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Basic equation of accounting

The basic equation of accounting is:
Assets = Liabilities + Equity

Contents

Expanded Definition

This is the equation of the balance sheet. It also governs double-entry bookkeeping. Whenever one account is changed (such as "Cash"), one or more other accounts are also changed (such as "Revenue" or "Accounts payable"). At the end of any such change, the above equality must hold true.

Sometimes, only one section is changed. For instance, if cash is spent to purchase short term investments, then the Asset side remains unchanged. Other times, several sections are changed. For instance, if cash is paid out to investors as dividends, then both the Assets and Equity portion are changed (both going down, in this instance).

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