The accounting equation and why the balance always balances
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The accounting balance of assets = equity + liabilities is descriptive, not prescriptive
You can think of it as assets – liabilities = equity
Your gross worth is all of the assets you own (things that can provide value for you in the future).
Loans are obligations to others, of which settling may lead to you being forced to give up your assets (where through selling or through bankruptcy). And so liabilities threaten the security of your assets from providing value in the future.
Deducting value of liabilities from your assets therefore leaves you with asset value that isnt threatened by liabilities.
Hence this is considered by the company’s net value ie. Equity. And so the equation is just the above but backwards.
And so theoretically it should always balance (A = L+ E) with any financial movement.
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