Mastering Accounting Equations

Sat, 10 Feb 2024 07:40:39 GMT

When it comes to the financial world, accounting is a crucial aspect of every business, irrespective of industry, structure, fund, and size. In case you’re studying accounting and are stuck at accounting equations, this blog will help you understand everything about them. Besides, if you need help even after reading this, we are here to assist you in every possible way. 

Before we get straight to examples, let us first understand what an accounting equation really is. 

Accounting Equation - What is it?

Commonly known as the balance sheet equation, the fundamental equation measures the relationship between the owner’s equity, liabilities, and assets. The basic equation examines the financial reports of a company and analyzes its financial condition. 

The base of the double-entry accounting system, this equation is used by several organizations to make sure that the balance sheet equals consistently. The sheet’s left side demonstrates the resources and must match the right side, which is the source. 

Everything a company owns is called an asset and everything it owes is known as a liability. The owner’s share of the total assets is referred to as the owner’s equity. Thus, an accounting equation represents the relationship between a business’s liabilities, assets, and the owner’s equity. 

The left column of the balance sheet represents liabilities while the right represents assets. When the two are equal, the company’s owner is at his best. 

Accounting Equation Formula Components and Examples

The formula for the accounting equation is as follows:

Assets - Liabilities = Owner’s Equity

Now, let us understand each term in depth. 


The resources that a business owns are called assets. These are utilized for sales and production. Common instances of tangible assets are accounts receivable, inventory of product assets, and cash. 

Some of the most common examples of material assets are collection systems, billing, buildings, furniture, land, computer appliances, dishes, office supplies, and customer supplies. Lastly, intangible assets include patents, trademarks, and copyrights. The business’s lenders or investors hold rights to the assets. 


What businesses owe to third parties and lenders are called liabilities. Creditors are entities a company owes money to, such as government agencies, banks, and employees. Similar to assets, liabilities are categorized as current and fixed. Current liabilities include supply charges, invoices, utility, and employee payroll. Long-term liabilities include bank loans, deferred taxes, and mortgages. 

Owner’s Equity

The owner’s equity is the total amount left after the liabilities are paid off and the assets are liquidated. Thus, it is the value of assets that a company’s owner owns. There are several factors that increase or decrease the owner’s equity. These are explained below.

  • Decrease in the owner’s equity: Financial debt and cost reduce the owner’s equity. In this, drawing refers to withdrawing money from the company and charges define utility charges. Other factors include taxes, tool purchases, and wage payments. 
  • Increase in the owner’s equity: The owner’s equity can rise in two scenarios: revenue and further investment by the owner. Revenue refers to the total profit from sales, renting, commissions, lending cash, etc. Investment is cash that owners put into a business. This is recorded as the owner’s finances. 

Based on these factors, the extended version of the accounting equation consists of further elements:

  • Charges
  • Revenues
  • Owner’s drawings
  • Owner’s funds
  • Liabilities
  • Assets 

Hence, the formula for this equation is:

Assets = Liabilities + Owner’s Funds - Owner’s Drawings + Revenues - Charges 

Let us understand these better through the help of some solved examples. 

Example 1

Find the missing factor with the use of the accounting equation transaction formula.

Assets = $200,000

Liabilities = $40,000

Equity = ?


Equity = Assets - Liabilities

Equity = $200,000 - $40,000 = $160,000

Example 2

Find the missing factor with the use of the accounting equation transaction formula.

Assets = $200,000

Liabilities = ?

Equity = $80,000


Liabilities = Assets - Equity 

Liabilities = $200,000 - $80,000 = $120,000

Kinds of Accounting Problems 

Accounting problems are the issues that lead to material financial statement errors and undetected mistakes because of regulatory non-compliance, cybersecurity breaches, wrong application of GAAP accounting standards, and poor internal control. 

Thus, accounting issues that remain unchecked may lead to adverse cash flow along with misstatement of the company’s profitability. Some of the most popular accounting challenges that businesses usually face are:

  • Regulatory non-compliance
  • Poor security measures
  • Insufficient internal control 
  • Fraudulent activities
  • Outdated accounting software technology
  • Inadequate financial analysis
  • Cash flow statement 
  • Lease accounting
  • Missing impairment write-downs
  • Revenue recognition
  • Payroll mistakes 

Still Need Help? Contact Us.

If you are seeking professional guidance for your assignment related to accounting equations, we are here to assist you. At SwipeUp, we are dedicated to helping students who get stuck in accounting equations. Our industry experts are there every step of the way to guide you at all academic levels. 

Whether you need help with your accounting assignment or accounting exams, SwipeUp Assignments is here to offer you the necessary help. Our team is available round the clock. 

Contact us today for further assistance.