The accounting equation is a fundamental principle in accounting that illustrates the relationship between a company’s assets, liabilities, and owner’s equity. It is expressed as:

Assets = Capitals + Liabilities

This equation serves as the foundation for the double-entry bookkeeping system, ensuring that every financial transaction affects at least two accounts, keeping the equation balanced. It provides a clear snapshot of a company’s financial position, showing what the company owns (assets), what it owes (liabilities), and the residual interest in the assets (owner’s equity).

Regardless of how the accounting equation is presented, the totals on both sides will always balance, irrespective of the number of transactions. While the individual amounts for assets, capital, and liabilities may fluctuate, the sum of the assets will always equal the sum of capital plus liabilities. In other words, the capital will always equal the assets of the business minus the liabilities.

Assets encompass various properties, such as buildings, machinery, inventory, and vehicles. Other assets include receivables from customers and the balance in the organization’s bank account.

Liabilities consist of amounts owed by the business for goods and services received but not yet paid for, as well as any borrowed funds.

Capital, also known as the owner’s equity or net worth, includes the funds invested in the business by the owner, retained profits for business use, and any profits paid out to the owner.

Re-write the equation

Assets = Owner’s Equity + Liabilities

Accounting equation for a corporation is:

Assets = Liabilities + Stakeholders Equity

Elements of Accounting Equation
There are two fundamental elements of an accounting equation. They are: (1) What the business owns, i.e. total assets, and (2) What the business owes, i.e. total equity.

In contrast to the basic accounting equation, the expanded version functions like a financial blueprint, dissecting a corporation’s equity into its building blocks: share capital, retained earnings, and the impact of transactions like dividends and withdrawals.
The expanded accounting equation builds on this foundation by providing more detail on the equity side of things. Here’s what it looks like:

Assets = Liabilities + Paid-in Capital + Revenues – Expenses – Dividends – Treasury Stock

Let’s break down the additional terms:

Paid-in Capital: This represents the money or other assets that owners have invested in the company. It includes things like common stock and additional paid-in capital.

Revenues: This is the income generated by the company from its core operations.

Expenses: These are the costs incurred by the company in running its business.

Dividends: These are the distributions of profits made by the company to its shareholders.

Treasury Stock: This refers to shares of a company’s own stock that it has bought back from investors.

More Resources

Thank you for reading our resources on the Accounting Equation. Enhancing your knowledge more and progressing in your career, you may find the following guides helpful: