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.
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.
Additional information can be found in our basic accounting equation tutorial
For further information see the Wikipedia accounts equation definition.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.