How Does the Accounting Equation Relate to the Balance Sheet?

Posted by: Patricia Barlow Post Date: 14th October 2015

The accounting equation is one of the first things you learn when you start to learn about accounting, and it’s a fundamental concept that the accounting equation must always balance after every transaction.

The accounting equation is assets minus liabilities equals capital. Let’s take a look at what each of the elements is, and how is relates to the balance sheet.

Assets:Assets are what the company owns, including things like motor vehicles, stock and bank accounts. These accounts will appear on the balance sheet, showing the balance they are worth on that day.

How Does the Accounting Equation Relate to the Balance Sheet?

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Liabilities: Liabilities are what is owed by the company. This includes loans, hire purchases and purchases from suppliers. These accounts will also appear on the balance sheet as balance of what is owed on that day.

Capital: The total assets minus the total liabilities will show how much more the assets are than the debts that are owed. On the balance sheet, this figure is known as the net assets. This is equal to the capital that has been invested into the business. The capital can be the money invested into the business by the owner, or by the business reinvesting profits. This again is shown on the balance sheet. Before the balance sheet can be finished, the two figures must be exactly the same.

If you’re looking to build a career in accounting, you need to start by developing your technical knowledge from the basics. The best way to do this is through a globally recognised qualification like AAT, and you can even enter the industry through an apprenticeship.

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