Basic Accounting Equation
The Foundation of Financial Accounting
Every accounting transaction affects the accounting equation. This equation forms the basis of the double-entry accounting system and ensures that financial records remain balanced.
Assets = Liabilities + Shareholders' Equity
- Assets are resources owned by the business.
- Liabilities are obligations owed to others.
- Shareholders' equity represents the owners' residual interest.
Note
Every transaction affects at least two accounts while keeping the accounting equation in balance.
Summary
Understanding the accounting equation is essential because every future accounting topic builds upon it.