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Fundamental Accounting Equation

Brian Krogol
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Alright, so let's just discuss a simple example of gaining equity when you buy a house. Okay, so let's start here on the left hand box, we say the home costs $150,000 and you make a 30,000 down payment? The remainder is a mortgage from the bank. Okay. So a lot of times when we're dealing with accounting, it's gonna be a lot about analyzing sentences like this. Okay, So the home here the $150,000. That's the asset. That's the value of the house. Right? So we'll remember our our formula is assets equal liabilities plus equity, right? That's our formula. Well, in this case the asset is the $150,000 right? That is the value of the house. And how are we financing that house? How are we getting the money to pay for it? Well, we put 30,000 down, Right? That is our equity. This is the the money that we put into it. We have equity in that house of that 30,000 and the liabilities. What we owe the bank the rest of the money, Right? The house is worth 100 and 50,000. We took a loan for the remainder which is 120,000, right, 100 and 50 minus 30 leaves us with 100 and 20,000 In liabilities. Okay, so this is how we would set up the equation when you first purchased the house. Alright. And now let's say time is going by and you pay off pay off some of the principal on the loan and you paid off 20,000. Right? So what happens when you pay off 20,000 of the loan? Well, the house in this case is still worth the same amount. Right, so the house is still worth $150,000, whoops. Let me clean that up. But how is the liabilities and equity split up? Now you no longer owe 100 and 20,000 to the bank. Right. You've paid off 20,000 of that mortgage. You only owe now 100,000 to the bank. Alright. So what's happened? Your equity has increased by 20,000? Right, it's up to now 50,000. So this is your assets liabilities and equity here, Right? And there you go. That's how it happens. So as you pay off the mortgage, your equity in the house keeps increasing. So the amount of the house that you own increases as you pay off those liabilities. And that's how we're going to see the relationship between assets liabilities and equity. We're going to see this relationship where there's gonna be transactions that happen and then we have to adjust our equation, right? Maybe our assets go up. Maybe our assets go down, right? We're gonna have to adjust. But the same is always gonna stay true that this equation is always gonna balance assets will always equal the liabilities plus equity. Alright, cool. Let's go ahead and move on to the next video