P04 · Lesson 2 of 10 · 11 min · 4 hands-on tasks
The Accounting Equation
Everything a business owns was paid for by someone: a lender or the owners. That one idea, Assets = Liabilities + Equity, holds after every single transaction.
🎥 Watch it (3 min)
🎬 Situation
Leo wants to open a second workshop. His bank asks for a balance sheet: everything Two Wheels owns, everything it owes, and what's left for Leo.
He's never made one. The good news: it all rests on one simple equation, and you're about to see it hold through every transaction.
🎮 Play
Watch the equation balance. Post Leo's transactions one at a time. The top bar is what the shop has; the bottom bar is who paid for it. They always match.
Balanced: every transaction changes both sides by the same amount.
| Account | Balance |
|---|---|
| Cash (asset) | $0 |
| Bikes in stock (asset) | $0 |
| Tools and equipment (asset) | $0 |
| Owed to bike supplier (liability) | $0 |
| Bank loan (liability) | $0 |
| Leo's money in the shop (equity) | $0 |
Equity is what's left. Slide what the shop owns and owes, and see the owners' share.
Mostly funded by the owner: a cushion if times get tough.
🏷️ Name it
Assets = Liabilities + Equity
| Term | Meaning | Two Wheels |
|---|---|---|
| Assets | What the business owns or is owed | Cash, bikes, tools, money owed by customers |
| Liabilities | What it owes to others | Bank loan, supplier bills, wages due |
| Equity | The owners' claim: assets − liabilities | Leo's investment plus profits kept in the shop |
| Double entry | Every transaction changes at least two accounts | Borrow: cash ↑ and loan ↑ |
The four kinds of balanced change:
| Transaction | Assets | Liabilities | Equity |
|---|---|---|---|
| Owner invests cash | ↑ | ↑ | |
| Borrow money | ↑ | ↑ | |
| Buy equipment with cash | ↑ and ↓ | ||
| Pay off a debt | ↓ | ↓ | |
| Earn a profit | ↑ | ↑ |
🖍️ Like you're five: you have a bike worth 100 stickers. You paid 60 stickers yourself and borrowed 40 from your sister. Bike (100) = what you owe your sister (40) + what's really yours (60). Always.
Real life: every published balance sheet, from a bakery to the biggest companies on earth, satisfies this equation to the cent. Investors use it to ask "how much of this company is funded by debt?", the first clue to how risky it is.
🔨 Do it: 4 tasks
0 / 4 doneTask 1 of 4 · Find the equity
Two Wheels owns $38,000 of assets (cash, tools, bikes). It owes $14,000 (a bank loan and a supplier bill). What is the owners' equity?
Task 2 of 4 · Borrowing
Leo borrows $10,000 from the bank. Assets were $38,000. What are total assets now?
Task 3 of 4 · Swapping one asset for another
Leo pays $3,000 cash for a new repair stand. What happens to total assets?
Task 4 of 4 · Paying a bill
Leo pays a supplier the $4,000 he owed. Which two things change?
🧩 Case: "Our assets doubled!"
⭐ VIPAt the end of the year Leo proudly tells a friend: "Two Wheels' assets doubled, from $40,000 to $80,000!" His friend, an accountant, asks one question.
What's the question?
What would you do? VIP members make the call, see what happens next across 2 decisions, and get the expert debrief.
🔁 Remember it
Assets $100,000, liabilities $70,000. Equity is...
Which transaction increases equity?
Can a transaction change only one account?
Assets = Liabilities + Equity. Every transaction changes at least two things and keeps the equation balanced. Equity is what's left for the owners: assets minus liabilities.
📅 Use it Monday
Find your company's balance sheet (or a well-known company's). Check: does total assets equal total liabilities plus equity? It always will. Then ask: how much of the assets are funded by debt?
Create a free account to track your progress.