The accounting equation is a fundamental principle in financial accounting that represents the relationship between a company's assets, liabilities, and equity. It states that the total value of a company's assets is equal to the sum of its liabilities and equity.
The accounting equation can be mathematically expressed as:
Assets = Liabilities + Equity
This equation must always remain in balance, meaning that the total value of assets must equal the sum of liabilities and equity. This balance is maintained through the double-entry bookkeeping system, where every financial transaction affects at least two accounts and is recorded with both a debit and a credit entry, ensuring that the equation remains balanced.