The accounting equation — and the first entry ever
Maya opens a design studio by depositing $10,000 of her own money into a business bank account. Show what happens to A = L + E, and record the very first journal entry of the business's life.
The journal entry
Owner invests $10,000 cash
| Account | Debit | Credit |
|---|---|---|
| Cash | $10,000 | |
| Owner's Capital | $10,000 |
- Cash (debit): The business now HAS something: $10,000 of cash. Assets are what the business owns or controls.
- Owner's Capital (credit): Every asset is claimed by someone: creditors (liabilities) or owners (equity). Maya's claim on the business = equity.
Remember this
- formula
A = L + E. Assets = what the business has. Liabilities = creditors' claims. Equity = owners' claim (contributions + earnings kept). Always balanced, after every single transaction.
- mnemonic
Two questions for any event: what does the business HAVE now (left side)? and WHO has claim to it (right side)? Answer both and you've done accounting.