Which of the following is the basis for financial management and represents the fundamental accounting equation?

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

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the fundamental accounting equation, which is the basis for financial management. The equation is: Assets = Liabilities + Equity.
2. Step 2: Analyze why this equation is fundamental. It represents the relationship between a company's resources (assets), obligations (liabilities), and ownership interest (equity).
3. Step 3: Compare the given options to the fundamental accounting equation. For example, 'Revenue = Expenses + Liabilities' does not align with the equation because revenue and expenses are part of the income statement, not the balance sheet.
4. Step 4: Evaluate the other options. 'Assets = Revenue - Expenses' is incorrect because revenue and expenses are not directly part of the balance sheet equation. Similarly, 'Equity = Assets + Liabilities' is incorrect because equity is derived by subtracting liabilities from assets.
5. Step 5: Conclude that the correct answer is 'Assets = Liabilities + Equity,' as it accurately represents the fundamental accounting equation used in financial management.