Describe the fundamental accounting equation, and apply it to accounting situations

Accounting Dec 16, 2020

Describe the fundamental accounting equation, and apply it to accounting situations.

Expert Solution

The fundamental accounting equation is as follows:

Assets = Liabilities + Equity

This must always balance.

Let's look at the following example to see how this is applied.

Larry's car shop gets a loan for 10,000. The entry is:

Account	Debit	Credit
Cash	10,000
Loan Payable		10,000

Cash is an asset, in which the amount is shown as usable for any needs of the business. However, Larry must eventually repay that loan. The loan is a liability.

The equation for this would be:

10,000 = 10,000 + 0

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