Understanding the Accounting Equation with Simple Animations

Now that we understand the components, let's see how transactions maintain the accounting equation's balance.Let's look at our first transaction. The business purchases five thousand dollars of inventory using cash.Watch how the cash decreases by five thousand dollars, while inventory increases by the same amount.Notice how total assets remain the same at fifteen thousand dollars. We've simply converted one type of asset, cash, into another type, inventory.Now let's look at our second transaction. The business takes out a ten thousand dollar loan.When we take out the loan, both cash and liabilities increase by ten thousand dollars.The equation remains balanced because both sides increase by the same amount. Total assets are now twenty-five thousand dollars, matching the sum of ten thousand in liabilities and fifteen thousand in owner's equity.Now that we understand the basic equation, let's see how different business activities affect it.When a business earns revenue, both assets and owner's equity increase by the same amount.When we pay expenses, both assets and owner's equity decrease equally.When an owner invests more money in the business, both assets and owner's equity increase.Taking out a loan increases both assets and liabilities, leaving owner's equity unchanged.Notice how after each transaction, the accounting equation remains in balance.