Sample Answer:

Accounting equation is the basic equation that keeps all the accounts of the business in a balance. When a business is started, the owner puts in some money in order to provide finance for the operations. This is the owner’s interest in the business and is therefore termed as equity/owners equity. This money is an asset for the company. Representing the relation as an equation:



Assets = Owner’s Equity



In case the owner of the business is in need of money and decides to take a loan from the bank, it would have the impact of increasing his Assets. The loan is a liability. Hence the above equation would be changed to: This leads to the above equation becoming:



Assets = Liabilities + Owner’s Equity








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