The basic accounting equation is another name for the accounting equation, which states that a business's assets always equal its liabilities plus its owners' equity: Assets = Liabilities + Equity. The main entry explains why the equation always balances, how it is used and gives a worked example.
Why it is called basic
Textbooks add the word "basic" to separate this short form from the expanded accounting equation, which splits equity into the items that change it, such as owner contributions, withdrawals, revenue and expenses. Both versions describe the same relationship; the expanded one simply shows more detail on the right-hand side.
The basic form sums up the logic of double-entry accounting. Every asset a business holds was paid for either with borrowed money, which creates liabilities, or with the owners' money and retained profits, which make up equity. Every transaction changes at least two accounts in a way that keeps the two sides equal, so the equation holds after each entry.
The equation also gives the balance sheet its shape, with assets on one side or at the top and liabilities and equity on the other. Rearranged, it shows that equity equals assets minus liabilities, which is why owners' equity is sometimes described as the residual interest in the business, or its net assets.