Accounting equation
Financial Accounting glossary · The Accounting Cycle & Financial Statements
Definition
Assets = Liabilities + Equity; the foundational identity of double-entry accounting.
Accounting equation in plain English
This is the one rule the entire accounting world balances on: everything a business owns had to be paid for somehow, either with borrowed money or with the owners' own money. So Assets (what the company controls, like cash, equipment, inventory) always equals Liabilities (what it owes to others) plus Equity (the owners' share). Think of a $300,000 house you bought with a $200,000 loan and $100,000 of your own savings — the house is worth $300,000, and that value splits into what you owe the bank and what's truly yours. Because both sides must always match, this equation is the built-in check that keeps the books honest.
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