Which of the following best represents the Fundamental Accounting Equation?

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

Answer: (B)

Verified step by step guidance

1. Understand that the Fundamental Accounting Equation is the foundation of financial accounting and represents the relationship between a company's assets, liabilities, and equity.
2. Recall the correct formula for the Fundamental Accounting Equation: \( \text{Assets} = \text{Liabilities} + \text{Equity} \). This equation ensures that a company's financial position is balanced.
3. Analyze why the other options are incorrect: \( \text{Assets} = \text{Revenues} - \text{Expenses} \) is not correct because revenues and expenses are part of the income statement, not the balance sheet. \( \text{Liabilities} = \text{Assets} + \text{Equity} \) is incorrect because liabilities are not the sum of assets and equity. \( \text{Equity} = \text{Assets} - \text{Revenues} \) is incorrect because equity is derived from assets minus liabilities, not revenues.
4. Recognize that the equation \( \text{Assets} = \text{Liabilities} + \text{Equity} \) reflects the balance sheet structure, where assets are funded by liabilities (debts) and equity (owner's investment).
5. Conclude that the correct representation of the Fundamental Accounting Equation is \( \text{Assets} = \text{Liabilities} + \text{Equity} \), which is essential for preparing accurate financial statements.