Accounting Equation
The foundation of double-entry bookkeeping, ensuring that every financial transaction keeps the business in balance.
AssetsEverything Owned
LiabilitiesBorrowed Funds
CapitalOwned Funds
Assets
Everything Owned
Everything the business owns. This includes cash, inventory, furniture, and equipment.
Liabilities
Borrowed Funds
The debts or obligations the business owes to outside parties, like bank loans or creditors.
Capital
Owned Funds
The owner's investment in the business. It represents the owner's claim on the assets.
The equation must always remain in balance. Any increase or decrease in one side must be accompanied by an equal change on the other side or a corresponding opposite change on the same side.