The accounting system reflects two basic aspects of a company:what is owns and what it owes.Assets are resources with future benefits that are owned or controlled by a company.Examples are cash，supplies，equipment，and land.The claims of a company's assets，what it owes，are separated into owner and non-owner claims.Liabilities are what a company owes its non-owners in future products or services.Equity refers to the claims of its owners.Together，liabilities and equity are the source of funds to acquire assets.

The relationship between the accounting elements can be expressed in a simple mathematical form known as the accounting equation:

Assets=Equity

Assets=Liabilities+Owner's Equity

　　　=Liabilities+Contributed Capital+Retained Earnings

　　　=Liabilities+Common Stock－Dividends+Revenues－Expenses

The accounting equation reflects the relationship among assets，liabilities，and owner's equity.Assets appear on the left side of the equation.The equity(liabilities and owner's equity)on the right side of the equation shows the legal and economic claims against the assets.The two sides of the accounting equation must be equal.In order to show that the owner's claim to business assets is residual，if liabilities on the right side of the equation are transferred to the left side of the equation，the accounting equation can also be written in the following way:

Assets－Liabilities=Owner's Equity

Or:Assets－Liabilities=Net Assets

A corporations'equity has two parts:contributed capital and retained earnings.Contributed capital refers to the amount that stockholders invest in the company.Retained earnings refer to income that is not distributed to its stockholders.The distribution of assets to stockholder is called“dividends”，which reduce retained earnings.Revenues increase retained earnings and are the assets earned from a company's earning activities.Examples are consulting services provided，sales of products，facilities rented to others，and commissions from services.Expenses decrease retrained earnings and are the cost of assets or services used to earn revenues.Examples are costs of employee time，use of supplies，and the advertising，utilities，and insurance services from others.

On the basis of the accounting equation，the financial position and the operating result of a business can be recorded and reported to the interested users of accounting information.