Introduction To The Accounting Equation
This post will cover the accounting equation, a fundamental accounting principle.
The Accounting Equation
This equation is the foundation of double-entry accounting. The basic principle behind the accounting equation is that the stuff the business owns (assets) equals the stuff the business owes (liabilities and equity). Liabilities are what the business owes to lenders, and equity is what the business owes to the owner. It is important that you remember that this equation balances. Assets contain cash, accounts receivable, inventory, plant, property, equipment, land, buildings, and investments. Liabilities include accounts payable, loan payable, wages payable, and taxes payable. Equity consists of stockholders' equity, owner's equity, and retained earnings (profit kept for later use). A balance sheet is a snapshot of all the different assets, liabilities, and equity at one point in time. You can tell a lot about a business by looking at its balance sheet.
TL;DR
Stuff the business has is equal to stuff the business owes
The accounting equation is assets = liabilities + equity
This equation always balances
The equation makes up the balance sheet
The balance sheet is a snapshot of a business's assets, liabilities, and equity
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