Which of the following best represents the most fundamental relationship in financial accounting?

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

Answer: (A)

Verified step by step guidance

1. Understand the fundamental accounting equation, which is the foundation of financial accounting. It states that the resources of a company (Assets) are financed by either borrowing (Liabilities) or by the owners' contributions and retained earnings (Equity). This is expressed as: $\mathrm{Assets}=\mathrm{Liabilities}+\mathrm{Equity}$.
2. Analyze the options provided in the problem. The correct equation must align with the fundamental accounting equation.
3. Option 1: $\mathrm{Assets}=\mathrm{Liabilities}+\mathrm{Equity}$. This matches the fundamental accounting equation and is correct.
4. Option 2: $\mathrm{Equity}=\mathrm{Assets}+\mathrm{Liabilities}$. This is incorrect because it does not represent the fundamental relationship; equity is derived by subtracting liabilities from assets.
5. Option 3 and Option 4 involve revenue and expenses, which are part of the income statement and not directly related to the fundamental accounting equation. Therefore, they are incorrect.