The accounting equation is the fundamental equation of accounting and states that:

Assets = Liabilities + Equity

This equation means that everything that a business owns (assets) must be financed by either debt (liabilities) or equity (owner’s investment).

Assets are resources that are owned by a business and have economic value. Examples of assets include cash, accounts receivable, inventory, and property, plant, and equipment.

Liabilities are debts that a business owes to others. Examples of liabilities include accounts payable, notes payable, and loans.

Equity is the owner’s investment in the business. It is also known as capital.

The accounting equation is important because it ensures that the balance sheet of a business is always in balance. The balance sheet is a financial statement that shows the assets, liabilities, and equity of a business at a specific point in time.

The accounting equation can also be used to calculate the equity of a business. To do this, simply subtract liabilities from assets:

Equity = Assets – Liabilities

This is useful for understanding how much of the business is owned by the owner and how much is owned by creditors.

Here is an example of the accounting equation:

Assets = Liabilities + Equity

Cash = Accounts Payable + Owner’s Capital

$10,000 = $5,000 + $5,000

This example shows that the business has $10,000 in assets, which are financed by $5,000 in accounts payable and $5,000 in owner’s capital.

The accounting equation is a fundamental concept in accounting and is used by businesses of all sizes. It is important for understanding the financial performance and position of a business.