In accounting, an identity is an equality that must be true regardless of the value of its variables, or a statement that by definition (or construction) must be true. The term is also used in economics to refer to equalities that are by definition or construction true, such as the balance of payments. This article or section does not cite its references or sources. ... The balance of payments is a measure of the payments that flow from one exports and imports of goods, services, and financial capital, as well financial transfers. ...

The most basic identity in accounting is that the balance sheet must balance, that is, that assets must equal liabilities (including equity), or that assets must equal debt plus equity. In its most common formulation: In formal bookkeeping and accounting, a balance sheet is a statement of the book value of all of the assets and liabilities (including equity) of a business or other organization or person at a particular date, such as the end of a fiscal year. ... In business and accounting an asset is anything owned which can produce future economic benefit, whether in possession or by right to take possession, by a person or a group acting together, e. ... In the most general sense, a liability is anything that is a hindrance, or puts individuals at a disadvantage. ... The Court of Chancery, London, early 19th century This article is about the concept of equity in the jurisprudence of common law countries. ...

Assets = Debt + Equity

Where an accounting identity applies, any deviation from the identity signifies an error in formulation, calculation or measurement. Since the accounting identity must always hold, any change to one side of the equation must be balanced by an equal change on the other side of the equation: a change to the total value of the assets of a firm must be reflected in a change to the debt or equity of a firm. For example, if a firm has an (uninsured) asset destroyed by a fire, either the debt of the firm must fall, or the equity (in this case, likely the equity). In most cases, each component of an accounting identity can be broken down into further sub-groups that must also respect the identity.

Accounting identities also apply between accounting periods, such as changes in cash balances. For example:

Cash at beginning of period + Changes in cash during period = Cash at end of period

This usage of the term identity is similar to the mathematical definition of an identity. In mathematics, the term identity has several important uses: identity can refer to an equality that remains true regardless of the values of any variables that appear within it, to distinguish it from an equality which is true under more particular conditions. ...

Economics

In economics, there are numerous accounting identities. The most commonly known is the balance of payments identity, where:

Current Account + Capital Account = Change in Official Reserve Account

Examples

Value of an asset

Any asset recorded in a firm's balance sheet will have a carrying value (also known as book value). By definition, the carrying value must equal the historic cost (or acquisition cost) of the asset, plus (or minus) any subsequent adjustments in the value of the asset, such as depreciation. Declining-balance depreciation of a $50,000 asset with $6,500 salvage value over 20 years. ...

Gross domestic product

The basic equation for gross domestic product is also considered an identity: IMF 2005 figures of total GDP of nominal compared to PPP. Absolute, not adjusted for population. ...

GDP = consumption + investment + (government spending) + (exports − imports)

In economics, consumption refers to the final use of goods and services to provide utility. ... Invest redirects here. ... Government spending consists of government purchases, including transfer payments, which can be financed by seigniorage (the creation of money for government funding), taxes, or government borrowing. ...

References

The Basic Accounting Identity]

See also

Identity // Computer programming In object-oriented programming, object identity is a mechanism for distinguishing different objects from each other. ...

Accounting It has been suggested that Accounting scholarship be merged into this article or section. ...

Balance sheet In formal bookkeeping and accounting, a balance sheet is a statement of the book value of all of the assets and liabilities (including equity) of a business or other organization or person at a particular date, such as the end of a fiscal year. ...

Du Pont Identity Du Pont Identity is an expression which breaks ROE (Return On Equity) into three parts. ...

Balance of payments The balance of payments is a measure of the payments that flow from one exports and imports of goods, services, and financial capital, as well financial transfers. ...