The accounting equation, also called a balance sheet equation, is a basic principle of accounting that conveys the relationship of assets, liabilities, and owner’s equity of a person or business.
Assets are economic resources that are expected to benefit the business in the future. Liabilities are debts that are owed to creditors. Equity is the difference between the value of assets and the value of liabilities of something owned. Owners of a corporation are referred to as stockholders. The owner’s claim to the assets of the business are called equity.
The equation looks like this:
Assets = Liabilities + Equity (or A=L+E)
The equation must always be in balance. This means the left side of equation must always equal the right side.