How do debits and credits affect the accounting equation?

The double-entry accounting system’s fundamental elements, debits and credits, have an impact on the formula Assets = Liabilities + Equity. Credits have the opposite impact of debits, increasing assets while reducing obligations and equity. For instance, a company’s assets increase when it gets cash (which is an asset) and debits the cash account. In order to balance the equation, it simultaneously credits another account, such as revenue or equity. This idea guarantees that the equation stays in equilibrium and appropriately reflects the financial health of a corporation. In conclusion, debits and credits enable correct financial reporting and analysis by preserving the equilibrium between assets, liabilities, and equity in the accounting equation.

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