The bookkeeping equation for a sole proprietorship is assets = liabilities + owner's equity. The bookkeeping equation for a corporation is assets = liabilities + stockholders' equity. The bookkeeping equation is also referred to as the accounting equation.
In the bookkeeping equation:
- assets are the resources owned by the business
- liabilities are the amounts the business owes
- owner's equity is the amount the owner invested plus the net income of the business minus the amounts the owner withdrew for personal use (all since the business began)
Often it is said that the liabilities and owner's equity are the claims against the assets. It can also be said that the liabilities and the owner's equity are the sources of the assets.
The bookkeeping equation should always be in balance because of double-entry bookkeeping.