Which equation correctly states the fundamental accounting equation?

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

Answer: (A)

Assets must equal Liabilities plus Owner's Equity. This relationship shows that everything the business owns is financed either by what it owes to others (liabilities) or by the owner's stake in the business (owner's equity). In double-entry bookkeeping, every transaction keeps this balance intact: increase an asset by borrowing (increase liabilities) or by owner investment/retained earnings (increase owner’s equity). For example, buying equipment with cash shifts within assets but keeps the total assets equal to the sum of liabilities and equity; buying on credit increases both an asset and a liability, leaving the equation balanced.

The other formulations mix up the relationships or sum the terms incorrectly, which would misstate who finances the assets.