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.
BREAKING DOWN 'Accounting Equation'
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 could also be written as Liabilities = Assets – Shareholder Equity and Shareholder Equity = Assets – Liabilities.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.
Total Liabilities
The total liabilities indicate the amount of money a company owes to its shortterm and longterm creditors. The total liabilities are divided into shortterm liabilities, also known as current liabilities, and longterm liabilities. Shortterm liabilities are expected to be paid off within one year, while longterm liabilities include debts that are expected to be paid off over one year from the balance sheet recording date. For example, assume a hypothetical company has total current liabilities of $5 million and total longterm liabilities of $20 million. Therefore, the company has total liabilities of $25 million, or $5 million + $20 million.
Shareholders' Equity
The shareholders' equity portion of the accounting equation could be calculated by summing the amount of share capital and retained earnings and subtracting the amount in treasury shares from the sum. The equation could be written as: Share Capital + Retained Earnings  Amount in Treasury Shares. For example, assume hypothetical company Rocket has share capital of $10 million, retained earnings of $25 million and treasury shares worth $5 million. Therefore, Rocket has total shareholders' equity of $30 million, or $10 million + $25 million  $5 million.
Real World Example
For example, Apple Inc. reported its annual balance sheet in September 2015. Apple had total current liabilities of $80.61 billion and total longterm liabilities of $90.51 billion. Therefore, it had total liabilities of $171.12 billion, or $80.61 billion + $90.51 billion. Apple had total common stock worth $27.42 billion, retained earnings of $92.28 billion and other stock holder equity of $345 million. Therefore, it had total shareholders' equity of $119.36 billion, or $27.42 billion + $92.28 billion  $345 million. Consequently, it had total assets of $290.48 billion, or $171.12 billion + $119.36 billion.

Balance Sheet
A balance sheet reports a company's assets, liabilities and shareholders' ... 
Liability
Liabilities are defined as a company's legal debts or obligations ... 
Total Liabilities
The aggregate of all debts an individual or company is liable ... 
Other LongTerm Liabilities
Other longterm liabilities are a balance sheet item that lumps ... 
Current Liabilities
A company's debts or obligations that are due within one year. ... 
Other Current Liabilities
Other current liabilities are obligations coming due in the next ...

Personal Finance
How To Improve Net Worth By Decreasing Liabilities
Here's an analysis of how to adjust liabilities and assets to improve net worth. 
Investing
Reading the Balance Sheet
Learn about the components of the statement of financial position and how they relate to each other. 
Investing
How to Analyze a Company's Financial Position
Find out how to calculate important ratios and compare them to market value. 
Investing
Examples Of Asset/Liability Management
In its simplest form, asset/liability management entails managing assets and cash inflows to satisfy various obligations; however, it's rarely that simple. 
Investing
Understanding CocaCola's Capital Structure (KO)
Since the crisis of 2008 and the implementation of an accommodative monetary policy by the Fed, CocaCola's capital structure has significantly shifted. 
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. 
Personal Finance
Common Liabilities That Hurt Your Net Worth
Every penny that you keep out of the liability side of the net worth equation essentially ends up on the asset side. 
Investing
Understanding Amazon's Capital Structure (AMZN)
Following the 2008 financial crisis, many companies, including Amazon, have been increasing their leverage, causing significant changes to capital structure.

On which financial statements does a company report its longterm debt?
Discover which financial statements are used to report a company’s longterm debt, as well as how a company uses debt to ... Read Answer >> 
How are accounts payable listed on a company's balance sheet?
Find out how accounts payable is listed on a company's balance sheet, why it is considered a current liability, and how it ... Read Answer >> 
How do I calculate current liabilities in Excel?
Learn what current liabilities are and examples of a company's current liabilities, and find out how to calculate total current ... Read Answer >> 
How do you calculate net debt using Excel?
Learn about the net debt formula and how to calculate this financial metric using Microsoft Excel, including a brief explanation ... 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 >> 
Can working capital be negative?
Negative working capital can arise under certain circumstances. Working capital can be negative if a company's current assets ... Read Answer >>