Accounting Equation:
The three basic elements of accounting are assets, liabilities and owners' equity (capital). The assets represent the things of value that a business owns. The liabilities are the claims of the creditors against those assets. The owner's equity (capital) is the claim of the owner against those assets. Whatever is not claimed by the creditors belongs to the owner. As a result, the total claims against the assets are always equal to the total assets. This equality between the assets and the liabilities and the owner's equity is expressed by the "accounting equation".
Assets = Liabilities + Owner's Equity
Example:
Mr. Naveed purchased a building for $2,00,000. This transaction brought two changes—cash (asset) decreased by $2,00,000 and Building (a new asset) increased by $2,00,000. Now the equation will be;
Assets = Liabilities + Owner's equity
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Cash + Building = Capital
$300,000 + 200.000 = Nil + $500.000