Basic accounting equation is the foundation for the double-entry book-keeping system.

The equation

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The equation is as follows:

$Assets=Liabilities+Shareholders\text{'}\backslash \; Equity$

It shows how assets were financed: either by borrowing money from someone else (liability) or by paying your own money (shareholder's equity). For example, a student buys a computer for $945. This student borrowed $500 from his best friend and saved another $445 from his part-time job. Now his assets are worth $945, liabilities are $500, and equity $445.

Re-write

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If formula is re-written in this manner:

$Assets-Liabilities=Shareholder\text{'}s\backslash \; Equity$

Now it shows that owner's interest is equal to property (assets) minus debts (liabilities). Since in a company owners are shareholders, owner's interest is called shareholder's equity.

How it works

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Every accounting transaction affects at least one element of the equation but always balances. Simplest transactions also include:

Transaction Assets = Liabilities + Shareholder's equity 1. + 6.000 +6.000 2. +10.000 +10.000 3. + 900 -900 4. + 1.000 -450 + 550 5. + 700 + 700 6. - 200 - 200 7. + 100 - 100 8. - 500 - 500 9. + 200 -200 Explanation of transactions:

1. issuing stocks for cash or other assets;
2. buying assets by borrowing money (taking a loan from a bank or simply buying on credit);
3. buying assets for cash (in essence, it's just an exchange of one asset to another);
4. buying assets by paying cash and by borrowing money;
5. earning revenues;
6. paying expenses (e.g., rent or professional fees) or dividends;
7. recording expenses, but not paying them at the moment;
8. paying on a debt that you owe;
9. received cash for sale of an asset

These are some simple examples, but even the most complicated transactions can be recorded in a similar way. This equation is behind debits, credits, and journal entries.

Balance sheet

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An elaborate form of this equation is presented in a balance sheet which lists all assets, liabilities, and equity and makes sure it balances (thus the name of balance sheet). Generally Accepted Accounting Principles

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