The accounting equation

The identity

Assets = Liabilities + Equity. This is not a slogan. It is the balance sheet. If it does not hold, a journal is unbalanced or an account is on the wrong side.

Assets are resources the business controls (cash, receivables, equipment). Liabilities are claims by outsiders (suppliers, the tax office, a lender, a credit card). Equity is the residual claim of the owners: what is left after liabilities.

Expanded form

Equity itself moves. Owners put money in (contributions), take money out (drawings or distributions), earn profit (revenue minus expenses), and keep prior-year profit (retained earnings). The working form you actually use is:

• Assets = Liabilities + Owner’s equity + Revenue − Expenses − Drawings
• Rearranged: Assets + Expenses + Drawings = Liabilities + Equity + Revenue
• The left side is the debit-normal family. The right side is the credit-normal family.

A walk-through

Cedar & Co. buys a $4,000 mower on the business card. Assets (equipment) up $4,000, liabilities (credit card) up $4,000. Equation holds. Next week they invoice a client $1,200. Assets (receivable) up $1,200, equity (via revenue) up $1,200. When the client pays, one asset (cash) replaces another (receivable). Revenue does not fire a second time.

In Xero and QuickBooks

Run a Balance Sheet as at today. Assets will equal liabilities plus equity, including the current-year profit that the P&L is feeding into equity. If they do not, stop and find the unbalanced journal or the locked period you posted around — do not “fix” it with a plug to Owner’s equity until you know why.