The accounting equation is considered to be the foundation of the double-entry accounting system. The accounting equation shows on a company's balance sheet whereby the total of all the company's assets equals the sum of the company's liabilities and shareholders' equity. Based on this double-entry system, the accounting equation ensures that the balance sheet remains “balanced,” and each entry made on the debit side should have a corresponding entry (or coverage) on the credit side.The financial position of any business, large or small, is assessed based on two key components of the balance sheet, assets, and liabilities. 

For example,

1. Purchasing a Machine with Cash

Company XYZ wishes to purchase a Rs. 50,000 machine using only cash. This transaction would result in a debit to Equipment (Rs. 50,000) and a credit to Cash (Rs. 50,000). The net effect on the accounting equation would be as follows:

This transaction affects only the assets of the equation, therefore there is no corresponding effect in liabilities or shareholder’s equity in the right side of the equation.

1. Purchasing a Machine with Cash and Credit

Company XYZ wishes to purchase a Rs. 50,000 machine but it only has Rs. 25,000 of cash in its holdings. The company is allowed to purchase this machine with an initial payment of Rs. 25,000 but it owes the manufacturer the remaining amount. This would result in a debit to Equipment (Rs. 50,000) and a credit to both Accounts Payable (Rs. 25,000) and Cash (Rs. 25,000). The net effect on the accounting equation would be as follows:

This transaction affects both sides of the accounting equation; both the left and right side of the equation increase by Rs. 25,000.

Recording and classification of financial transactions

Debtors: Debtors are those persons who owes amount to the business on account of credit sales of goods and services. Debtors are an asset for the company because amount is to be received from them.
Creditors:  Creditors are those persons to whom business owes amount on account of credit purchases of goods and services.Creditors are liabilities for the business because money is to be paid to them by the business.

Financial statements are drawn to provide information about growth or decline of business activities over a period of time or comparison of the results, i.e. intra-firm (comparison within the same organisation) or inter-firm comparisons (comparison between different firms). Comparisons can be performed only when the accounting policies are uniform and consistent.

According to the Consistency Principle, accounting practices once selected should be continued over a period of time (i.e. years after years) and should not be changed very frequently. These help in a better understanding of the financial statements and thus make comparisons easy. For example, if a firm is following FIFO method for recording stock, and switches over to the weighted average method, then the results of this year cannot be compared to that of the previous years. Although consistency does notprevent change in the accounting policies, but if change in the policies is essential for better presentation and better understanding of the financial results, then the firm must undertake change in its accounting policies and must fully disclose all the relevant information, reasons and effects of those changes in the financial statements.

1. Researchers: Researchers are interested in interpreting the financial statements of the concern for a given objective. Accounting information helps research scholars who wants to make a study into the financial operation of a particular firm.
2. Government:- Government has to collect sales tax, income tax, excise duty, and other taxes from the business. For this, it is necessary that proper accounts are made available to the government.Government wants to know earnings or sales for a particular period for the purpose of taxation. Income tax returns are examples of financial reports which are prepared with information taken from accounting.Government ensures that a company's disclosure of accounting information is in accordance with the regulations that are in place to protect the interest of various stakeholders who rely on such information in forming their decisions
3. Creditors:- Creditors are those parties that provide a firm with raw material, goods, services and financial resources by either extending credit or making loans. They are interested in knowing whether an enterprise can settle its obligations on a scheduled date in time. As a result, the existing cash position, outstanding debts, present and future earnings of an enterprise are of utmost concern.
4. Potential Investors: The prospective investors are in need of detailed information about the progress of the concern because on the basis of the information revealed by the accounting statements they make decisions regarding the investment to be made in that particular business. They would like to know the data relating to the past and present performance of the business and details of the decisions taken for future programmes.