# 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. 