Accounting Equation

I plan to address accounting-related themes several times in the future.

Today, I’d like to talk about the “Accounting Equation“, which is the most fundamental concept in accounting.

The following “Accounting Equation” always hold true without exceptions.

Assets = Liabilities + Shareholders’ Equity

Assets are any properties held by the firm.

Liabilities are any debts that the firm has outstanding to lenders.

Shareholders’ Equity is the ownership interest in the firm after all debts have been repaid.

So, let’s take a look at a simple example.

【Example】

X company established with a capital of 100,000 yen purchased inventory worth 40,000 yen on credit.

Applying the Formula to this example would give us this:

　　　　　Assets = Liabilities + Shaleholdsrs’ Equity
⇔　￥140,000 ＝￥40,000 ＋￥100,000

In another perspective, the ”Accounting Equation” is expressed as follows:

Assets(￥140,000）－ Liabilities(￥ 40,000）= Shareholders’ Equity(￥100,000)

In short, shareholders’ equity serves as a reconciling factor for the difference between Assets and Liabilities.

For simplification, my explanation excludes the concept of profit.

That’s all for now.
See you soon!