The key concept in accounting is the principle of double-entry bookkeeping, which is based on the accounting equation…

Assets = Liabilities + Equity

This equation forms the foundation of accounting and reflects the fundamental relationship between a company’s assets, liabilities, and equity.

Here’s a breakdown of each component

1. Assets – Assets are the economic resources owned or controlled by a company that have measurable value and are expected to provide future benefits. Examples include cash, inventory, property, plant, equipment, and accounts receivable.

2. Liabilities – Liabilities represent the company’s obligations or debts to external parties that require future settlement or payment of economic resources. Examples include accounts payable, loans payable, accrued expenses, and deferred revenues.

3. Equity – Equity represents the residual interest in the assets of the company after deducting its liabilities. It reflects the ownership interest of shareholders or owners in the company’s assets. Equity includes contributed capital from shareholders and retained earnings.

Double-entry bookkeeping requires at least two equal and opposite entries for every transaction to maintain balance in the accounting equation. In other words, every debit entry must have a corresponding credit entry, and vice versa. This principle ensures accuracy and completeness in recording financial transactions and helps maintain the integrity of the company’s financial records.

By applying the principle of double-entry bookkeeping, companies can accurately track their financial transactions, prepare reliable financial statements, comply with regulatory requirements, and make informed business decisions. It forms the basis of modern accounting practices and is essential for maintaining the accuracy and reliability of financial information.