Accountancy/The Accounting Equation

The Accounting Equation

The fundamental accounting equation, which is also known as the balance sheet equation looks like this:

Assets = Liabilities + Owner's Equity

or

Assets = Liabilities + Capital

On the left-hand-side of the equation are the resources (assets) of the business. Or more correctly, the term assets "represents" the value of the resources of the business. On the other side of the equation are claims of ownership on those assets. Liabilities are the claims of creditors (those "outside" the business). The equity, or owner's equity, is the claim of the owners of the business (those "inside" the business).

This equation is kept in balance after every business transaction. Everything falls under these three elements in a business transaction.