The accounting equation shows the relationship between assets, liabilities and equity.

It can be shown as either:

Assets = Liabilities + Equity

Assets – Liabilities = Equity

Each accounting transaction impacts both sides of the accounting equation.

Both sides of the equation must always BALANCE.

Assets = Liabilities + Equity

If assets increase, either liabilities or equity must increase too. It is also possible for one asset to increase while another asset decreases. This has no impact on the other side of the accounting equation.

If a liability increases, either assets must increase or equity must decrease.

The accounting equation – example

Assets = Liabilities + Equity

10,000,000 = 8,000,000 + 2,000,000

or

Assets – Liabilities = Equity

10,000,000 – 8,000,000 = 2,000,000