Accounting is full of various equations and formulas that are designed to help you quickly and effectively acquire information about the financial standing of your business. Among these many formulas is the famous accounting equation, which is used to calculate the total value of the assets held by your company.
In a situation where the business has a sole proprietor, the formula is as follows:
Assets = Liabilities + Owner's Equity
For publicly held corporations, the formula is the same, but equity is described as shareholder’s equity:
Assets = Liabilities + Shareholder's Equity
And as any accountant knows, having a clear picture of a company’s finances and what it has on hand is one of the most important elements in making good financial decisions, and why the accounting equation is so critical.
In this article, we'll dig into each element of the accounting equation and explain some of its applications in order to help you become more familiar with the formula. You'll learn about all of these things and more as we explore the following sections:
