What is the 'Accounting Equation'
The equation that is the foundation of double entry accounting. The accounting equation displays that all assets are either financed by borrowing money or paying with the money of the company's shareholders. Thus, the accounting equation is: Assets = Liabilities + Shareholder Equity. The balance sheet is a complex display of this equation, showing that the total assets of a company are equal to the total of liabilities and shareholder equity. Any purchase or sale by an accounting equity has an equal effect on both sides of the equation, or offsetting effects on the same side of the equation. The accounting equation is also written as Liabilities = Assets – Shareholder Equity and Shareholder Equity = Assets – Liabilities.
BREAKING DOWN 'Accounting Equation'
The basic equation shows that a company can fund the purchase of an asset with assets (a $50 purchase of equipment using $50 of cash) or fund it with liabilities or shareholder equity (a $50 purchase of equipment by borrowing $50 or using $50 of retained earnings). In the same vein, liabilities can be paid down with assets, like cash, or by taking on more liabilities, like debt.

Shareholders' Equity
A firm's total assets minus its total liabilities. Equivalently, ... 
Balance Sheet
A financial statement that summarizes a company's assets, liabilities ... 
Expanded Accounting Equation
The expanded accounting equation is derived from the accounting ... 
Equation Of Exchange
An economic equation that showcases the relationship between ... 
Total Liabilities
The aggregate of all debts an individual or company is liable ... 
Liability
A company's legal debts or obligations that arise during the ...

Investing
Explaining the Accounting Equation
The accounting equation is the basis for doubleentry accounting, and requires that every business transaction affect two accounts equally. 
Investing
5 Tips For Reading A Balance Sheet
If you know how to read it, the balance sheet provides valuable information on a potential investment. 
Personal Finance
Explaining Equated Monthly Installments
An equated monthly installment is a fixed payment a borrower makes to a lender on the same date of each month. 
Investing
What's a Liability?
A liability is a debt. It is an obligation that arises during the course of business and represents a thirdparty claim on the company's assets. A liability can arise in a number of different ... 
Investing
Reading The Balance Sheet
Learn about the components of the statement of financial position and how they relate to each other. 
Investing
What is the Shareholder Equity Ratio?
The shareholder equity ratio shows how much money shareholders will receive if a company has to liquidate its assets. 
Entrepreneurship & Small Business
Understanding Total Liabilities
Total liabilities are the combined debts an individual or company owes. 
Investing
What Does Negative Shareholder Equity On A Balance Sheet Mean?
Negative shareholder equity on a company’s balance sheet is a red flag that should prompt potential investors to take a closer look before committing their money. 
Managing Wealth
Breaking Down The Balance Sheet
Knowing what the company's financial statements mean will help you to analyze your investments. 
Investing
How To Analyze A Company's Financial Position
Find out how to calculate important ratios and compare them to market value.

What is the difference between an expense and a liability?
Learn what liabilities and expenses are, which financial statements they are listed on, and the differences between liabilities ... Read Answer >> 
What does negative shareholder equity on a balance sheet mean?
Negative shareholder equity could show up on a company's balance sheet for a number of reasons, all of which should serve ... Read Answer >> 
What items on the balance sheet are most important in fundamental analysis?
Read about which balance sheet items are considered most important for fundamental analysis, including cash, current liabilities ... Read Answer >> 
How do you calculate company equity?
Find out more about company equity, or shareholders' equity, what company equity measures and how to calculate a company's ... Read Answer >> 
How do you calculate shareholder equity?
Find out more about shareholders' equity, what shareholders' equity measures and how to calculate a company's shareholders' ... Read Answer >> 
What does it signify about the state of a company if it has unusually high shareholders' ...
Understand the meaning and calculation of shareholder equity and what a high level of shareholder equity signifies about ... Read Answer >>