gen-define-the-accounting-identity-assets-liabilities-equity-and-a0d4

Define the accounting identity (assets = liabilities + equity) and give one short worked example.

# Accounting Identity ## Definition **Assets = Liabilities + Equity** This fundamental equation states that everything a company owns (assets) is financed either by borrowing (liabilities) or by owner investment and retained profits (equity). - **Assets**: Resources owned by the business (cash, inventory, equipment, etc.) - **Liabilities**: Debts owed to others (loans, accounts payable, etc.) - **Equity**: Owner's residual claim (invested capital + retained earnings) ## Worked Example **Scenario**: You start a business with $10,000 of your own money and take a $5,000 bank loan to buy equipment worth $15,000. **Breakdown**: - **Assets**: Equipment = $15,000 - **Liabilities**: Bank loan = $5,000 - **Equity**: Your investment = $10,000 **Verification**: $$15,000 = 5,000 + 10,000$$ ✓ The equation always balances because every transaction affects at least two accounts. If you later earn $2,000 profit (held as cash), assets increase to $17,000 and equity increases to $12,000 (keeping liabilities at $5,000), maintaining the balance.