The accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital (owner’s equity). The equation reads as follows:
A = Assets
L = Liabilities
C = Capital
- equation depicts the fundamental relationship among the components of the balance sheet, it is also called the Balance Sheet Equation.
- balance sheet is a statement of assets, liabilities, and capital.
- At any point in time, Resources of the business entity must be equal to the claims of those who have financed these resources.
- The proprietors and outsiders provide the resources of the business.
- The claim of the proprietors is called capital and that of the outsides is known as liabilities.
- Asset side of the balance sheet is the list of assets, which the business entity owns.
- The liabilities side of the balance sheet is the list of owner’s claims and outsider’s claims, i.e., what the business entity owes.