Which of the following best describes the fundamental accounting equation?

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

Answer: (D)

Verified step by step guidance

1. Understand the fundamental accounting equation: It is the foundation of double-entry bookkeeping and represents the relationship between a company's assets, liabilities, and equity.
2. Recall the formula: The fundamental accounting equation is expressed as Assets = Liabilities + Equity. This equation ensures that the balance sheet remains balanced.
3. Break down the components: Assets are 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 deducted.
4. Analyze the incorrect options: Liabilities = Assets + Equity is incorrect because liabilities are not calculated by adding assets and equity. Similarly, Assets = Revenues - Expenses is incorrect because revenues and expenses are part of the income statement, not the balance sheet. Equity = Assets - Revenues is also incorrect because equity is calculated as Assets - Liabilities, not revenues.
5. Conclude with the correct answer: The correct representation of the fundamental accounting equation is Assets = Liabilities + Equity, which ensures the balance sheet is accurate and reflects the financial position of the company.