Definition, Explanation and Examples
This equation holds true for all business activities and transactions. If assets increase, either liabilities or owner’s equity must increase to balance out the equation. This straightforward relationship between assets, liabilities, and equity is considered to be the foundation of the double-entry accounting system. The accounting equation ensures that the balance sheet remains balanced. That is, each entry made on the debit side has a corresponding entry (or coverage) on the credit side. The basic concept of accounting equation is to express two main points in the accounting rule. If a transaction is completely omitted from the accounting books, it will not unbalance the accounting equation. Let’s take a look at the formation of a company to illustrate how the accounting equation…
