What does the accounting equation A = L + O.E. represent?

The accounting equation A = L + O.E. stands for Assets = Liabilities + Owner's Equity, which is a fundamental principle in accounting that illustrates the relationship between what a company owns (its assets) and what it owes (its liabilities) plus the residual interest of the owners (owner's equity).

This equation serves as the foundation for double-entry bookkeeping, ensuring that every financial transaction is balanced. It indicates that all assets are financed either by borrowing money (liabilities) or by the owner's investments (owner's equity). When a company acquires new assets, it must either incur a debt or bring in more capital from the owners, which keeps the equation in balance.

Understanding this equation is crucial for analyzing the financial health of a business, as it provides insight into how assets are funded and the net worth of the owner's stake in the company. This principle not only facilitates accurate financial reporting but also aids in strategic decision-making and financial analysis.