The representation of the double-entry bookkeeping system such that total assets are equal to total liabilities plus capital (equity). In equation form:
Total assets = total liabilities + owners’ equity
This equation reflects the activities undertaken by a firm on both sides of balance sheet. The liabilities side enlists all sources of funds a company can draw on to finance its assets. Therefore, the assets side include the uses of funds.
The accounting equation is the foundation for double-entry accounting, which is utilized to record changes in a company’s accounts as either debits or credits. The balance sheet should maintain that the total of accounts with debit balances equals the total of accounts with credit balances.
