Question

What is the accounting equation?

Answer 1

The accounting equation shows the relationship between assets, liabilities, and capital. It is based on the dual aspect concept of accounting, which means that every business transaction has two effects. The equation is expressed as:

Assets = Liabilities + Capital

or

Capital = Assets − Liabilities

This equation indicates that the total assets of a business are always equal to the combined claims of outsiders (liabilities) and the owner (capital).

In a balance sheet, the total of the assets side and the total of the liabilities side are always equal. Every transaction increases or decreases one side of the equation, but an equal effect is also made on the other side, thereby maintaining equality at all times.