Accounting equation

What is accounting equation?

The accounting equation states that a company's assets always equal its liabilities plus owner's equity. It's the foundation of double-entry bookkeeping: everything a business owns is financed either by debt (liabilities) or by owners (equity). Because both sides must stay equal, the equation is what keeps your balance sheet balanced.

Formula

Worked example

Why it matters for fast-growing companies

Every transaction touches this equation, so when your books don't balance, something is miscoded. Clean, balanced books are the baseline for trustworthy financials, investors, lenders, and auditors all start by checking that assets tie to liabilities plus equity.

Related terms

• Accounting & closeDouble-entry accountingDouble-entry accounting records every transaction in at least two accounts, one debit and one matching credit, so the books always stay in balance.
• Accounting & closeBalance sheetA balance sheet is a financial statement showing what a company owns (assets), what it owes (liabilities), and the owners' stake (equity) at a single point in time.
• Accounting & closeJournal entryA journal entry is the record of a single business transaction, listing the accounts affected and the debits and credits that keep them balanced.
• Accounting & closeRetained earningsRetained earnings are the cumulative profits a company has kept rather than paid out to owners as dividends or distributions.

Frequently asked questions