Q.What is the Accounting Equation? State its components and explain why it always remains in balance.

The Accounting Equation is the Dual Aspect Concept written as a single formula that must hold true for every business at every moment.

The Accounting Equation states that Assets = Liabilities + Capital. Assets are the economic resources the business owns; Liabilities are amounts it owes to outsiders; Capital is the amount it owes to its owner. The equation always balances because every asset a business holds has been financed from exactly one of two sources — the owner's own funds …

The Accounting Equation expresses the Dual Aspect Concept as a single formula that must hold true for every business, at every point in time:

Assets = Liabilities + Capital

(equivalently, Capital = Assets − Liabilities)

Its components are:

1. Assets — the economic resources owned by the business (e.g. cash, stock, furniture, building, debtors).
2. Liabilities — the amounts the business owes to outsiders (e.g. creditors, bank loans, bills payable).
3. Capital — the amount the business owes to its own owner, representing the owner's claim on the business's assets after outside liabilities are met. …

A common mistake is writing the equation as "Assets + Liabilities = Capital" or some other rearrangement without understanding which items sit on which side — always fix it as Assets = Liabilities + Capital, and derive any other form …