The accounting equation, assets = liabilities + equity, is the foundation of double-entry accounting. This guide covers the formula, an intuitive version, a worked example, and what it does and does not tell you.
Published July 2026 · Updated July 2026
The accounting equation states that a business's assets equal its liabilities plus its equity. Put simply, everything your business owns is funded either by money it owes to others or by money the owners have put in and left in the business.
The formula is assets = liabilities + equity.
Rearranged as assets − liabilities = equity, it reads more naturally: start with what you own, subtract what you owe, and what is left is your equity. It is a quick health check on the business.
Because every transaction is recorded twice, the equation always stays balanced. Buy a £2,000 laptop with cash and one asset rises while another falls; buy it on credit and assets and liabilities both rise by £2,000. Either way, both sides still match.
The equation confirms your books balance, but it does not show whether you are profitable, and it records assets at book value, which can differ from market value. For performance you also need the profit and loss statement.
A small business adds up what it owns and owes:
It usually points to a bookkeeping error, such as a missing entry or a figure on the wrong side. Trace the transactions to find and fix it before trusting your reports.
They are closely linked. The balance sheet is the report that presents the equation at a point in time, assets on one side, liabilities and equity on the other.
Yes, to every business that keeps double-entry records. Equity is just labelled differently, owner's capital for a sole trader, shareholders' equity for a company.
Source: Investopedia ↗. This glossary is written for small business owners, so definitions are simplified. Tax rates and thresholds reflect 2026/27 UK rules and change over time. Berified does not provide accounting, tax or legal advice; always check the source or a qualified adviser.