Quick Definition

The accounting equation is a fundamental principle of financial accounting that represents the relationship between a company's assets, liabilities, and equity.

Formula

Examples

• 1A company has $100,000 in assets and $70,000 in liabilities. The equity would be $30,000, calculated as Assets ($100,000) - Liabilities ($70,000).
• 2If a business purchases a new piece of equipment for $10,000 by taking out a loan for the same amount, its assets and liabilities increase equally, keeping the equity unchanged.
• 3When a company earns a profit of $5,000 without any withdrawals, this profit increases both the assets and the equity by $5,000, assuming no new liabilities are created.

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