Definition of Bookkeeping Equation
The bookkeeping equation (or accounting equation) is similar to the structure of the balance sheet:
- For a sole proprietorship: Assets = Liabilities + Owner's Equity
- For a corporation: Assets = Liabilities + Stockholders' Equity
The bookkeeping equation should always be in balance when double-entry bookkeeping (or accounting) is used.
Example of Bookkeeping Equation
Assume that Sara Jones starts a sole proprietorship, SJCO, by depositing $900 in a new business checking account. The bookkeeping equation will show the following: Assets of $900 = Owner's Equity of $900. In words, the equation indicates that SJCO has resources of $900 and that the owner has the only claim to its resources. The equation also indicates that the resources of $900 were provided by the owner.
Next, assume that SJCO incurs advertising expense of $250, but the bill will be paid 10 days later. Since owner's equity is reduced by expenses (and is increased by revenues), the bookkeeping equation will show the following: Assets of $900 = Liabilities of $250 + Owner's Equity of $650. After the advertising bill is paid, the bookkeeping equation will show these amounts: Assets of $650 = Owner's Equity of $650.
To learn more about the bookkeeping or accounting equation, see our Explanation, Quiz, and more.
