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 |
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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.