Solve the accounting equation for any missing value. Use the basic form (assets = liabilities + equity) or the expanded form with capital, revenue, expenses and dividends, and get the working, a balance check and key ratios.
Net income = Revenue − Expenses; Ending retained earnings = Beginning RE + Net income − Dividends
Example: a company starts the year with $120,000 of capital and retained earnings, earns $75,000 of revenue, has $45,000 of expenses, pays $10,000 of dividends and owes $90,000. Ending equity is 120,000 + 75,000 − 45,000 − 10,000 = $140,000, so total assets must be $90,000 + $140,000 = $230,000.
How common transactions affect the equation
Transaction
Assets
Liabilities
Equity
Owner invests $10,000 cash
+10,000 (cash)
0
+10,000 (capital)
Borrow $5,000 from a bank
+5,000 (cash)
+5,000 (loan)
0
Buy $2,000 of supplies on credit
+2,000 (supplies)
+2,000 (payables)
0
Earn $3,000 of revenue in cash
+3,000 (cash)
0
+3,000 (revenue)
Pay $1,200 rent
−1,200 (cash)
0
−1,200 (expense)
Pay $1,000 to a supplier you owe
−1,000 (cash)
−1,000 (payables)
0
Owner withdraws $500
−500 (cash)
0
−500 (draws)
Tips for using the equation
Use figures from the same date. Balance sheet items (assets, liabilities, equity) are a snapshot; revenue, expenses and dividends cover the period that ends on that date.
Unearned revenue is a liability until the work is done; prepaid expenses are assets until they are used.
If your books don't balance, look for one-sided entries, transposed digits or a transaction posted in the wrong period.
Sole proprietors usually call equity “owner's capital” and distributions “draws”; corporations use “shareholders' equity” and “dividends”.
Frequently asked questions
What is the accounting equation?
The accounting equation states that Assets = Liabilities + Equity. Everything a business owns is financed either by creditors (liabilities) or by its owners (equity), so the two sides of a balance sheet must always be equal.
What is the expanded accounting equation?
The expanded form splits equity into its parts: Assets = Liabilities + Contributed capital + Revenue − Expenses − Dividends (or owner draws). It shows how profits increase equity and how expenses and distributions reduce it.
How do I find owner's equity?
Subtract total liabilities from total assets. For example, a business with $250,000 of assets and $90,000 of liabilities has $160,000 of equity.
Can equity be negative?
Yes. If liabilities are larger than assets, equity is negative, often called a deficit or negative net worth. It usually follows years of losses or large distributions and is a warning sign for lenders.
Why must the accounting equation always balance?
Double-entry bookkeeping records every transaction in at least two accounts with equal debits and credits. For example, buying equipment with a loan raises assets and liabilities by the same amount, so the equation stays balanced after every entry.
What goes into contributed capital and beginning retained earnings?
Contributed capital is money or assets owners put into the business (common stock, paid-in capital or owner investment). Beginning retained earnings are profits kept from earlier periods. Together they are the equity at the start of the period before this period's revenue, expenses and dividends.
Is the debt ratio the same as debt-to-equity?
No. The debt ratio is liabilities divided by assets, while debt-to-equity is liabilities divided by equity. A debt ratio of 36% corresponds to a debt-to-equity ratio of about 0.56.
Are all the tools on FreeToolCabin tested for quality and accuracy?
Yes! Every tool on our site undergoes automated Q/A testing in real browser environments to ensure high precision, correct output, and zero errors. If you happen to spot a bug or have a suggestion, please contact us at [email protected] and our team will review it right away.