The basis of accounting is the accounting equation, that is:
Assets + Liabilities = Equity
The accounting equation holds true for every transaction, every journal and every balance sheet. Because of this, you can check if a journal or transaction is correct by checking it against the accounting equation. If it doesn’t match, you’ve got a problem!
Within Equity there are also two sub account types – Revenues and Expenses
So an expanded equation looks like this:
Assets – Liabilities = Equity + Revenues – Expenses
It is important to know what each of these elements are in order to study accounting.
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