Hello,
I have a question regarding the formula, I'm new to accounting and I'm a smart guy but this equation eludes me. There's something terribly wrong with it and I'd like someone to clear it up please.
Assets = Liabilities + Equity
Example 1. Let's say I own a website that costs me $500 per month to run and $1000 income from ads. Profit is $500 per month. No payroll, I handle it all myself. Then liability would be $500 (cost of operation)? Let's assume it's not cost of operation and it's $0 for liabilities then please go to Example 2. If it is $500 Liability then how can I have $1500 Assets when I don't technically "own" that 500, it went away into operations? If that's not it, then let's consider $0 Liability in Example 2 bellow..
Example 2. I own a tractor and operate a farm. I'm using down payment on the tractor towards the dealership. This liability is not equal an asset (technically). Think about it... The value of my tractor is worth half what I payed for it initially just because it's used, so how can my assets be worth their original value as time passes? Same thing goes for printers, computers, etc... in a business... Let's look at it in reverse if you're confused. This equation is telling us that: All I owe (assets, that devalue with time) equals what I owe to others + Profit I make... What I owe to others cannot be what I own under assets, especially if the interest goes up on the tractor what the tractor value goes down, it's not equal... This addition doesn't work out in real life... It completely trumps the value of things and the real profit of a company.
This equation is not realistic at all... It's a recipe for disaster because it uses improper KPIs (key performance indicators) that do not match with the realistic life expectations... Is there something I don't understand here?
I'm new to accounting, please bare with me. Thank you.
I have a question regarding the formula, I'm new to accounting and I'm a smart guy but this equation eludes me. There's something terribly wrong with it and I'd like someone to clear it up please.
Assets = Liabilities + Equity
Example 1. Let's say I own a website that costs me $500 per month to run and $1000 income from ads. Profit is $500 per month. No payroll, I handle it all myself. Then liability would be $500 (cost of operation)? Let's assume it's not cost of operation and it's $0 for liabilities then please go to Example 2. If it is $500 Liability then how can I have $1500 Assets when I don't technically "own" that 500, it went away into operations? If that's not it, then let's consider $0 Liability in Example 2 bellow..
Example 2. I own a tractor and operate a farm. I'm using down payment on the tractor towards the dealership. This liability is not equal an asset (technically). Think about it... The value of my tractor is worth half what I payed for it initially just because it's used, so how can my assets be worth their original value as time passes? Same thing goes for printers, computers, etc... in a business... Let's look at it in reverse if you're confused. This equation is telling us that: All I owe (assets, that devalue with time) equals what I owe to others + Profit I make... What I owe to others cannot be what I own under assets, especially if the interest goes up on the tractor what the tractor value goes down, it's not equal... This addition doesn't work out in real life... It completely trumps the value of things and the real profit of a company.
This equation is not realistic at all... It's a recipe for disaster because it uses improper KPIs (key performance indicators) that do not match with the realistic life expectations... Is there something I don't understand here?
I'm new to accounting, please bare with me. Thank you.