The accounting equation is the basic formula of accounting that shows the relationship between a company’s assets, liabilities, and capital.

Assets = Liabilities + Capital (Owner’s Equity)

It means:

Assets → What the business owns

Liabilities → What the business owes

Capital → Owner’s investment in the business

Every financial transaction affects at least two parts of this equation, keeping it balanced.

In simple terms, the accounting equation shows that everything a business owns is financed either by borrowing or by the owner’s money.