The Accounting Equation

The accounting equation is a fundamental principle in finance stating that a company's assets (what it owns) are always equal to its liabilities (what it owes) plus its owner's equity (the owner’s stake). In simple terms, it shows that everything a business owns is financed either through debt or by the owner’s investment. This equation ensures the books always balance, providing a clear picture of the company’s financial health. For example, if a business buys equipment worth $10,000 and finances it with a loan of the same amount, its assets and liabilities increase equally, keeping the equation balanced.