What is the fundamental accounting equation?

• A. Revenue - Expenses = Net Income
• B. Assets = Liabilities + Owners Equity
• C. Cash + Receivables = Liabilities
• D. Equity = Assets - Liabilities

Answer: (B)

The fundamental idea is that what a company owns (assets) is funded by what it owes (liabilities) plus what the owners have invested or earned (owners’ equity). This balance shows up on the balance sheet and is the backbone of double-entry bookkeeping: every transaction keeps the equation in balance by affecting at least two accounts.

For example, when owners invest cash, assets rise and owners’ equity rises too; when the company borrows, assets rise and liabilities rise; when purchasing equipment with cash, one asset decreases while another increases, so total assets stay the same and the equation remains balanced. That makes the form assets = liabilities + owners’ equity the clearest way to express how resources are financed.

The other way of writing it, equity = assets - liabilities, is just a rearrangement of the same relationship, but the standard presentation uses the first form. The remaining options describe different financial concepts and don’t reflect the fundamental balance on the balance sheet.