The accounting equation is a basic principle of accounting and a fundamental element of the balance sheet. The equation is as follows:
Assets = Liabilities + Shareholder’s Equity
This equation sets the foundation of double-entry accounting and highlights the structure of the balance sheet. Double-entry accounting is a system where every transaction affects both sides of the accounting equation. For every change to an asset account, there must be an equal change to a related liability or shareholder’s equity account. It is important to keep the accounting equation in mind when performing journal entries.
The balance sheet is broken down into three major sections and their various underlying items: Assets, Liabilities, and Shareholder’s Equity.
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