What Is a Basic Accounting Equation?

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The accounting equation is the basis for financial management.
The accounting equation is the basis for financial management. (Image: accounts fig image by Aleksandr Ugorenkov from Fotolia.com)

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.

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