State the accounting equation and define each of its terms

The basic accounting equation is Assets = Liabilities + Equity

Assets are items that are owned and controlled by the company in which future economic benefits are expected. Liabilities, on the other hand, are debts or obligations of the company as a result of past events or transactions in which future payments are expected. Equity is the excess of assets over the liabilities and accounts for the net worth of the company.

The logic behind the equation is that Assets must always be equal to Liabilities plus Equity, an increase in the asset would result in a decrease in another asset or an increase in Liability and Equity. Each transaction would have effects on the accounting equation but would always balance the equation afterward.

The structure of the balance sheet is very similar to the accounting equation. The balance sheet summarizes the financial position of the company as of the given period. Assets are reported first, wherein items such as cash, receivables, and inventories are reported. Then the Liabilities would follow, wherein short term and long-term payable are included. The final item would be the Equity portion, which indicates the net assets of the company and commonly includes capital stock and retained earnings.