What is the accounting equation?
Understand the Problem
The image displays the fundamental accounting equation, which is a core principle in accounting. It shows the relationship between a company's assets, liabilities, and owner's equity. Specifically, it illustrates that Assets are equal to the sum of Liabilities and Owner's Equity.
Answer
The accounting equation is: Assets = Liabilities + Owner's Equity
The accounting equation is Assets = Liabilities + Owner's Equity. This equation represents the foundation of double-entry accounting.
Answer for screen readers
The accounting equation is Assets = Liabilities + Owner's Equity. This equation represents the foundation of double-entry accounting.
More Information
The accounting equation ensures that the balance sheet always remains balanced. It's based on the principle that a company's assets are funded by either borrowing money (liabilities) or by investments from the owners (equity).
Tips
A common mistake is to confuse the terms 'assets,' 'liabilities,' and 'equity'. Assets are what the company owns, liabilities are what it owes to others, and equity is the owner's stake in the company.
Sources
- Accounting Equation: What It Is and How You Calculate It - investopedia.com
- The Accounting Equation, Explained - Forage - theforage.com
- Accounting Equation | Assets = Liabilities + Equity - Wall Street Prep - wallstreetprep.com
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