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.

Assets
Computers1500
Fixtures and Fittings750
Accounts Receivable575
Bank600
.
Liabilities
Accounts Payable425
PAYE75
Total Liabilities500
.
Equity
Finance Introduced2000
Retained Earnings500
Total Equity2500

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.