The current research explored children's ability to recognize and explain different concepts both with and without reference to physical objects so as to provide insight into the development of children's addition and subtraction understanding. In Study 1, 72 7- to 9-year-olds judged and explained a puppet's activities involving three conceptual relations: (a) a+b=c, b+a=c; (b) a-b=c, a-c=b; and (c) a+b=c, c-b=a. In Study 2, the self-reports and problem-solving accuracy of 60 5- to 7-year-olds were recorded for three-term inverse problems (i.e., a+b-b=?), pairs of complementary addition and subtraction problems (i.e., a+b=c, c-b=?), and unrelated addition and subtraction problems (e.g., 3-2). Both studies highlighted individual differences in the concepts that children understand and the role of concrete referents in their understanding. These differences were related to using efficient procedures to solve unrelated addition and subtraction problems in Study 2. The results suggest that a key advance in children's conceptual understanding is incorporating subtractive relations into their mental representations of how parts are added to form a whole.