FA2 - The Accounting Equation EXAMPLE

the problem from this video can be downloaded at a counting workbook calm if you go to the website click the PDF link and you can download a copy of this and all of my problems for yourself now if you check the website and you click on videos you'll see there are more videos than those I've listed publicly on YouTube you can see that there's every problem covered in the workbook has either a public video or a members-only video if you'd like access to the members only video just click the join button beneath the video player

on YouTube alright let's jump into the problem so this problem has us exploring the accounting equation and if you're not sure what I mean when I say the word accounting equation go back and watch the last video it's gonna be really helpful in just defining these terms assets liabilities shareholders equity we also explained a couple more revenues expenses and dividends and I think it's just so useful to go through that video before you do this one but anyway assuming you've gone through that let's go through this problem so this just sort of says okay fill

in the missing information and keeping in mind this formula that we introduced in the previous video assets equals liabilities plus shareholders equity assets equals liabilities plus shareholders equity that's called the accounting equation it's so fundamental to what we do so let's start with business 1 we don't know the assets we know the liabilities are 181 we know the equity is 212 so 181 plus 212 doing the math here that looks like three hundred and ninety three thousand dollars three ninety three and there we have it we've solved part one and again just sort of saying

what they have three hundred ninety three thousand dollars of good stuff that they own and control one hundred and eighty one thousand dollars of debts that have to be paid back if they liquidated all their assets got three hundred ninety three thousand dollars cash paid their debts of 181 two hundred and twelve thousand dollars would flow through to the shareholders the shareholders piece of the pie is $212,000 for business number one let's do business number two the assets are $75,000 we don't know the liabilities but we know the equity is 36 so we know like

36 plus whatever is in this blank space equals 75 or stated differently 75 minus 36 equals whatever's in the bank space the bank space is 39 thousand dollars and you can double check write 39 plus 36 equals 75 yes it works do business three thirty thousand dollars is the assets 21,000 is the liabilities our shareholders equity then the missing number has got to be nine thousand if I had thirty thousand dollars in assets let's assume we again sold them all off for cash we had twenty-one thousand dollars in debts or bills to be paid thirty

thousand in let's say we sold it for cash pay off all the debts twenty-one grand how much money goes to my shareholders nine thousand okay the last ones a little bit funny and it says it's $10,000 you can see it's negative and it notes that business fours equity is an accumulated deficit position what does that mean it means they have negative shareholders equity you see this happen once in a while right and it's the equivalent of somebody's mortgage being higher than the value of their house they'll talk about this like the house is underwater they

say in other words the debt is worth more than the asset is that the debt is sort of held against in the financial crisis this happened a lot it happens with companies to where they have higher liabilities than they do assets and what does that mean it means they're gonna need money from their shareholders or they're not gonna be in business for long so business number four the liabilities have got to be ten thousand dollars higher than the assets how do I know that because the equity is negative ten thousand so if the assets are

twenty five the liabilities have gotta be thirty five ten thousand dollars more thirty five thousand plus a negative ten is twenty five thousand assets still do equal liabilities plus shareholders equity we call that accumulated deficit if we have negative retained earnings as this company certainly what okay there we have it problem 1 1a is in the books stay tuned for our next video bye for now