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# How Do Accountants Use Algebra?

## Double-Entry Accounting

Accounting tracks the value of a business's or an individual's finances using a method called double-entry. At its most basic, double-entry accounting is an algebraic equation consisting of x = y + z. This system was first published in the 15th century by Luca Pacioli to describe the accounting method Venetian merchants used.

## Fundamental Equation

The fundamental algebraic equation in accounting is "assets = liability + capital." Capital is commonly called equity. If the only thing you own is a car, and you are making car payments, you can use this formula to depict this particular financial situation as the car's market value = the amount you owe + equity, or \$15,000 = \$10,000 + \$5,000. Accountants refer to the equal amount on both sides of the equation as "balance."

## Equation Changes

Say you open a savings account with \$1,000. You now can add this amount to your equation on both sides, as (x + 1,000) = (y + z + 1,000), or \$16,000 = \$10,000 + \$6,000. You still only have \$5,000 equity in your car, but you have another \$1,000 in capital.

## Debits and Credits

Accountants refer to entries as "debits" and "credits." They always enter at least one debit and at least one credit to balance the equation. If you buy a new computer and spend \$700 on it, you need to debit your assets to reflect the new total of \$16,700. To make the equation balance, you need to add a third column to indicate expenses paid. The algebraic equation becomes [(x + 1,000) + 700] = (y + z + 1,000) + 700.

## Further Changes

As you make monthly car payments, you change amounts on the right side to reflect this. Over time, your equation might read, \$16,700 (car's market value + your savings account + computer) = \$7,000 (amount you owe on the car) + \$8,000 (your equity in the car) + \$1,000 (your original capital) + \$700 (the expenses you paid for the computer).