Accounting equation definition


The equation uses total assets, total liabilities, and total equity in the calculation. This formula differs from working capital, based on current assets and current liabilities. In double-entry accounting or bookkeeping, total debits on the left side must equal total credits on the right side.

What is the accounting equation?

The accounting equation is a formula that shows the sum of a company's liabilities and shareholders' equity are equal to its total assets (Assets = Liabilities + Equity). The clear-cut relationship between a company's liabilities, assets and equity are the backbone to double-entry bookkeeping.

If you sold your for exactly what you paid for them and paid off the debt, equity is what you have left over. We will increase an asset account called Prepaid Rent and decrease the asset cash. We want to decrease the liability Accounts Payable and decrease the asset cash since we are not buying new supplies but paying for a previous purchase.

What Is the Formula for Assets?

They are considered as long-term or long-living assets as the Company utilizes them for over a year. Furniture was purchased on the last day of the financial year.

debits and credits

Shareholders’ Equity SectionThe internal sources of capital that helped fund its assets, such as capital invested by the founders and issuances of equity financing. Equity typically refers to shareholders’ equity, which represents the residual value to shareholders after debts and liabilities have been settled.

Explaining the Accounting Equation in Context

of current liabilities include short term loans, overdrafts, accounts payable, etc. This article gives a definition of accounting equation and explains double-entry bookkeeping. We show formulas for how to calculate it as a basic accounting equation and an expanded accounting equation. It is important to pay close attention to the balance between liabilities and equity.