Apr 30, 2021

What Is the Accounting Equation Formula?

The foundation of good bookkeeping is organization. If you clearly record your expenses or income sources and categorize them appropriately, then managing your books will be a breeze. Beyond organization, bookkeeping requires understanding some simple—but important—formulas.

These equations help you assemble and interpret financial reports, which can assist you in making better strategic decisions for your business.

One of the most common formulas is the accounting equation. The purpose of this formula is to track your assets and liabilities. Learn more about the basic accounting equation and where you can find it.  

What Is the Accounting Equation?

The accounting formula is probably the most basic financial formula you’ll come across, but its importance cannot be overstated. Below is the accounting equation:

Assets = Liabilities + Owner’s Equity

Assets refer to anything that has value within the organization. Your assets range from petty cash to the equipment you use for production and change each year as your equipment ages and depreciates—or when you invest in new business opportunities.

Liabilities are line items that your company still owes. These obligations range from bank loans to accounts payable. Your liabilities may shrink over time as you pay off your startup loans and mortgages. 

Equity is the value of assets invested by shareholders. Owner’s equity has a formula of its own. To calculate it, you subtract all of the paid-off liabilities from the assets—whatever remains is the equity.  

Once you have 2 out of the 3 variables in the accounting equation determined, you can find the other. This formula is less about calculating a specific number and more about finding a way to balance your financials.

When Is the Accounting Formula Used?

The accounting formula is part of the double-entry bookkeeping system, most frequently used to create the checks and balances that ensure your accounting information is accurate.

While the formula itself might seem basic, it takes time to pull all of the information to calculate it. Bookkeepers need to review their liabilities and equity to get a final number for the formula. In some business cases, the balance sheet will be multiple pages long—with categories and subcategories related to the business. 

The accounting formula is the final product that comes from balancing the books and putting together a report.  

Where Can You Find the Accounting Formula?

Most frequently, the accounting formula is located at the top of your balance sheet. Shareholders, investors, and lenders will look at this formula to get an immediate idea of the health of a business. If they have any questions about the formula, they can dive into greater detail by reviewing the expense and asset categories in the rest of the report.  

We Can Create Balance Sheets for You

If you’re overwhelmed by accounting basics and financial formulas, look into a service that handles your bookkeeping for you. At Sunrise, all you have to do is upload your invoices and expenses—we can take care of the rest. 

We can pull various reports like your profit and loss (P&L) statement and your balance sheet. Our software can even create different reporting windows that align with your fiscal year. 

Check out our app and see if it’s right for your business. The service is free for small business owners, with options to upgrade for additional bookkeeping help.

About the author

Derek Miller
Derek Miller
Derek Miller is a writer specializing in entrepreneurship, small business, and digital marketing. His work has featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp. He’s currently the CMO of Smack Apparel, the content guru at Great.com, and a marketing consultant for small businesses.

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