Accounting Equation

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An Accounting Equation is a mathematical relationship between total asset value, financial liabilities and economic capital.



[math] \text{Assets} = \text{Capital} + \text{Liabilities} [/math] [1][2]
[math] a = c + l [/math]
In a corporation, capital represents the stockholders' equity. Since every business transaction affects at least two of a company’s accounts, the accounting equation will always be “in balance,” meaning the left side should always equal the right side. Thus, the accounting formula essentially shows that what the firm owns (its assets) is purchased by either what it owes (its liabilities) or by what its owners invest (its shareholders equity or capital).

  1. Meigs and Meigs. Financial Accounting, Fourth Edition. McGraw-Hill, 1983. pp.19-20.
  2. Financial Accounting 5th Ed,p 47, HornGren, Harrison, Bamber, Best, Fraser, Willet, Pearson/Prenticehall, 2006