Accounting Equation

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

• AKA: Balance Sheet Equation.
• Context:
  • It can be expressed as Asset Value = Financial Liabilities + Ownership Equity in the case of a financial transaction, economic capital is represented by the ownership equity. This is based on Double-entry Accounting assumption that every financial transaction has equal and opposite effects.
  • It can also be expressed as Total Assets of a Company = Total of Financial Liabilities + Shareholders Equity, in this case economic capital is represented by shareholders equity.
  • …
• Example(s):
  • An asset costs $1000, to buy this asset the potential owner uses $750 from his debit account (i.e. ownership equity = $750 ) and borrows $250 (financial liability = $250) to complete the transaction.
  • …
• Counter-Example(s):
  • Ownership Equity.
  • Net Income.
• See: Double-Entry Accounting, Balance Sheet, Real Property Value, Asset, Financial Liability, Equity, Market Value.

---

---

References

2016

• (Wikipedia, 2016) ⇒ http://en.wikipedia.org/wiki/Accouting_equation
  • The basic accounting equation, also called the balance sheet equation, represents the relationship between the assets, liabilities, and owner's equity of a business. It is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits. It can be expressed as

[math]\displaystyle{ \text{Assets} = \text{Capital} + \text{Liabilities} }[/math]

[math]\displaystyle{ 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).

• (Investopedia, 2016) ⇒ Retrieved December 11, 2016 from http://www.investopedia.com/terms/a/accounting-equation.asp
  • The equation that is the foundation of double entry accounting. The accounting equation displays that all assets are either financed by borrowing money or paying with the money of the company's shareholders. Thus, the accounting equation is: Assets = Liabilities + Shareholder Equity. The balance sheet is a complex display of this equation, showing that the total assets of a company are equal to the total of liabilities and shareholder equity.

---