There is a basic accounting equation which relates to the double-entry system. The equation will always balance unless a mistake has been made.
Assets = Liabilities + Equity (Owners or Shareholder funds)
In more detail, an asset is something that you own; this includes computers, equipment, premises, goodwill, patents, money, and accounts receivable.
Liabilities is money that you owe and includes loans, accounts payable, overdrafts and taxes payable.
Equity is the amount that owners have introduced into the business and any profit and loss.
Basic Accounting Equation Example
Below is a simple Balance sheet showing Assets, Liabilities and Equity, from this we can use the equation.
| Assets | |
| Computers | 1500 |
| Fixtures and Fittings | 750 |
| Accounts Receivable | 575 |
| Bank | 600 |
| . | |
| Liabilities | |
| Accounts Payable | 425 |
| PAYE | 75 |
| Total Liabilities | 500 |
| . | |
| Equity | |
| Finance Introduced | 2000 |
| Retained Earnings | 500 |
| Total Equity | 2500 |
From the simple example above the equation now looks like this:
Assets 3000 = Liabilities 500 plus Equity 2500
Therefore 3000 = 3000
The retained earnings are the figures from the profit and loss account.
Return from free basic accounting equation to Accounting Basics page.