Business Forms and the Accounting Equation A business is an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers. A business entity may take the form of a sole proprietorship, partnership, or corporation. Regardless of the business form, the accounting equation shows the relationship among the entity's assets, liabilities, and equity The Accounting Equation The details of the activities of a company, or transactions, are recorded in a company's accounting system. These transactions are summarized in a set of reports known as the financial statements. The foundation for the accounting system and the financial statements is the accounting equation. Assets Liabilities + Equity The left side of the accounting equation shows the economic resources of the company (what the company has). The right side of the accounting equation summarizes who provided those assets: Creditors or the owners When a business is first formed, both sides of the equation are equal to zero. As transactions occur, they affect the accounting equation, but the accounting equation must always stay in balance. A transaction can increase both sides or decrease both sides. A transaction could also affect only one side by increasing and decreasing one side at the same time. APPLYING THE CONCEPTS: Analyzing Changes to Assets, Liabilities and Equity