The basic accounting equation helps us to determine the true state of a company’s financial situation. This accounting equation is expressed as Assets = Liabilities + Owner’s Equity.
Assets
Anything a company owns that will eventually produce a benefit is called an asset. Examples of assets include cash, investments, land, equipment, or money owed to the company.
Liabilities
A liability is something that the company owes to someone else. Liabilities can be a company’s accounts payable, salaries it owes to employees, or even services that are due to be carried out at some point in the future.
Owner's Equity
Equity is what remains after you subtract the company’s liabilities from its assets. Equity also includes money that owners or shareholders have paid into the company as well as any of the company’s net income that hasn’t been paid out or distributed in some way.
Equality
Both sides of the basic accounting equation should be equal, meaning the number for liabilities plus equity should be equal to the number for assets.
References
- AccountingCoach.com: Introduction to the Accounting Equation
- “Financial Accounting for MBAs”, Peter D. Easton, John J. Wild, Robert F. Halsey, Mary Lea McAnally, Cambridge Business Publishers, 2010
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Writer Bio
Chris Amisano began writing professionally in 2005, and his freelance work has appeared in "PennyCents Magazine," "The ACUTA Journal" and "Career Focus Magazine." Amisano holds an Associate of Science in aviation management from Everglades University and a Bachelor of Arts in Spanish from the University of Memphis. He is pursuing his Master of Business Administration with a concentration in human resources management at Bellevue University.