This leads us, then, to the basic equation of accounting; Basic Accounting Equation. Sometimes called the basic accounting equation, the accounting equation is the foundation of double entry accounting, a system where every financial transaction is entered into two places in the business’s books—as a debit and as a credit. The following are some of the most frequently used accounting formulas. For example, if the business buys furniture on credit from a supplier for 200 then the basic accounting formula is as follows. What this accounting equation includes: Cash is the amount of cash you have at your disposal. The equation: Cash Ratio = Cash ÷ Current Liabilities. This can include actual cash and cash equivalents, such as highly-liquid investment securities. The balance sheet, which shows a business’s financial condition at any point, is based on this equation. Other names used for accounting equation are balance sheet equation and fundamental or basic accounting equation. The basic accounting formula forms the logical basis for double entry accounting . This equation is the foundation of modern double entry system of accounting being used by small proprietors to large multinational corporations. The basic accounting equation sometimes referred to as the basic accounting formula is true at any point in time for a business and is also true for each individual double entry transaction. Assets, liabilities and owners’ equity are the three components that make up a company’s balance sheet. The formula is: Assets = Liabilities + Shareholders' Equity The three components of the basic accounting formula are: Assets . Current Liabilities are the current debts the business has incurred. 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