Knowing accounting equation is very essential especially if we are in the early process of establishing a new company.
Accounting equation is the way to express the relationship between resources supplied by the owner and the resources in the business.

Resources supplied by the owner = Resources in the business

In accounting we have to know the 'jargon' language which means the special terms are used to describe something.
In this case, the amount of resources supplied by the owner is called capital. The actual resources that are then in the business are called assets. So, the accounting equation can be shown as:

Capital = Assets

In order to run the business, the owner might ask other people to supply some of the assets. Meaning that the business Liabilities is the name given to the amounts owing to these people for these assets. The accounting equation has now changed to:

Capital = Assets - Liabilities
Assets = Capital + Liabilities
Liabilities = Assets - Capital

However, the common way to express the equation is:

Assets = Capital + Liabilities
The above equation is known as the basic acounting equation or the balance sheet equation. it forms the basis of the whole double entry bookkeeping system. The equality of the accounting equation is always maintained regardless of the number of transactions recorded in the business. Any change in the amount of the total assets is always accompanied by an equal change in the amount of the total liabilities and owner's equity.
The accounting equation A = C + L is expressed in a financial statement known as the Balance Sheet. It is the detailed expression of the accounting equation.


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