What is the Accounting equation?
- 3 months ago
The accounting equation is a fundamental principle in accounting that represents the relationship between a company's assets, liabilities, and equity. It is expressed as:
Assets
=
Liabilities
+
Equity
Assets=Liabilities+Equity
In other words:
Assets represent what a company owns or controls. These can include cash, inventory, equipment, property, and investments.
Liabilities are what a company owes to external parties. These can include loans, accounts payable, and other debts.
Equity represents the owner's claim on the company's assets after all liabilities have been deducted. It includes contributed capital (such as investments by shareholders) and retained earnings (profits that have been reinvested into the business).
The accounting equation must always remain in balance, meaning that the total value of a company's assets must equal the sum of its liabilities and equity. This principle forms the foundation of double-entry accounting, where every transaction must impact the equation in a way that maintains its balance.
Assets
=
Liabilities
+
Equity
Assets=Liabilities+Equity
In other words:
Assets represent what a company owns or controls. These can include cash, inventory, equipment, property, and investments.
Liabilities are what a company owes to external parties. These can include loans, accounts payable, and other debts.
Equity represents the owner's claim on the company's assets after all liabilities have been deducted. It includes contributed capital (such as investments by shareholders) and retained earnings (profits that have been reinvested into the business).
The accounting equation must always remain in balance, meaning that the total value of a company's assets must equal the sum of its liabilities and equity. This principle forms the foundation of double-entry accounting, where every transaction must impact the equation in a way that maintains its balance.