Accounting Equation
The fundamental formula underlying double-entry bookkeeping: Assets = Liabilities + Equity. This equation must always remain in balance for accurate financial reporting.
Accounting Equation
The fundamental relationship in accounting: Assets = Liabilities + Equity. This equation forms the basis of the double-entry bookkeeping system and must always remain in balance.
For example, when a small business purchases $10,000 of inventory on credit, both assets (inventory) and liabilities (accounts payable) increase by $10,000, maintaining the balance in the accounting equation.
The accounting equation provides the structure for the balance sheet and ensures that all transactions are recorded with equal and offsetting entries. It reflects the relationship between what a company owns, what it owes, and the residual interest of its owners.