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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