Accounting equation
What is the accounting equation?
The accounting equation is: assets equal liabilities plus capital.
It is always true, because everything a business has was paid for by someone: a lender, a supplier or the owner.
Turned round, it gives the capital: assets less liabilities.
Example
A bakery has assets of £12,000.00 and liabilities of £5,800.00. Its capital is £6,200.00.
Why it matters
It is why a statement of financial position balances. When two of the three figures are known, the third can be worked out.
Practise it
Practise it nowWhat a business has and owes
Ledger Drill is practice, not tax or accounting advice. If this looks wrong, tell us at [email protected].