which of the following statements best represents the accounting equation?
Which of the following statements best represents the accounting equation?
Answer:
The accounting equation is a fundamental principle of accounting and is expressed as:
Assets = Liabilities + Equity
This equation represents the relationship between a company’s assets, liabilities, and equity:
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Assets: These are resources owned by the company that have economic value, such as cash, inventory, and property.
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Liabilities: These are obligations or debts the company owes to external parties, like loans or accounts payable.
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Equity: Also referred to as owner’s equity or shareholder’s equity, this represents the owner’s claims after all liabilities have been subtracted from the assets.
Explanation:
- The equation ensures that the balance sheet is balanced — the total value of assets must always equal the sum of liabilities and equity.
- This relationship confirms that every financial transaction affects at least two accounts in such a way that the equation remains in balance, which is the basis for double-entry bookkeeping.
Understanding this equation helps in analyzing the financial position of a business. Each component provides insight into different aspects of a company’s financial health.