What is Revenue, Expense & Drawing in Accounting? [Examples] - Shikshaglobe

The accounting equation is the mathematical foundation of double-entry bookkeeping. It states that all assets must equal the sum of all liabilities and shareholders' equity. This equation is also known as the balance sheet equation because it's used to prepare the balance sheet, one of the three major financial statements.

The accounting equation can be expressed as:

Assets = Liabilities + Shareholders' Equity

The accounting equation is the foundation for all double-entry bookkeeping. It states that assets = liabilities + equity. This equation is always true because every financial transaction must have two equal and opposite sides. The left side of the equation represents the amount of money that the business owes to others, while the right side represents the amount of money that the business owns.

For example, if a company takes out a bank loan, this will increase its liabilities by the amount of the loan. At the same time, it will also increase its assets by the same amount because it now has the money to use for business purposes.

The accounting equation can be used to solve problems involving financial transactions. For instance, if a company wants to know how much equity it has, it can simply subtract its liabilities from its assets. This will give them their equity balance.

The accounting equation is a fundamental concept in accounting that represents the relationship between assets, liabilities, and equity. The equation is expressed as Assets = Liabilities + Equity. In other words, assets are financed by either debt or equity.

The accounting equation is important because it shows the balance between what a company owns (assets) and what a company owes (liabilities) as well as the owners' equity in the business. From a financial standpoint, the equation must always be in balance. This means that if there is an increase in assets, there must be an equal increase in either liabilities or equity. For example, if a company purchases $100 of inventory on credit (an increase in assets), then the accounting equation must be adjusted to reflect the new liability of $100 (increase in liabilities).

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