Accounting Equation is the double entry system of accounting that is based on accounting equations where the relationship between assets, liabilities and capital can be expressed in the form of equations. 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:
Assets = Liabilities + Capital
The above equation can be presented in the following forms.
Assets – Liabilities = Capital
Assets – Capital = Liabilities
As the accounting equation depicts the fundamental relationship among the components of the balance sheet, it is also called the Balance Sheet Equation.
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