Which of the following statements best represents the accounting equation?

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:

  1. Assets: These are resources owned by the company that have economic value, such as cash, inventory, and property.

  2. Liabilities: These are obligations or debts the company owes to external parties, like loans or accounts payable.

  3. 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.