Accounting Equation

Description of Accounting Equation. Explanation.

Definition Accounting Equation. Description.

The Accounting Equation is the foundation of many double-entry accounting systems, which state that assets equal liabilities plus owners' equity.

In other words, the two sides of the equation must always be in balance

The accounting equation is:

Assets = Capital + Liabilities

The accounting equation can also be written as:

Capital = Assets - Liabilities

Another variation of the accounting equation is to write it as:

Liabilities = Assets - Capital

Instead of the word 'Capital' you may also find 'Owners Equity' or 'Shareholders' Equity' or 'Stockholders' Equity' being used, which all indicate the same.

Expanded Accounting Equation

Capital can be split up in a number of elements, resulting in the so called 'expanded accounting equation':

Assets = Capital + Liabilities = (Common Stock + Retained Earnings - Dividends + Revenues - Expenses) + Liabilities

Usages of Accounting Equation. Applications

Bookkeeping
Business finance
Investing
Business decision-making

Accounting Equation Forum (2)

What's the Use of Accounting? Why Accounting?
"What the use of accounting for businesses? Why are accounting information systems important for business?"

Revenue versus Proceeds
"What's the difference between revenue and proceeds in accounting? In which conditions we use proceeds?
Thanks for your advice..."

New topic | Join our management network