What is the basic accounting equation?

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Multiple Choice

What is the basic accounting equation?

Explanation:
The basic accounting equation shows that what a company owns (assets) is funded by what it owes to others (liabilities) and by the owners’ claims (shareholders’ equity). At any moment, assets must equal liabilities plus equity, which is the balance sheet snapshot in double-entry bookkeeping. This makes the correct option clear: assets equal liabilities plus shareholders’ equity. If you finance an asset with debt, both assets and liabilities rise. If you finance with owner investment, assets and equity rise. Either way, the equation stays balanced. The other forms aren’t correct because they mix the categories in ways that don’t reflect the actual financing of assets. Revenue and expenses relate to performance over a period and affect retained earnings, not the immediate balance between assets, liabilities, and equity. And equations that set equity equal to or as a function of assets plus liabilities, or liabilities equal to assets plus equity, contradict the fundamental relationship and would misstate the balance on the financial statements.

The basic accounting equation shows that what a company owns (assets) is funded by what it owes to others (liabilities) and by the owners’ claims (shareholders’ equity). At any moment, assets must equal liabilities plus equity, which is the balance sheet snapshot in double-entry bookkeeping.

This makes the correct option clear: assets equal liabilities plus shareholders’ equity. If you finance an asset with debt, both assets and liabilities rise. If you finance with owner investment, assets and equity rise. Either way, the equation stays balanced.

The other forms aren’t correct because they mix the categories in ways that don’t reflect the actual financing of assets. Revenue and expenses relate to performance over a period and affect retained earnings, not the immediate balance between assets, liabilities, and equity. And equations that set equity equal to or as a function of assets plus liabilities, or liabilities equal to assets plus equity, contradict the fundamental relationship and would misstate the balance on the financial statements.

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