What you’ll learn to do: state the accounting equation
The cornerstone of accounting, as it’s been practiced since Pacioli documented it back in 1494, is the accounting equation. It’s a relatively simple mathematical identity that looks like this:
A=L+OE
The A stands for assets, the L stands for liabilities, and the OE stands for owner’s equity.
While the accounting equation only includes three categories, there are actually five that financial accountants track over time:
- Assets (A): Anything of value that a business owns.
- Liabilities (L): Debts that a business owes; claims on assets by outsiders.
- Owner’s Equity (OE): Worth of the owners of a business; claims on assets by the owners.
- Revenues (Rev): Income that results when a business operates and generates sales.
- Expenses (Exp): Costs associated with earning revenue.
In this section, we’ll be exploring each of those items.
Let’s move ahead so that you can gain a more detailed understanding of the basic accounting equation and its components.