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:**

**ASSETS = EQUITY + LIABILITIES**

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...

*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.

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**

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

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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**

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