What is the fundamental accounting equation?

The fundamental accounting equation is Assets = Liabilities + Equity.

It states that everything a business owns is financed either by borrowing money or by the owners’ investment and accumulated earnings. Assets include resources such as cash, inventory, buildings and equipment. Liabilities are obligations such as loans, wages payable and amounts owed to suppliers. Equity is the residual interest belonging to owners after liabilities are deducted.

The equation is the foundation of double-entry bookkeeping. Every transaction changes at least one accounting element, but the two sides must remain equal. For example, borrowing $10,000 increases both cash, an asset, and a loan, a liability. Buying equipment for cash changes the mix of assets without changing the total.

Debits = Credits is an important bookkeeping rule, but it is not the fundamental equation itself. Likewise, Revenue − Expenses = Profit describes an income calculation. Revenue and expenses ultimately affect equity, which is why they can appear in an expanded version of the accounting equation.