The Accounting Equation

The accounting entity convention is the basic principle that the personal transactions of the owner/s be kept separate from those of the business. The business is always viewed as a separate entity regardless whether the firm is a sole trader, partnership or company.

The equation reads:

Assets (A) = Liabilities (L) + Owners Equity (OE)

A = L + OE

The equation can also be mathematically arranged as:

OE = A - L

L = A - OE

Examples of each include, though not limited to:

Assets	Liabilities	Owners Equity
Cash Accounts Receivable Inventory Furniture Premises Land Etc...	Accounts Payable Loans from Banks Loans Secured by Mortgage Loans from Finance Companies	Capital Contribution of the Owner

So what does all this mean? This is the basic foundation to the balance sheet. If you understand how a balance sheet works from the basic equation, then you can understand why it must balance. This is further explained in the balance sheet lesson.