What is the role of the accounting equation in the analysis of business transactions?

In the analysis of a business transaction, the accounting equation is an essential tool. It is considered as the basis upon which the double-entry accounting system was established. The double entry system specifies that debits of a given transaction are equal to the resulting credits. The components of the accounting equation are expressed in an equation format where assets are equal to liabilities plus equity. Assets are resources owned by a business such as inventory, account receivables, cash, and fixed assets. Liabilities are payments owed which include outstanding expenses, debt allowances and income tax payable. Owners' equity signifies the extent by which a business is owned by an individual. It is the capital invested in a business. Business analysis is the process of examining business transactions and their effects on the accounting equation. The major role of the accounting equation is determining whether business assets are financed by business funds or debts. By doing so, the real-life financial position or status of the business is shown.