Accounting Equation

The Accounting Equation is the foundation of the double-entry bookkeeping system and represents the relationship between an entity’s Assets, Liabilities, and Equity.

The accounting equation is the foundation of the balance sheet. A balance sheet is the accounting equation displayed as a financial statement.

Components of Accounting Equation

1. Assets

• Resources owned by an Entity
• Cash, accounts receivable, inventory, investments, property Plant and Equipment, equipment, intellectual property etc
• resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

2. Liabilities

• Liabilities are the obligations the business owes to others.
• Loans, Accounts Payable, payroll, Taxes etc
• Present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.

3. Equity

Equity represents the owner’s stake in the business. Equity is the value of a business if the owner were to liquidate all assets and pay off all liabilities.
Share capital, accumulated profits and losses over time.
The residual interest in the assets of the entity after deducting all its liabilities.

The Balance Sheet – Statement of Financial Position

Financial statement that presents the entity’s financial position at a specific point in time.
Display of Accounting Equation on a Document
The balance sheet shows the relationship between what the business owns, what it owes, and how much the owners have invested.