The Accounting Equation is the foundation of all bookkeeping and accounting. It shows how a business’s resources (what it owns) are financed—either through debts or the owner’s investment. The equation is simple but powerful:

Assets = Liabilities + Equity

This might look like a formula from math class, but don’t worry—it’s much easier than it seems. Let’s break it down step by step.

Assets are everything a business owns that has value. This includes things like cash, inventory, equipment, furniture, and even money owed by customers. If it can help the business generate income or save money, it’s likely an asset. In simple terms, assets are the valuable things your business has.

Liabilities are what the business owes to others. This includes loans, unpaid bills, credit card balances, or any money that needs to be paid back in the future. For example, if you borrowed money to buy a delivery van, that loan is a liability. Liabilities are the claims other people have on your business assets.

Equity is the owner's share of the business after subtracting all liabilities from assets. It’s also known as owner’s equity or net worth. If the business were to sell everything it owns (assets) and pay off all its debts (liabilities), whatever is left belongs to the owner—that’s equity. It reflects the real value of the owner’s interest in the business.

These three parts—assets, liabilities, and equity—are connected through the accounting equation. Every transaction in a business affects at least two of these components. For example, if you take a loan to buy equipment, your assets (equipment) go up and your liabilities (loan) also go up. If you invest your own money into the business, both your assets (cash) and equity increase. The goal is to always keep the equation balanced.

✅ Assets are what the business owns—like cash, inventory, and equipment.
✅ Liabilities are what the business owes—like loans, unpaid bills, or taxes.
✅ Equity is the owner’s share in the business after debts are paid.
✅ The three parts are always connected through the formula: Assets = Liabilities + Equity
✅ Every financial transaction affects at least two of these components and keeps the equation balanced.