By understanding the definition of an asset, liability, equity, income, and expenses and classifying the financial data correctly, one can put together these elements to form the following equation.
A(Asset) = L(Liability) + E(Equity)
By expanding the equation further, we can rewrite it as follows:
A(Asset) = L(Liability) + [E(Equity) + I(Income) – E(Expense)]
In a “T accounting format,” they will appear as follows:
This means that the left-hand side (Assets) will always be equal to the right-hand side (Liabilities + Equities) by default.
