The accounting equation is the recording of monetary business transactions by applying double-entry accounting. It is also called a balance sheet because it is the equational form of a balance sheet, as it equates the total of assets with the sum of liabilities and stockholder's equity. It always gives a dual effect of each business transaction to keep the equation balanced.

The accounting equation must always balance to show that the assets acquired by the business are from the funds invested by the investors in the form of equity and with the help of taking loans or other payables.