The fundamental accounting equation can actually be expressed in two different ways. A double-entry bookkeeping system involves two different "columns;" debits on the left, credits on the right. Every transaction and all financial reports must have the total debits equal to the total credits. A mark in the credit column will increase a company's liability, income and capital accounts, but decrease its asset and expense accounts. A mark in the debit column will increase a company's asset and expense accounts, but decrease its liability, income and capital account.
For example, if a person buys a computer for $945. He borrows $500 from his best friend and pays for the rest using cash in his bank account. To record this transaction in his personal ledger, the person would make the following journal entry.
Computer (Increase in asset) $945
Cash (Decrease in an asset) $445
Loan from friend (Increase in debt) $500
As you can see, the total amount of the debits (the amount on the left) equal the credits (the total amount on the right). The transaction is in "balance. "
An extension of that basic rule involves the balance sheet. The total assets listed on a company's balance sheet must equal the company's total liabilities, plus its owners' equity in the company. This identity reflects the assumption that all of a company's assets are either financed through debt or through the contribution of funds by the company's owners.
A simple balance sheet example:
Assets
Cash $100,000
PP&E $200,000
Liabilities & Equity
Mortgage $150,000
Equity $150,000
As you can see, the business's total assets equal the company's total liabilities and equity. This company is "balanced. "