FA2 – Accounting Equation Practice Problem (Assets = Liabilities + Equity)

Let's examine problem 11 a, all of my problems. You can download from TonyBell.com. It's a free PDF link There's no sign in no sign up. You just click and the the PDF will pop right up for you You'll see it linked below this video as well This one has us looking at the accounting equation, and if you don't know anything about the accounting equation, I really advise you to watch the first video in this series. This is the second video in this series, so you've joined at number two, but hopefully you saw that first video, and hopefully you'll remember the accounting equation says... Assets equals liabilities plus shareholders' equity. And I mentioned this is a way to think of equity, right? I have a $300,000 house, against which I have a $200,000 mortgage. Therefore, my home equity is $100,000. If I sold my house, which is an asset, paid the mortgage, which is a debt, a liability, how much money would I get? I'd get my equity, $100,000. hundred thousand Ah, okay. So let's look at business one now. Again, we're just using that formula, dollars assets equals liabilities plus equity. you So we don't know the assets, but if we know the liabilities and equity, we just add them, right? for 150 plus 100. Business one's assets have got to be $250,000. two hundred and fifty Let's do business two. Business two, the assets are 80. The liabilities, we don't know, thousand dollars but we know the equity is 32. So something plus 32 equals 80. The math would be, you go 80 minus 32. The answer here is 48,000. And I always double check. I always go, when I do ones like this, I go, well, let's pretend I didn't know the assets. I go, what's 48 plus 32? It is 80, right? That the math worked. We do the same thing with business three assets equals liabilities plus shareholders equity. I know the assets are 50. If the liabilities are 21, the equity has got to be 50 minus 21. It's got to be 29, and just double checking 21 plus 29. Yes, indeed, it is 50. So things are balancing, right? This is what makes a balance sheet balance. So it's it's working. Business four is a little tricky for an intro class, but it's important to understand the concept of negative equity. And I'll give you an example of negative home equity. In the great financial crisis, so again, A equals L plus SE, people bought houses that they thought, and the mortgage company thought was worth. Say 500k, I'm making numbers up here, 500k, and they gave them a $450,000 mortgage, meaning the person had to put down 50 grand, say, and their equity was $50,000 in the house. And in 2008, property values plummeted, really went down, really went down. So let's say the property value went from 500 to 300 over the course of like six months, which is just insane, right? And that type of thing was happening. Property values plummeted. The mortgage doesn't plummet at the same time. The mortgage just stays the same, or maybe you're making some small payments on it, but let's just say the mortgage here stayed the same. Well, what does that mean? Well, again, if you take the assets, sell them off, you pay off the debts, how much money goes to you, the shareholder? 50 grand. Well, in this case, if I sold my assets and I paid off my bill, I still owe $150,000, right? I've got $150,000 negative equity. What an economic catastrophe. And it's bad for companies too. This is not just a home equity example. It can happen for companies when they're in a negative equity situation, they're in big trouble. And this company, business number four, is in big trouble. Why? Because the liabilities are greater than the assets. The value of what you owe is greater than the value of what you own. You're in trouble. So in this case, the liabilities have got to be $10,000 more than the assets. Assets equals liabilities plus shareholders' equity. Well, $95,000 plus negative 10 is 85. So it works, but we have more debts than we have assets. A bad place. to be but a very good place to be is right here with me in these videos. I hope they're helping and I'll see you in the next one. Stay tuned. Bye for now. The next video in our series is right up here and if you want a super cut of all of the videos in this series that's the one down below.