Which statement correctly describes the accounting equation for the balance sheet?

Which statement correctly describes the accounting equation for the balance sheet?

• A. Total assets equal total liabilities plus equity.
• B. Total assets equal total liabilities minus equity.
• C. Total assets equal only equity.
• D. There’s no relation between assets, liabilities, and equity.

Answer: (A)

The fundamental relationship is that assets equal liabilities plus equity. This means everything a company owns (assets) is funded either by what it owes to others (liabilities) or by the owners’ stake (equity). On the balance sheet, this balance holds because every asset increase is matched by a corresponding increase in liabilities or equity. For example, buying an asset with borrowed funds raises both assets and liabilities by the same amount, keeping the equation in balance; funding an asset with owner contributions raises assets and equity equally. The other statements misstate how financing works—subtracting equity from liabilities isn’t how assets are funded, implying assets come from equity alone, or claiming there’s no relation—and all contradict the established accounting framework.

The fundamental relationship is that assets equal liabilities plus equity. This means everything a company owns (assets) is funded either by what it owes to others (liabilities) or by the owners’ stake (equity). On the balance sheet, this balance holds because every asset increase is matched by a corresponding increase in liabilities or equity. For example, buying an asset with borrowed funds raises both assets and liabilities by the same amount, keeping the equation in balance; funding an asset with owner contributions raises assets and equity equally. The other statements misstate how financing works—subtracting equity from liabilities isn’t how assets are funded, implying assets come from equity alone, or claiming there’s no relation—and all contradict the established accounting framework.