Accounting Equation

What is the Accounting Equation?

The accounting equation forms the basis of the double entry bookkeeping system and states that the total assets of a business must equal the total liabilities plus the owners equity in the business.

Assets = Liabilities + Owners Equity

The left hand side of the equation shows what assets (inventory, machinery) the business owns, the right hand side shows how those assets were funded, either by liabilities (bank loans, supplier credit) or by equity (money put into the business by the owner or retained earnings).

The accounting equation is true at any point in time and for each financial transaction within a business. It also is a useful reference point when determining debits, which means on the left of the accounting equation, and credits, which means on the right of the equation.

Assets = Liabilities + Owners Equity
Debit Credit

Additional information can be found in our basic accounting equation tutorial

For further information see the Wikipedia accounts equation definition.

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Last modified July 4th, 2014 by Team

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