What is the accounting equation?
The starting point for every accountant.
By Amr Adel
The starting point for every accountant.
Assets equal liabilities plus equity. Every transaction in every company, from a corner shop to a listed group, keeps this equation in balance.
What each side means
Assets are what the business controls and expects to benefit from. Liabilities are what it owes to others. Equity is what remains for the owners: the money they put in plus the profits kept in the business.
Three quick examples
- Buying equipment for cash: one asset goes up, another goes down
- Taking a bank loan: cash and liabilities rise together
- Earning a profit: assets rise, and so does equity
Why it matters
Once the equation is clear, double entry, the balance sheet and even group consolidation become logical rather than memorised. It is the first lesson in every course Amr teaches for a reason.
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