What is Accounting Equation?

The Accounting Equation is the fundamental principle upon which double-entry bookkeeping and the balance sheet are built. The equation is: Assets = Liabilities + Equity. It signifies that a company's total assets are financed by either borrowing money from others (liabilities) or through the funds provided by its owners (equity).

For Startups: For a startup founder, this equation is the bedrock of financial understanding. Every transaction, from buying a laptop to receiving investor funding, must keep this equation in balance. It provides a logical framework for understanding how financial events impact the company's overall position. During due diligence, investors will scrutinize the balance sheet to ensure this equation holds true, and any discrepancy is a major red flag.

Example: A startup raises ₹1 Crore in funding. Its Cash (Asset) increases by ₹1 Crore, and its Shareholder's Equity also increases by ₹1 Crore, keeping the equation in balance.