Accounting Equation

The accounting equation is a fundamental principle that shows the relationship between a company's assets, liabilities, and owner's equity. It states that Assets = Liabilities + Owner's Equity. This means everything a company owns (assets) is financed either by borrowing money (liabilities) or by the owner's investments (owner's equity). The equation helps ensure that a company's financial records are balanced and accurate. If the company's assets increase or decrease, it reflects changes in liabilities or owner's equity, keeping the equation in harmony.