In the context of recording journal entries, which formula correctly represents the fundamental accounting equation that must be maintained when entering debits and credits?

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

Answer: (D)

Verified step by step guidance

1. Understand the fundamental accounting equation: The equation is the foundation of double-entry bookkeeping and ensures that the financial statements are balanced. It states that the total assets of a company are equal to the sum of its liabilities and equity.
2. Break down the components of the equation: Assets represent resources owned by the company, liabilities are obligations owed to external parties, and equity represents the owner's residual interest in the company after liabilities are subtracted.
3. Recognize the relationship between debits and credits: In journal entries, debits increase assets and expenses, while credits increase liabilities, equity, and revenue. This ensures the accounting equation remains balanced.
4. Apply the equation to journal entries: When recording transactions, ensure that any change in assets is matched by an equal change in liabilities and/or equity. For example, if cash (an asset) increases, it might be due to a loan (a liability) or an investment (equity).
5. Verify the equation after each transaction: After recording debits and credits, check that the total assets still equal the sum of liabilities and equity. This confirms the accuracy of the journal entry and maintains the integrity of the financial statements.