Which of the following represents the basic accounting equation?

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

Answer: (D)

Verified step by step guidance

1. Understand the basic accounting equation: The fundamental principle of accounting is that a company's assets are financed by liabilities and owner's equity. This is expressed as Assets = Liabilities + Owner's Equity.
2. Break down the components: Assets represent resources owned by the company, liabilities are obligations owed to outsiders, and owner's equity is the residual interest in the assets after deducting liabilities.
3. Analyze the incorrect options: The equation 'Assets = Revenues - Expenses' is incorrect because revenues and expenses are part of the income statement, not the balance sheet. Similarly, 'Liabilities = Assets + Owner's Equity' is incorrect because liabilities are not the sum of assets and owner's equity. Lastly, 'Owner's Equity = Assets - Revenues' is incorrect because owner's equity is derived from assets minus liabilities, not revenues.
4. Confirm the correct equation: The correct equation is 'Assets = Liabilities + Owner's Equity,' which aligns with the balance sheet structure and ensures the accounting equation remains balanced.
5. Apply the equation: Use this equation as the foundation for recording and analyzing financial transactions, ensuring that every transaction maintains the balance between assets, liabilities, and owner's equity.