Accounting Equation Explanation

 Accounting Equation, also called the balance sheet equation, represents relationship among the assets, liabilities, and owner's equity. Equation is the foundation for the double entry book-keeping method. Accounting Equation can be expressed as:

Assets= Liabilities + Owners' Equity
As Symbol: A= L+E
                 A= L+OE
                 A= L+P
For Example: Mr. Petter want to buy a computer for $1,000. To pay for the computer, Mr. Petter uses $400 in cash and borrows $600 from a Bank. Now his assets are worth $1,000 , Liabilities are $600, and Equity $400.

The connection between a company's assets, liabilities, and equity is represented by the accounting equation, commonly referred to as the fundamental accounting equation or the balance sheet equation. It is the basis for double-entry bookkeeping, a technique used by firms to correctly record financial transactions. 

Assets: Assets are the financial resources that a firm owns, have a measured worth, and may employ to produce future financial gains. Cash, receivables from customers, inventory, equipment, real estate, and investments are examples of assets.

Liabilities: The financial commitments or debts owed by the business to other parties are referred to as liabilities. These liabilities may result from financial borrowing, credit card purchases of products or services, or other business-related dealings. Loans, accounts payable, accumulated costs, and bonds payable are examples of liabilities.

Equity: After subtracting liabilities, equity is the remaining stake in a company's assets. It essentially represents the shareholders' or company owners' ownership stake. Common stock, retained earnings, and additional paid-in capital are examples of equity.

The company's financial records are always in balance according to the accounting equation. This indicates that the sum of the company's liabilities and equity equals the worth of all of the company's assets. In other words, the equation represents the concept that the resources of the firm are supported by either its owners (equity) or its creditors (liabilities).

The accounting equation serves as the foundation for the double-entry bookkeeping system. A debit and a credit entry are made for every transaction that is recorded. Different accounts on the balance sheet and income statement are impacted by debits and credits, each of which must have an equal value. This approach guarantees accurate financial reporting and aids in keeping the accounting equation in balance.

The accounting equation, which explains the connection between a company's assets, liabilities, and equity, is a fundamental accounting concept. It serves as the cornerstone for the double-entry bookkeeping system and guarantees that a company's financial records stay correct and balanced.