It is the foundation for the double-entry bookkeeping system. Accounting Equation states that sum of the total liabilities and the owners capital is equal to the companys total assets and it is one of the most fundamental parts of the accounting on which the whole double entry system of accounting is based. Merely placing an order for goods is not a recordable transaction because no exchange has taken place.
This means that each debit has an equal credit and vice-versa.
In the formation of accounting data a basic accounting equation is used for financial statement no matter if you are just a small business or a multimillion company. ASSETS OWNERS EQUITY LIABILITIES The word equation comes from the word equal. This accounting equation is expressed as Assets Liabilities Owners Equity. The accounting equation is a representation of how these three important components are associated with each other.