Accounting Equation

What is the Accounting Equation?

The Accounting Equation is the fundamental principle of double-entry bookkeeping and forms the foundation of a company's balance sheet. It is expressed as:

Assets = Liabilities + Shareholders' Equity

This equation represents the relationship between the resources a company owns or controls (assets), its debts (liabilities), and the owners' residual interest (shareholders' equity). It must always be balanced to reflect that each transaction affects at least two accounts.

Short Description: The fundamental formula that shows the relationship between a company's assets, liabilities, and owner's equity.

• Assets: Resources providing economic value that the company owns or controls.
• Liabilities: Debts or obligations owed to others.
• Shareholders' Equity: Owners’ residual claim after liabilities are deducted.

This concept ensures accurate recording in accounting, vital for interpreting financial health and constructing balanced financial statements.