The Accounting Equation and Why You Must Know It

Many business owners detest bookkeeping and managing their balance sheets. And that’s alright because not every individual is fond of math. If you happen to hate accounting, you are not alone. Fortunately, you can outsource the work to reliable firms that proffer accounting services in the Philippines.

Although you seek professional help, you must still be familiar with the accounting equation.  This fiscal tool can help you manage your business because it tells you where your company stands. It can also help you make sound decisions and business projections. Learn more about the accounting equation below:

What is the Accounting Equation?  

The accounting equation is the fundamental tool used for monitoring financial accounts. It summarizes the relationship between the three major components of a balance sheet. This includes the assets, liabilities, and equity. The equation is as follows:

(Assets – Liabilities = Equity)

When accounting for your finances, whether personal or for business, it is important to keep this equation in mind. It gives you an overall glimpse of what you own relative to how many resources you currently have versus the liabilities you need to shoulder.

What is Its Importance?

The accounting equation’s importance lies in the fact that it shows the relationship between your assets, liabilities, and equity. The simple rule is, everything being equal, an increase in assets will increase equity. An increase in liabilities will decrease equity. The outcomes of this equation will give you an overview of your overall financial health.

Professional tax and accounting services in  the Philippines share that this information helps you verify the accuracy of your bookkeeping. More importantly, it can help you see how profitable your business is. For instance, if your liabilities are way higher than your assets, it indicates you’re operating at a loss and not managing your money wall.

In contrast, if the equation is balance, it indicates your fiscal health is good and you’re on the right track. The balance sheet you have can also help you attract potential investors if you need financing for expansion because if the equation is balanced, it indicates that investing in your company is a sound choice. You can verify this by having your books audited by a professional firm offering accounting services in Pasig.

What Do the Three Elements Mean?


Your assets are anything, money or monetary equivalent, that is within the control of you or your company, which may be used to benefit the business in the future. Assets can be broken down into long-term and short-term assets. Short-term assets are those that can be liquidated easily. This includes cash and certain cash equivalents, like short-term investments which can be liquidated or claimed within a year. Other short-term expenses include prepaid expenses and accounts receivables. Long-term assets are those that are fixed or are realized after more than twelve months have passed. This includes assets like:

  • Land
  • Building
  • Equipment
  • Notes receivables
  • Long-term investments


Liabilities are simply the things that you or your company owes to another entity. This includes every debt incurred. In the accounting equation, liabilities are subtracted from assets. Liabilities can be broken down into short-term or long-term liabilities. Short-term liabilities are financial obligations that include those that can be paid off within 12 months. This includes the following:

  • Accounts payable
  • Accrued expenses
  • Dividends payable
  • Short-term debt
  • Current portion of long-term debt
  • Taxes payable
  • Salaries Payable

Note that the current portion of long-term debt is the amount you must pay within the year if your long-term debt payment terms include paying in installment. Long-term debts are financial obligations that are to be paid beyond the period of one year. This includes long-term debts taken on cars, machinery, equipment, or land.


Your equity is how much YOU actually own. It is representative of how much from the assets is yours when total liabilities are subtracted from total liabilities. Equity includes shareholders’ equity if your company is a corporation.

Seek Professional Help to Focus on What Your Business

The accounting equation may seem pretty complex at first glance. However, it is simply the formula that will help you understand how much resources you have, how much you owe, and how much you actually own. It becomes even easier to grasp once you realize this equation relates to a very common financial concept – Net worth. Your Equity is essentially your net worth. Note that this equation is not limited to Assets – Liabilities = Equity. It can be manipulated algebraically to solve for the necessary values. If you need help, don’t hesitate to call us for assistance. Our accounting services in Manila can help monitor your books to assure accuracy and free you up to focus on your business. We can also help you make projections, guided by this equation. After all, our team’s primary mission is to help you retain more of your profits.