaries are an asset? Man im so confused as whether Im right, or looking at this from the wrong point of view.

As said, the numbers way of looking at it does help, but I really need to know what the wording means, as I cannot see for the life of me how the two ways of writing the equation mean the same...
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GabiAbi84
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(Original post by ElBloggy)
Thanks for your reply.

That is actually a really helpful way to look at it, thank you, however, I think I may need to understand why/how a liability is classed as an asset though.
I thought a liability was a debt? If so, is the accounting equation stating that liabilities are an asset?
That means salaries are an asset? Man im so confused as whether Im right, or looking at this from the wrong point of view.

As said, the numbers way of looking at it does help, but I really need to know what the wording means, as I cannot see for the life of me how the two ways of writing the equation mean the same...
Liabilities are a debt which is why it’s
assets - liabilities = capital

Assets are a positive, liabilities are a negative = capital which is positive if your assets are more than your liabilities.

So rearranging the equation in words is the same as rearranging the equation in numbers.

Your capital is the difference between those two amounts.


Say you have £100 but you have to pay your worker £10 - you really only have £90 left to play with (capital) as you have to keep that £10 for wages.

So you still have £100 in assets but it is broken into £90cash and £10wages.

So you would add them together to get your assets.
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Ne en mia nomo
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If you want to buy some assets you can either use your own money (capital) or get a loan (liability).
So the value of all your assets comes from the sum of all your CAPITAL and all your liabilities.
Last edited by Ne en mia nomo; 7 months ago
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ElBloggy
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Thanks guys, that’s really helping.

I think I’m slowly starting to get this, to test could I also write:
Liabilities = assets - capital ...?

If I’m right, then I’ve been looking at it too literally rather than a numerical sum (if that makes any sense)
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Ne en mia nomo
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(Original post by ElBloggy)
Thanks guys, that’s really helping.

I think I’m slowly starting to get this, to test could I also write:
Liabilities = assets - capital ...?

If I’m right, then I’ve been looking at it too literally rather than a numerical sum (if that makes any sense)
Yes, it's all just basic algebraic manipulation:
A = C + L
C = A - L
L = A - C
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ElBloggy
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(Original post by Ne en mia nomo)
Yes, it's all just basic algebraic manipulation:
A = C + L
C = A - L
L = A - C
Right, got it, thank you!!!

Now all I have to do is remember it.
I need to practice this, any suggestions how I can engrain this, perhaps a balance sheet?
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Ne en mia nomo
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(Original post by ElBloggy)
Right, got it, thank you!!!

Now all I have to do is remember it.
I need to practice this, any suggestions how I can engrain this, perhaps a balance sheet?
Just keep in mind that
Assets = Capital + Liability (I think this is the easiest to remember)
and treat it as a maths equation
A=C+L /subtract L from both sides/ --> A-L=C etc.
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vsofat
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DEBIT= IN / LESS OUTCREDIT = OUT / LESS IN E.G Purchases come IN to business, hence debit. If purchase returns, then is OUT from business = CREDITE.G. Trade suppliers, buying on credit, means business owes OUT to suppliers, when business pays suppliers, then less owing out to suppliers= debit
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Kogomogo
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(Original post by ElBloggy)
Hi guys

As title suggests, Im just not getting it, or more accurately variations of it.

So I understand: Assets – liabilities =capital(or equity), but what I cannot understand, no matter how much I read is how:
Assets=capital + liabilities means the same thing as the first equation.

Like I said, I get the top version clear as day, but the second way of writing it, I cannot see how on earth that is the same..?

Can someone please help, I feel like a complete dummy as I just can't see it. Ive read loads about this, but I feel Im missing a very simple detail, and its doing my head in.

Thanks guys

You can still 'add' a minus number. Your equation was originally:
A - L = C
Rearranging the equation gives:
A = C + L

Now L can still be a minus number (as a liability normally would be). Lets say your capital is 10, and your liabilities are 2. Your liabilities are actually -2, not positive 2, as they are liabilities / losses. The equation still works, as the minus cancels out the plus, or to put it another way, adding a minus number is the same as subtracting. So the equation with numbers in this example would be:

A = 10 + -2

(Which is the same as A = 10 - 2)

And solving it gives A = 8, so you have subtracted the liabilites from the capital to find the value of the assets. Adding a negative number to something is like taking that amount away from it.
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