Accounting equation is formula representing three factors: Asset , liability and capital.

Assets - Liability = CAPITAL.

Accounting equation is always remained in balance for each transaction of business.

Before understanding accounting equation, first we need to understand what is assets, liability and capital?

Assets: assets are property of business like land, building, furniture, machinery, plot, debtors, stock , cash, bank etc. Through asset, business will gain any future benefit or gain.

Liability: liability is debt of business like creditors, loans from bank, outstanding expenses etc.

Capital: Capital is owner's equity or investment in business. Revenue: Revenue is income of business and it will increase capital.

Expenses: Expenses are day to day cost of running business. When we reduce liability from asset, it will be business capital. We can understand it with following examples.

Example 1:

Xoya has started business with $500000. Now, let’s make accounting equation for this transaction.

Xoya is owner of business so owner's equity is $500000. Other side, as she started business with cash, cash balance is $500000. So asset is $500000.

Equation is

$500000- 0 = $500000.

Example 2:

Xoya has sold service to peter at $5000. Peter has not paid yet. In this transaction, Xoya has sold service so income will increase by $5000. Similarly capital will be increased by $5000.

Other side, Debtor ( Peter) balance will be increased by $5000. Equation is

$5000- 0 = $5000.

Example 3:

Xoya has paid $1000 as salary.

In this transaction, salary (Expense) will be increased which will reduce the profit and capital by $1000. Other side cash will be reduced by $1000.

Equation is

-$1000 - 0 = -$1000.

Accounting equation can be used to do journal entry or understand transactions easily. Accounting equation is 100% accurate and it never varies for any transaction.