The accounting equation, also known as the balance sheet equation, is a concept in accounting that forms the basis for recording financial transactions. It illustrates the relationship between a company’s assets, liabilities, and owner’s equity at any given point. The equation is:
Assets = liabilities + owner’s equity
The equation must always balance, meaning that the total value of the company’s assets must equal the total of its liabilities plus owner’s equity. This principle reflects the accounting principle of double-entry bookkeeping.
The accounting equation is the foundation of financial accounting and is used to prepare the balance sheet, which is one of the three main financial statements that provide a snapshot of a company’s financial health at a given time.