Accounting Equations That Always Hold Define Accrual Accounting

balance sheet equation

In bookkeeping and management of ledgers, the basic accounting formula is extensive. The assets in the accounting equation are the resources that a company has available for its use, such as cash, accounts receivable, fixed assets, and inventory. Accounts receivable include all amounts billed to customers on credit that relate to the sale of goods or services. Inventory includes all raw materials, work-in-process, finished goods, merchandise, and consigned goods being offered for sale by third parties. This straightforward relationship between assets, liabilities, and equity is considered to be the foundation of the double-entry accounting system. The accounting equation ensures that the balance sheet remains balanced. That is, each entry made on the debit side has a corresponding entry on the credit side.


This sets the foundation of double-entry accounting, also known as double-entry bookkeeping, and highlights the structure of the balance sheet. Double-entry accounting is a system where every transaction affects at least two accounts. The accounting equation is a simple but very important concept in accounts to move forward with other concepts and to understand them better. A correct accounting equation can simplify a lot of things, and an accounting equation approach properly taken paves the way for other transactions. The accounting equation is more of a measure to maintain the transactions’ mathematical and recording accuracy. The investors cannot trust the equation only for the actual impact of the transactions. They have to consider other things to understand them better and then invest in the company.

GL Accounts: What Are They and How Do They Work in Double-Entry Accounting

Put another way, it is the amount that would remain if the liquidated all of its assets and paid off all of its debts. The remainder is the shareholders’ equity, which would be returned to them. Locate the company’s total assets on the balance sheet for the period. Equity is named Owner’s Equity, Shareholders’ Equity, or Stockholders’ Equity on the balance sheet. Business owners with a sole proprietorship and small businesses that aren’t corporations use Owner’s Equity. Corporations with shareholders may call Equity either Shareholders’ Equity or Stockholders’ Equity. Accounting equation is also called balance sheet equation and fundamental accounting equation.

What is the basic equation of accounting?

The basic equation of accounting is Assets = Liabilities + Owner’s Equity


​liabilities are all current and long-term debts and obligations

owner’s equity is the sum of assets that are available to shareholders after all liabilities are paid

Companies compute the equation from their balance sheet. They prove that the financial statements balance and the double-entry accounting system works. The company’s assets are equal to the sum of its liabilities and equity. The balance sheet is also known as the statement of financial position and it reflects the accounting equation. The balance sheet reports a company’s assets, liabilities, and owner’s (or stockholders’) equity at a specific point in time. Like the accounting equation, it shows that a company’s total amount of assets equals the total amount of liabilities plus owner’s (or stockholders’) equity.

Basic Accounting Equation Formula

As you can see below, this simultaneous debit and credit has a zero net effect and leaves the final accounting equation balanced. Is the owner’s claim on the assets of the business, that is, the difference between what they own and what they owe. Essentially, equity tells a business owner or investor how much the firm is worth after all the debt is repaid.

The accounting equation formula is based on the double-entry bookkeeping and accounting system. Debits and credits are equal when recording business transactions and preparing financial statements. In above example, we have observed the impact of twelve different transactions on accounting equation.

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