The Accounting Equation is a fundamental principle that states assets must equal the sum of liabilities and shareholders equity at all times. We know that every business holds some properties known as assets. The claims to the assets owned by a business entity are primarily divided into two types service operations vs manufacturing operations – the claims of creditors and the claims of owner of the business. In accounting, the claims of creditors are referred to as liabilities and the claims of owner are referred to as owner’s equity. Under all circumstances, each transaction must have a dual effect on the accounting transaction.
Accounting Equation Explained – Definition & Examples
- The accounting equation is also called the basic accounting equation or the balance sheet equation.
- This methodical approach is fundamental to the accounting system’s integrity.
- In other words, we can say that the value of assets in a business is always equal to the sum of the value of liabilities and owner’s equity.
