Accounting Equation

Accounting can be described as a process of managing and recording various kinds of financial transactions over a period that is related to businesses. Accounting is a vast subject with multiple functions and various aspects. Some of the steps involved in accounting are analysing, calculating, summarising, and then reporting the data recorded to convey valuable information to the company or businesses for financial planning and organisation. Accountancy helps in tracking, managing, and regulating expenditures and income, gathering important information for stakeholders, and using these quantitative data for business policies. In accounting, debits are cash flows outside of the businesses and credits refer to the cash flows that enter the business organizations. The debits and credits occur in a complementary way in the balance sheets. So, after every transaction, debits and credits must be in balance on the balance sheets of a business organization. Accounting has a fundamental equation that constitutes the basis of all calculations there. That accounting equation is known as the balance sheet equation and showcases the relationship between assets, owner’s equity, and liabilities. Here, the total debt that is accrued is equal to the total credits. In businesses, capital means the equity of stockholders. As transactions in businesses affect both sides of the balance sheet, the equation is in balance. This means that the left side is equal to the right side on the balance sheet. The Accounting equation is expressed as the Assets = Liabilities + Equity. This is a simple equation that is foundational to double-entry sort of accounting.