Which of the following statements best represents the fundamental accounting equation?

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

Answer: (D)

Verified step by step guidance

1. Understand the fundamental accounting equation: The equation is a cornerstone of financial accounting and represents the relationship between a company's assets, liabilities, and equity.
2. Recall the formula: The fundamental accounting equation is expressed as \( \text{Assets} = \text{Liabilities} + \text{Equity} \). This equation ensures that a company's financial position is 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 subtracted.
4. Analyze the incorrect options: \( \text{Assets} = \text{Revenues} - \text{Expenses} \) is incorrect because revenues and expenses are part of the income statement, not the balance sheet. \( \text{Equity} = \text{Assets} + \text{Liabilities} \) is incorrect because equity is derived from \( \text{Assets} - \text{Liabilities} \). \( \text{Liabilities} = \text{Assets} + \text{Equity} \) is incorrect because liabilities are part of the equation, not the sum of assets and equity.
5. Conclude with the correct statement: The correct representation of the fundamental accounting equation is \( \text{Assets} = \text{Liabilities} + \text{Equity} \), which reflects the balance sheet structure and ensures that all financial transactions are accounted for.