Basic Accounting Equation

Basic accounting equation assets liabilities and equity

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.

Computers 1500
Fixtures and Fittings 750
Accounts Receivable 575
Bank 600
Accounts Payable 425
Total Liabilities 500
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.

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