Accounting Equation

The accounting equation is fundamental to understanding accounting and financial statements. It is always in the form:

Assets = Liabilities + Owner’s Equity

Assets: are the resources a company owns that generate revenue. Examples include cash, accounts receivable, inventory, and fixed assets.

Liabilities: are the debts or obligations that a company owes to others. Examples include accounts payable, long-term debt, and current liabilities.

Owner’s Equity: is the owner’s ownership stake in the company. Examples include common stock and retained earnings.

The accounting equation is important because it ensures that the financial statements are accurate and complete. It also helps to ensure that the financial statements are consistent and can be easily compared to other companies.