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5 min 13 sec
0:00
Meet Maya
0:30
Assets, liabilities and equity
1:21
Savings and a bank loan
2:13
A laptop, a fee, software
3:19
Double-entry bookkeeping
3:53
Northlight in Beeswax
4:28
Recap and quiz
Accounting 101
·
Foundations
·
Episode 1
The Accounting Equation
(It's more interesting than it sounds. Slightly.)
Maya quits her agency job to start Northlight Studio. Follow her first five transactions to see why assets always equal liabilities plus equity.
accounting equation
assets
liabilities
equity
double-entry
Transcript
0:00
This is Maya. Last Tuesday she quit her agency job, which felt brilliant for about four hours.
0:07
She's now got some savings, a meeting with the bank, and a very long list of things to buy.
0:13
Which leaves the question she's been quietly avoiding ever since. Has she just made a terrible mistake?
0:20
Don't panic. Nobody can tell on day one. But you can start keeping score, and that's what the next few minutes are for.
0:30
Right. Accounting has a reputation for being dull, and to be fair, we did earn it.
0:37
But under all the jargon is one idea so simple it's almost rude. Everything a business has came from somewhere.
0:47
The stuff it has, like cash, a laptop, money clients owe it, we call assets.
0:53
And where it came from? Only two places. Either someone lent it to you. That's a liability, a polite word for money you owe.
1:02
Or it's yours. That's equity.
1:06
So. Assets equal liabilities plus equity. Always. Not usually. Not on a good day. Always.
1:16
Accountants get quite excited about that. We don't get out much.
1:21
Maya moves ten thousand of her savings into a new business bank account. Goodbye, kitchen extension.
1:29
The business now has ten thousand in cash. That's an asset. Where did it come from? Maya. So it's her equity.
1:38
Both sides up by ten thousand. Balanced. Lovely.
1:44
Next, Maya borrows five thousand from the bank, who were surprisingly relaxed about it.
1:50
Cash goes up again. But this money isn't hers. The bank would like it back, with interest, and they have her address. So it's a liability.
2:00
And here's the mistake nearly everyone makes. A loan is not income.
2:06
More money in the account? Yes. Any richer? Not even slightly.
2:13
Then Maya buys a laptop. Three thousand. It's very shiny, and she's already given it a name.
2:21
Cash goes down three thousand. But she now owns a laptop worth three thousand, which is also an asset.
2:28
She hasn't lost money. She's turned it into something you can spill coffee on.
2:33
The total? Exactly the same.
2:37
Now for the bit Maya actually quit her job for. She designs a logo for the cafe down the road, and they pay her two thousand.
2:45
Nobody lent her this. She didn't put it in herself. She earned it. And profit belongs to the owner, so equity goes up.
2:53
First proper money. She's going to frame the invoice. Honestly, we would too.
3:00
Then she pays five hundred for design software, because apparently you can't own software any more. You just rent it, forever.
3:09
Cash goes down, and because it's a cost of running the business, it comes straight off her profit.
3:15
Still balanced. Slightly less smug.
3:19
Five transactions. Spot the pattern? Every one changed at least two things, and the equation balanced every single time.
3:28
That's double-entry bookkeeping. An Italian friar called Luca Pacioli wrote it down in fourteen ninety-four, and frankly, nobody's managed to improve on it since.
3:41
So if the equation ever doesn't balance, it isn't the maths having an off day. Something's been recorded wrong. Usually by a human. Often by us.
3:53
Here's Northlight Studio in Beeswax, with all five transactions in.
3:57
Assets, in blue. The bank account and the laptop. Sixteen and a half thousand.
4:03
Liabilities, in red. The loan. Five thousand.
4:06
And equity. Maya's ten thousand, plus fifteen hundred of profit this year. Beeswax calls that current year earnings.
4:14
Sixteen-five on one side. Five, plus eleven-five, on the other. Same equation.
4:20
And if the two sides ever stop agreeing, Beeswax will tell you. Think of it as a very polite smoke alarm.
4:28
So. Assets: what you've got. Liabilities: what you owe. Equity: what's left that's actually yours. And they always balance.
4:40
Quick one before you go. Maya pays back a thousand of her loan. What happens to the equation?
4:47
Pause it. Have a think. We'll wait.
4:52
Cash down a thousand. Loan down a thousand. Still balanced.
4:57
See? You're basically an accountant now. Sorry about that.
5:03
On the next episode, we'll explore the five types of accounts every business uses, and where Beeswax keeps them. Try to contain yourself.