The basic accounting equation

The basic accounting equation forms the logical basis for double entry accounting.

The equation is:

Assets = Liabilities + Shareholders Equity

The three components of the basic accounting formula are:

  1. Assets: These are the tangible and intangible assets of a business, such as cash, accounts receivable, inventory, and fixed assets.
  2. Liabilities: These are the obligations of a business to pay its creditors, such as for accounts payable, accrued wages, and loans.
  3. Shareholders’ equity: This is funds obtained from investors, as well as accumulated profits that have not been distributed to investors.