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