Explain the accounting equation and how this equation relates to both the balance sheet and the income statement

The accounting equation is calculated as: Assets=(Liabilities+Owner's Equity). Owner's equity can also be replaced with shareholder equity if it is a corporation.

The information used in calculating the accounting equation is found on the balance sheet. The income statement deals with revenues and expenses of a company. The income statement relates to the accounting equation because is shows some of the change in the equity portion of the equation during the time between balance sheets.

The accounting equation is the primary guidance in recording journal entry transactions which are necessary in making correct and proper financial statements such as the balance sheet and the income statement. Proper recording of transactions that affects these accounts in the equation would result in balanced and correct financial statements at the end of an accounting period.