The Accounting Equation is the fundamental accounting principle that states Assets = Liabilities + Owner’s Equity. In other words, all of a company’s accounting entries must balance out and remain in equilibrium, or else something has gone wrong.
Put simply, what a business owns (its assets) is equal to what it owes (its liabilities) plus the amount of money injected by its owners (owner’s equity). By understanding this equation, businesses can quickly get an idea of their financial position and make informed decisions about how best to manage and grow their operations going forward.