Accounting Equation
Definition
The accounting equation says that Assets = Liabilities + Equity. Everything a business owns (assets) was paid for either by owing someone (liabilities) or by the owner's own money and profit (equity).
Example
A business has $10,000 in the bank, owes $4,000 on a loan, and the owner invested $6,000. Assets ($10,000) = Liabilities ($4,000) + Equity ($6,000). The equation balances.
Why It Matters
Every transaction must keep this equation balanced. If it does not, something was recorded incorrectly. The equation is the foundation of double-entry bookkeeping.