1.4 Fundamental Accounting Equation
The accounting equation may be expressed in three different forms:
Assets = Liabilities + Owner's Equity
Liabilities = Assets - Owner's Equity
Owner's Equity = Assets - Liabilities
The first format is the fundamental accounting equation used in financial reporting. Accountants used the second and third format for analysis purposes. The most important thing to remember is that the equation must be in balance at any given time.
In the Accounting Equation, the Owner’s Equity section is expanded to include the Revenue and Expense accounts. The Owner’s Equity is increased by the Revenue accounts and decreased by the Expense accounts.