In accounting, ESPECIALLY when writing a Balance Sheet, you follow the equation

Question

In accounting, ESPECIALLY when writing a Balance Sheet, you follow the equation of Assets equaling the total of Liabilities and stockholder's equities (for a company). My question is, WHY do they add up? There are different amounts used in each side of the equation. How is it that both sides add up to the same number?? The assets are a different set of additions than the L+SE. I asked my professor if they are ever unequal and she said no, that means that I did something wrong. But if I have different amounts, how is it that they add up to the same number? Why does it work that way? I get the equation, I just don't get how the equation turns out that way.

Explanation / Answer

An easy analogy is to think of a house. The value of the house minus the mortgage left equals the equity. The house is the asset, the mortgage is the liability, the equity is the stockholder's equity. A-L=SE, or A = L + SE They add up because all journal entries have a debit and a credit, and the only way to make changes to the balance sheet is through a journal entry. Debits will always increase an asset, but decrease a liability. This is why the equation remains balanced, because they are always opposite of each other. For example, a company pays $1,000 in accounts payable. So, the journal entry would be: DR CR Cash 1,000 AP 1,000 You decrease cash by 1,000 and decrease AP by 1,000. Remember from Algebra that as long as you decrease both sides of an equation equally, the equation stays balanced. You do not always have to cross between an asset and a liability in a balance sheet. For example, if a company receives $1,000 from an accounts receivable, the journal entry would be: DR CR Cash $1,000 AR $1,000 You've decreased AR by $1,000 and increased cash to recognize the payment. The equation remains balanced because you've only changed the distribution of the assets, not the total amount of the assets. If your numbers aren't adding up, then go back to the journal entries you had to make. The most likely suspect is that you flipped accounts (like put cash in as a debit when you were paying cash out - should be a credit). Drawing T-accounts will help visualize the process.

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