ACCOUNTING EQUATION : Assets = Liabilities + Owner's Equity

ACCOUNTING EQUATION : Assets = Liabilities + Owner's Equity

Accounting is built upon the fundamental accounting equation:

Assets = Liabilities + Owner's Equity

1. Assets are what the company owns = what the business has or owns (equipment, supplies, cash, accounts receivable)
2. Liabilities are what the company owes to creditors against those assets = what the business owes outsiders (bank loan, accounts payable)
3. Equity is the difference between the two and represents what the company owes to its investors/owners = what the owner owns (investment and business profit)

All accounting transactions must keep this equation balanced so when there is an increase on one side there must be an equal increase on the other side or an equal decrease on the same side. This equation must remain in balance and for that reason our modern accounting system is called a dual-entry system. This means that every transaction that is recorded in accounting records must have at least two entries; if it only has one entry the equation would necessarily be unbalanced.