Accounting Equation

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Description of Accounting Equation. Explanation.

 

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

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