What is the bookkeeping equation?

Definition of Bookkeeping Equation

The bookkeeping equation (or accounting equation) is similar to the structure of the balance sheet:

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.

Free Debits and Credits Cheat Sheet

513,065
Subscribers
You are already subscribed. This offer is not available to existing subscribers.
Error: You have unsubscribed from this list.
Step 2: Please check your email.