Which of the following correctly states the fundamental 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 fundamental accounting equation, which is the cornerstone of financial accounting. It states that the resources owned by a business (Assets) are financed either by debts (Liabilities) or by the owner's investment (Owner's Equity).
2. Break down the equation: Assets = Liabilities + Owner's Equity. This means that the total value of assets must equal the sum of liabilities and owner's equity.
3. Analyze why the other options are incorrect: 'Assets = Revenues - Expenses' is not correct because revenues and expenses are part of the income statement, not the balance sheet. They do not directly define the relationship between assets, liabilities, and equity.
4. Evaluate the second incorrect option: 'Liabilities = Assets + Owner's Equity' is incorrect because liabilities are not the sum of assets and owner's equity. Instead, liabilities are one component of the equation that balances with assets and owner's equity.
5. Confirm the correct equation: 'Assets = Liabilities + Owner's Equity' is the correct representation of the fundamental accounting equation, as it reflects the balance sheet structure and the relationship between these three key components.