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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