What is the accounting equation?

The accounting equation is expressed as Assets = Liabilities + Equity. This fundamental principle of accounting reflects the relationship between a company's resources (assets) and the claims against those resources (liabilities and equity).

In this equation, assets represent everything owned by a business, such as cash, inventory, and property. Liabilities, on the other hand, are what the business owes to external parties, including loans and accounts payable. Equity signifies the owners' claims on the business's assets after all liabilities have been settled. This equation maintains a balance, indicating that all assets must either be financed through borrowing (liabilities) or through the owners' investments (equity).

Thus, the equation serves as the foundation for double-entry accounting, ensuring that for every financial transaction, the books remain balanced. Understanding this relationship is crucial for analyzing financial statements and making informed business decisions.