Basic Accounting Equation
Or Formula

Previous lesson: Define Accounting
Next lesson: What Are Assets?

Have you ever heard of the basic accounting equation or basic accounting formula? And do you know what this is? This equation is really, really important. In fact, all accounting entries are derived from this. If you really understand it, the rest of accounting is much easier. If you don't, you'll probably find the subject pretty hard. So listen up...

The whole of accounting is based on a single equation:


Accounting = Balance

The word equation comes from the word equal.

For any equation, one side always equals another. Also, equations can be made out of anything.

For example:
1 Orange = $0,50
House = Walls + Doors + Windows + Roof
1 week = 7 days

So what does the basic accounting equation or basic accounting formula mean? Well, in order to answer that question we need to look at what each of the terms in the equation mean...

Construction Vehicle


Assets are possessions of the business. They are things that add value to the business and will bring it benefits in some form. For example, furniture, machinery, vehicles, computers, stationery or cash.


Equity, or owner's equity, is the value of the assets that the owner owns. It is the value of the business assets that the owner can lay claim to.


Liabilities are basically debts. The amount of liabilities represents the value of the business assets that are owed to others. It is the value of the assets that people outside the business can lay claim to.

What the Basic Accounting Equation Means

In a nutshell, the accounting equation above shows us how much of the assets are owned by the owner (equity) and how much are owed to others (liabilities). It's as simple as that.

Does this equation and its meaning still seem a bit tricky right now? If so, don't worry, it will become easier as you continue along.

Read through the following lessons, where I will go into more details about each of the components of the basic accounting equation and give more examples of each one:

1. Assets
2. Liabilities
3. Owners Equity

Once you are done with these lessons be sure to check out my second lesson on the accounting equation, which will give you more info and certainty on this key concept.

Return from The Basic Accounting Equation to Basic Concepts

Return to the Home Page

Previous lesson: Define Accounting
Next lesson: What Are Assets?

Enjoying this Website?
Help Support it with a Donation


Questions Relating to This Lesson

Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)

Accounting Equation Exercises
Q: Tom Jones is the owner and operator of Jones Enterprise, a motivational consulting business. At the end of its accounting period, December 31, 2009, …


Q: WHAT IS THE MAIN PURPOSE OF THIS ACCOUNTING EQUATION? A: The main purpose of the basic accounting equation is to show the real-life financial …


Have your say about what you just read! Leave me a comment in the box below.

Advertise on

privacy policy

Related pages

calculating markuphow to learn accountancybookkeeping skills testbookkeeping entriesis accounts payable a credit or debitcost of good sold income statementcogs percentageexamples of statements of cash flowsundistributed profitsample llc balance sheetthe retained earnings statement should be preparedworking out vat on gross amountcompute the cost of goods manufactureddistributable reserves definitionsupplies and supplies expenseaccounting midterm examthe fundamental accounting equation isexample p&l and balance sheetbills receivable account formataccounting general journal examplesrevenues minus expenses equalsa multiple step income statementresidual interest definitiondirect and indirect method cash flow25 journal entries with ledger and trial balancecredit memo accounting entryperpetual fifofreight outwardbest books for accounting beginnerstypes of source documentsminus vat calculatormeaning of perpetual inventoryrecording petty cash transactionsdollar markup calculatorperpetual inventory system and a periodic inventory systemwhat is cogs accountingexamples of lifo and fifojournal entry to record accounts payableincome statement for the month endeddebitmeaningsynonym for investmentjournal entry for accrued expensejournal general entries accountingcogs costaccrued expenses accountingsale ledger control accountcalculate ex vatmeaning of cash discount9 steps of the accounting cycleaccounting pnlcreditors ledgersample cash budgetjournal entry worksheetaccumulated depreciation naturecalculate vat taxfinding ending inventorytrade payableaccountancy for beginnersaplia accounting test answersbrought meaning in tamilpurchase ledgereceive cash on account journal entryovercast in accountingfinding markup percentagehow to calculate sales tax backwards from totaltrial balance usesrevenue deftutorial for accounting for beginnerscost of goods manufactured and sold statement formattrial balance vs general ledgeraccrued liability examplework out gross profit marginhow to calculate vat from gross amountcash flow statement questions and answers