Accounting equation
In one sentenceThe constant relationship stating that a business's assets always equal the sum of its liabilities and equity.
Simply put
Everything the business owns (assets) came from two sources: other people's money (liabilities) or the owners' money (equity). That is why the two sides are always equal.
Every transaction you record keeps this balance: if one asset increases, either another asset decreases or a liability or equity increases by the same amount. This is the idea of double-entry bookkeeping.
Worked example
A spare parts store has assets (cash, inventory and furniture) of 500,000 SAR and owes suppliers and the bank 200,000 SAR.
Assets500,000 SAR
Liabilities200,000 SAR
Equity (500,000 − 200,000)300,000 SAR
Formula: Assets = Liabilities + Equity