Accounting Equation
Definition
The foundational identity of double-entry bookkeeping: Assets = Liabilities + Equity. Every transaction keeps the equation in balance, which is why total debits always equal total credits.
Formula
Assets = Liabilities + Equity
Why it matters
The equation is the sanity check behind every financial statement. If it does not balance, something has been recorded with only one side of the entry.
Related Terms in Accounting Principles
Debits and Credits
The two sides of every double-entry transaction. Debits increase assets and expenses and decrease liabilities, equity and income; credits do the reverse. Each transaction records equal debits and credits so the books stay balanced.
T-Account
A visual representation of a ledger account shaped like the letter T, with debits recorded on the left and credits on the right. It is a teaching and analysis tool for seeing how entries affect a single account.
Accounting Cycle
The repeating sequence of steps that turns transactions into financial statements: recording journal entries, posting to the ledger, preparing a trial balance, making adjustments, and producing and closing the statements each period.
Accounting Period
The span of time over which financial performance is measured and reported, such as a month, quarter or year. Consistent periods make results comparable across time.
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