How to Solve Basic Accounting Equations With Examples An accounting equation builds the foundation for all accounting system. The double entry accounting system is based on basic accounting equation only. A simple accounting equation illustrates two simple facts about a company: what it owns and what it owes. Let us first understand the elements of an accounting equation. The financial position of a company is measured in the following terms:
Assets (what it owns) (for example, cash, accounts receivable, inventory, prepaid insurance, and investments) Liabilities (what it owes to others) (notes or loans payable, account payable, salaries and wages payable and interest payable) Capital (the difference between assets and liabilities)
The general accounting equation states the relationship among the above in the follow manner, Asset = Liabilities + Capital