What is the accounting equation?

What is the accounting equation?

• A. Assets = Liabilities + Equity
• B. Liabilities = Assets + Equity
• C. Equity = Assets - Liabilities
• D. Revenue = Assets - Liabilities

Answer: (A)

The accounting equation shows that what a company owns (assets) is financed either by what it owes to others (liabilities) or by the owners’ investment (equity). This balance is the foundation of double-entry accounting: every transaction affects at least two accounts so the total remains in balance. The standard form puts assets on one side and liabilities plus equity on the other: Assets = Liabilities + Equity. For example, when a company borrows cash, its assets rise and its liabilities rise by the same amount, keeping the equation balanced. While a rearranged version like Equity = Assets − Liabilities conveys the same relationship, the conventional form used in financial reporting is assets equals liabilities plus equity, which is why that option is the best answer.

The accounting equation shows that what a company owns (assets) is financed either by what it owes to others (liabilities) or by the owners’ investment (equity). This balance is the foundation of double-entry accounting: every transaction affects at least two accounts so the total remains in balance. The standard form puts assets on one side and liabilities plus equity on the other: Assets = Liabilities + Equity. For example, when a company borrows cash, its assets rise and its liabilities rise by the same amount, keeping the equation balanced. While a rearranged version like Equity = Assets − Liabilities conveys the same relationship, the conventional form used in financial reporting is assets equals liabilities plus equity, which is why that option is the best answer.