UK Accounting Glossary
The relationship between assets, liabilities and ownership interest.
Also known as the balance-sheet equation, The accounting equation is the underlying formula of a balance sheet.
It is expressed as: assets = liabilities + capital.
An increase (or decrease) in the total assets of a concern needs to be accompanied by an equal movement in the liabilities and capital in order to ensure that they always balance.
Hence, the balance in balance sheet.
This formula expresses an entity view of a business, whereas an proprietary view deducts liabilities from assets to calculate an owners’ stake in a business.