1. What is the Accounting Equation?

The accounting equation (Assets = Liabilities + Equity) is the fundamental equation of double-entry bookkeeping and represents the relationship between a company's resources and claims against those resources.

2. How Does the Calculator Work?

The calculator uses the accounting equation:

Where:

• Assets — Resources owned by the company
• Liabilities — Claims by creditors
• Equity — Claims by owners

Explanation: The equation must always balance, meaning the total value of assets must equal the sum of liabilities and equity.

3. Importance of the Accounting Equation

Details: This equation forms the foundation of the balance sheet and ensures the accounting records are accurate and complete. It's essential for financial reporting and analysis.

4. Using the Calculator

Tips: Enter any two known values (in dollars) to calculate the third. The calculator will automatically solve for the missing component of the equation.

5. Frequently Asked Questions (FAQ)

Q1: Why must the accounting equation always balance?
A: The balance reflects the fundamental principle of double-entry bookkeeping where every transaction affects at least two accounts to maintain equilibrium.

Q2: What's included in equity?
A: Equity includes owner's capital, retained earnings, and other comprehensive income.

Q3: Can liabilities be greater than assets?
A: Yes, this results in negative equity, indicating the company owes more than it owns (insolvency).

Q4: How does this relate to the balance sheet?
A: The balance sheet is a formal presentation of this equation, showing assets on one side and liabilities plus equity on the other.

Q5: What if my calculation doesn't balance?
A: This indicates an error in your accounting records that needs to be investigated and corrected.