Welcome to understanding how businesses track their financial health! Every business, from corner stores to giant corporations, uses the same fundamental tool.
It's called the accounting equation: Assets = Liabilities + Owner's Equity
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In one sentence, how would you explain the accounting equation in your own words?
Let's break down Assets first. Assets are everything valuable that a business owns or controls.
Think cash in the bank, inventory on shelves, equipment, buildings, or even money customers owe you.
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What assets might a coffee shop have?
Next are Liabilities - these are debts or obligations the business owes to others.
Examples include loans from banks, money owed to suppliers, unpaid bills, or wages owed to employees.
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Can you think of liabilities a coffee shop might have?
Finally, Owner's Equity represents the owner's claim on the business assets after all debts are paid.
It's like saying: "If we sold everything and paid all debts, what would be left for the owner?"
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In a few words, how would you explain Owner's Equity to a friend?
Here's the magic: this equation must always balance. Every business transaction affects at least two parts of the equation, but it stays in balance.
Assets = Liabilities + Owner's Equity
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Why do you think keeping this balance is so important?
Let's see a simple example. Say you start a business with $1,000 cash:
