Accounting Equation

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Description of Accounting Equation. Explanation.

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Definition Accounting Equation. Description.


The Accounting Equation is the foundation of many double-entry accounting systems, which state that assets equal liabilities plus owners' equity.

In other words, the two sides of the equation must always be in balance

 

The accounting equation is:

 

     Assets = Capital + Liabilities

 

The accounting equation can also be written as:

 

     Capital = Assets - Liabilities

 

Another variation of the accounting equation is to write it as:

 

     Liabilities = Assets - Capital


Instead of the word 'Capital' you may also find 'Owners Equity' or 'Shareholders' Equity' or 'Stockholders' Equity' being used, which all indicate the same.

 

Expanded Accounting Equation

Capital can be split up in a number of elements, resulting in the so called 'expanded accounting equation':

 

     Assets = Capital + Liabilities = (Common Stock + Retained Earnings - Dividends + Revenues - Expenses) + Liabilities

 

Usages of Accounting Equation. Applications

  • Bookkeeping
  • Business finance
  • Investing
  • Business decision-making

Accounting Equation Forum
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Accounting Equation Special Interest Group


Special Interest Group

 

Best Practices - Accounting Equation Premium

Expert Tips - Accounting Equation Premium

Resources - Accounting Equation Premium

Quickly Reading a Profit and Loss Statement and a Balance Sheet

This video explains that when we're reading a profit and loss statement as a director we should:
- Not focus on the figures as such, but on the E...
Usage (application): Profit and Loss Statement Analysis, Analyzing a P&L
 

Introduction to the Balance Sheet

This video explains the main terms you need to read a balance sheet

Assets: things a company owns that have value.
- Current Assets: t...
Usage (application): Initial Understanding of a Balance Sheet, Financial Statement Analysis, Accounting
 
 

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Compare: Accrual Accounting

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