Accounting equation can be termed as the foundation stone of the modern day accounting. The financial position of a business is affected by its financial transactions and these financial transactions are measured by following parameters called assets, liabilities and owner’s equity. The accounting equation describes the relationship between these three financial parameters as shown below
Assets= Liabilities + Owner’s Equity
The equation describes that the assets of a company are either borrowed money from financing or the money acquired from the company’s shareholders. Accounting equation is displayed quite effectively through the balance sheet of the company. Any kind of cash inflow or outflow has equal affect on the both sides of the equation.
Assets in the equation represent the resources of a company. Assets include account receivable, cash, stocks, land and buildings. On the other hand liabilities are the compulsions of a company including payable loans, payable wages, income tax, interest and other accounts payables. In addition to these two entities there is owner’s equity that means the money invested by the owner in the business. In order to keep accounting equation in balance a company must keep all the record up-to-date and transparent. To keep the equation one side must be always equal to the other side of the equation. As there are two sides of an account equation and at least two accounts are affected by each and every this system is called double-entry accounting system. Accounting equation is also called as balance sheet equation.
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