From the course: Financial Modeling and Forecasting Financial Statements
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The power of the accounting equation
From the course: Financial Modeling and Forecasting Financial Statements
The power of the accounting equation
- The balance sheet is built around one of the most awesome creations of the human mind, the accounting equation: assets equal liabilities plus equity. - [Man 2] Now I can tell that you all are underwhelmed. You're expecting a little bit more, something like Einstein's famous equation: E equals M-C squared. Well, in it's own way, the accounting equation is just as impressive as E equals M-C squared. Now, the great insight behind this accounting equation was created a little bit over five hundred years ago in Italy. The traders in Venice, and other traders in Italy, had this insight. Listen. Let's keep a list of our assets like we've always been doing, but every time we get an asset, let's also write down where we got the money to buy that asset. - [Man 1] We write down the asset and we write down the source of the financing to buy that asset. Did I borrow the money to buy the asset? Was it an investment by the…
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