Accounting equation practice: find the missing amount

One short equation sits under every balance sheet and every journal entry. Learn what each part means, how to solve for whichever amount is missing, and how transactions move the totals while the two sides stay equal.

What the accounting equation says

The accounting equation is:

Assets = Liabilities + Owner's equity

Read it as a statement about ownership. Assets are everything the business owns or is owed: cash, money customers owe it, supplies, equipment, buildings. Every one of those assets has to be claimed by someone. Creditors, the people and companies the business owes money to, have the first claim. That claim is the liabilities. Whatever is left belongs to the owner. That remainder is owner's equity.

Because equity is defined as "what is left," the equation always balances. It is not a rule you hope holds; it is true by the way the terms are defined. If a business has $100 of assets and owes $30, the owner's claim is $70. There is nothing else the remaining $70 could be.

That is also why the equation is so useful for checking work. If your totals don't balance, a number is wrong somewhere, and you know to look for it before going any further.

Three ways to write the same equation

You can rearrange the equation to solve for any one of its three parts, as long as you know the other two:

Only the missing assets case uses addition. The other two always subtract, and they always start from the assets. Keeping that one fact in mind prevents both of the mistakes covered later on this page.

Worked example: four businesses, one missing amount each

Here is a table of four small businesses. Each row is missing one figure. Your job is to fill in the blank so each row balances.

Take the rows one at a time and decide which formula you need before you calculate anything.

1. Bluebird Florist: equity is missing. The owner gets what is left after creditors, so subtract: $76,750 − $7,050 = $69,700.
2. Pine Street Dental: liabilities are missing. Creditors claim what the owner doesn't: $69,800 − $51,450 = $18,350.
3. Maple Tutoring: assets are missing. Add the two claims: $16,900 + $63,100 = $80,000.
4. Northside Print Shop: equity is missing. Assets minus liabilities: $79,100 − $48,200 = $30,900.

Now check each row by putting the answer back in. For Bluebird Florist, $7,050 + $69,700 = $76,750, which matches the assets. For Pine Street Dental, $18,350 + $51,450 = $69,800. A quick check like this catches almost every slip.

Notice how different the businesses look. Bluebird Florist owes very little, so most of its assets belong to the owner. Northside Print Shop owes $48,200 against $79,100 of assets, so creditors have a claim on well over half of what it owns. The equation doesn't judge either one. It simply shows who has a claim on the assets.

How owner's equity changes during a year

Equity doesn't stay fixed. Four things change it:

• Owner investments increase it. The owner puts in cash or other assets.
• Revenue increases it. Doing the work earns the business assets, and those extra assets belong to the owner.
• Expenses decrease it. Costs of running the business use up assets.
• Drawings decrease it. The owner takes cash or assets out for personal use.

Put together:

Ending equity = Beginning equity + Investments + Revenue − Expenses − Drawings

Take Northside Print Shop over a year. It started with $37,100 of equity. The owner invested $5,800. The business earned $45,000 of revenue and had $11,200 of expenses. The owner drew $3,700. Ending equity is $37,100 + $5,800 + $45,000 − $11,200 − $3,700 = $73,000.

You can solve for any missing item in the same way. Pine Street Dental began with $12,500, the owner invested $10,100, revenue was $20,300, expenses were $14,100, and ending equity was $21,600. Drawings are the only unknown. Everything before drawings adds up to $28,800, and the year ended at $21,600, so the owner must have drawn $28,800 − $21,600 = $7,200.

Revenue minus expenses is net income. Investments and drawings are dealings with the owner, not results of running the business, so they change equity without touching net income. That split is exactly why the income statement shows revenue and expenses but never drawings.

Transactions and the equation

Every transaction changes at least two things in the equation, and the equation still balances afterward. Tracing a short list of transactions is the best way to see this. Lantern Bookkeeping starts a month with assets of $26,200, liabilities of $4,700 and equity of $21,500. During the month:

A few lines deserve a closer look:

• Billing a customer raises assets even though no cash arrived. The business now has a receivable, and the revenue is earned because the work is done.
• Buying equipment on credit adds an asset and a liability of the same size. Equity doesn't move, because the owner is no richer or poorer.
• Buying supplies for cash swaps one asset for another. Cash goes down $2,000 and Supplies goes up $2,000, so total assets don't change.

Check the end: $6,250 + $24,150 = $30,400. The equation still balances. Each of these transactions becomes a journal entry with equal debits and credits, which is the same balance seen from a different angle. The page on journal entry practice problems shows how to write those entries.

Common mistakes and how to avoid them

These are the slips the exercises catch. Each comes with feedback that explains what went wrong.

Adding instead of subtracting

When equity or liabilities is the missing amount, some learners add the two numbers they have. For Bluebird Florist that gives $76,750 + $7,050 = $83,800 of equity. That can't be right: the owner's claim would be bigger than everything the business owns. Equity is what is left after creditors are paid, so subtract.

Subtracting the wrong way round

The opposite slip is to subtract in the wrong order: $7,050 − $76,750 = −$69,700. A negative answer is a clear sign. Always start from the assets and take away the known claim.

Adding drawings to equity

Drawings are cash the owner takes out, so they reduce equity just as expenses do. Adding Northside Print Shop's $3,700 of drawings instead of subtracting them gives ending equity of $80,400 instead of $73,000.

Leaving out owner investments

Investments aren't revenue, so it is easy to forget them. But they still increase equity. Leaving out Northside Print Shop's $5,800 investment gives ending equity of $67,200, which is $5,800 short.

Treating an asset swap as a decrease

When Lantern Bookkeeping buys $2,000 of supplies for cash, it might feel like assets went down because cash left. But the supplies are an asset too. Subtracting the $2,000 gives end-of-month assets of $28,400, and the equation no longer balances against $6,250 + $24,150.

Leaving the owner withdrawal out of equity

An owner withdrawal reduces two things: assets, because cash leaves, and equity, because the owner's claim shrinks. If you reduce only assets, Lantern Bookkeeping's equity comes out at $28,850 instead of $24,150. Again the check fails, which tells you to look for the missing change.

How to check your answers

• Put the answer back in. Liabilities plus equity must equal assets for every row.
• Look at the sign. In these problems no total should be negative. A negative answer usually means the subtraction is reversed.
• Look at the size. Neither liabilities nor equity can be bigger than total assets when both are positive.
• Ask what each transaction did. For each one, name the two parts of the equation that changed. If you can only name one, something is missing.

Where this leads

The equation is the reason debits and credits work the way they do. Assets sit on the left of the equation and increase with a debit; liabilities and equity sit on the right and increase with a credit. The next step is learning each account's type and the side it normally sits on, covered in normal balance of accounts. After that, chart of accounts classification shows which statement reports each account.