Also called the balance sheet equation, it is the most significant expression in accounting. It represents the main relationship between the two principal sections of the balance sheet: (1) assets, and (2) liabilities and equity.
Assets = Liabilities + Equity
This equation is fairly straightforward as it puts into mathematical form a basic accounting and financial concepts. An entity has to pay what it owns (i.e., assets) by issuing debt(i.e., liabilities) or raising capital (i.e., equity).
For instance, say a company in the consumer goods sector needs to raise 4,000,000.00 SGD to invest in Research and Development to design and produce a new product. Then, it can either take on debt by asking for a loan or issue 4,000,000.00 in stocks. By increasing liabilities or equity by 4 million SGD, its cash reserves will also increase by that amount. Hence, the equation remains balanced.