Accounting Equation

Sum of entity’s assets must always be equal to the sum of entity’s liabilities and owners’ equity i.e.

Assets = Equity + Liabilities

It is the very concept on which present day accounting is based and because it is presented in the form of mathematical equation hence the name accounting equation. It is also called balance sheet equation.

In simple words, accounting equation means that all the assets owned or controlled by the entity are acquired by raising finance from owners (who in return got the share of ownership in entity or lenders (who loaned us and entity paid for asses from these borrowings).