What is the Accounting Equation?

What is the Accounting Equation?

The Accounting Equation is the most fundamental principle in all of Accounting Services in Jersey City and the structural basis for the Balance Sheet. It is a mathematical expression that must always remain in balance, reflecting the fact that all of a company's resources are funded by either internal or external sources.

The Three Elements Explained

The equation represents a dual perspective on the company's financial position: the left side shows what the company has, and the right side shows who provided the funding for it.

1. Assets (The Resources)

Assets are resources controlled by the company that are expected to provide future economic benefit.

Examples: Cash, Accounts Receivable (money owed by customers), Inventory, Equipment, and Land.

2. Liabilities (External Claims)

Liabilities represent the company's obligations to outside parties (creditors). These are debts that will require an outflow of economic benefits (usually cash) in the future.

Examples: Accounts Payable (money owed to suppliers), Notes Payable (bank loans), Salaries Payable, and Unearned Revenue (money received for services not yet delivered).

3. Owner's Equity (Internal Claim)

Also known as Shareholder's Equity (in a corporation), this is the owners' residual claim on the assets after all liabilities have been settled. It represents the value of the investment made by the owners.

Source Components:

Capital Contributions: The money or assets directly invested by the owners.

Retained Earnings: The cumulative profits the business has earned and kept (reinvested) rather than Accounting Services Jersey City.