Accounting Equation

Assets = Owner's equity + Liabilities

The Accounting Equation

The fundamental equation of accounting is: Assets = Owner's Equity + Liabilities. Assets are what the business owns. Owner's equity is the owner's investment and accumulated profits. Liabilities are debts owed to others. This equation must ALWAYS balance.

Example

Applying the Equation

Starting a business with R50 000 cash: Assets (R50 000) = Owner's Equity (R50 000) + Liabilities (R0) Borrow R20 000 from bank: Assets (R70 000) = Owner's Equity (R50 000) + Liabilities (R20 000) Buy equipment for R30 000 cash: Assets (R70 000: R40 000 cash + R30 000 equipment) = OE (R50 000) + L (R20 000) ✓

Note

Remember

Every transaction affects at least two items in the equation — this is why it's called double-entry bookkeeping. The equation ALWAYS balances. If it doesn't, there's an error. Owner's equity increases with profit and decreases with losses or drawings.

Key Vocabulary

AssetsEverything of value that the business owns

Owner's equityThe owner's financial interest in the business

LiabilitiesDebts the business owes to others

Double-entryRecording each transaction in two accounts to keep the equation balanced

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