Accounting equation

The accounting equation states that a business’s assets equal its liabilities plus owners’ equity. It expresses the balance maintained by double-entry bookkeeping.

Double-entry bookkeeping: A bookkeeping system that records each transaction with equal total debits and credits. Its paired entries keep assets equal to liabilities plus equity.
Assets: Resources controlled by an entity that are expected to provide future economic benefits. Assets form the left side of the accounting equation.
Journal entry: A chronological record of a financial transaction, showing the accounts and amounts affected. Every properly balanced entry preserves the accounting equation.
Single-entry bookkeeping: A bookkeeping method that records each transaction once, rather than using paired debit and credit entries. Unlike double-entry bookkeeping, it does not systematically enforce the equation.
Debits and credits: The two sides of an accounting entry, used to record increases and decreases in accounts. Their equal totals implement the equation in each transaction.
Liabilities: Present obligations of an entity arising from past events and expected to require resource transfers. Liabilities are one source of the assets represented in the equation.
General ledger: The central collection of accounts summarizing an entity’s recorded financial transactions. Its balances classify the amounts on both sides of the equation.
Accounting identity: An equation that holds by definition among quantities in an accounting framework. The accounting equation is a foundational identity within financial accounting.
Balance sheet: A financial statement showing an entity’s assets, liabilities, and equity at a specific date. It presents the equation’s three elements as a financial statement.
Owners’ equity: The residual interest in an entity’s assets after its liabilities are deducted. Owners’ equity completes the equation’s right side.

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