The accounting equation is the fundamental formula that shows how these three components relate: Assets = Liabilities + Owner’s Equity.

Understanding Each Component:

Assets: Everything you own that has value
– Cash and bank accounts
– Property and real estate
– Investments and retirement accounts
– Vehicles and personal belongings

Liabilities: Everything you owe to others
– Mortgages and loans
– Credit card debt
– Outstanding bills and obligations

Owner’s Equity (Net Worth): What you truly own
– Net Worth = Assets – Liabilities
– This represents your actual financial position

The Accounting Equation in Practice:
If you have £100,000 in assets and £40,000 in liabilities, your owner’s equity (net worth) is £60,000.

Why This Matters for Families

Understanding this relationship helps you:
1. Calculate your true net worth accurately
2. Make informed financial decisions about debt and investments
3. Track your financial progress over time
4. Plan for your family’s financial future

Real Example:
– Assets: £200,000 (home) + £50,000 (savings) + £30,000 (car) = £280,000
– Liabilities: £150,000 (mortgage) + £20,000 (car loan) = £170,000
– Net Worth: £280,000 – £170,000 = £110,000

The accounting equation always balances: £280,000 = £170,000 + £110,000 ✓

This fundamental principle helps families understand their complete financial picture and make better money management decisions.