What is the accounting equation?

The accounting equation is a fundamental principle in accounting that reflects the relationship between a company's assets, liabilities, and equity. It states that the total assets of a business are always equal to the sum of its liabilities and equity, which is represented as:

Assets = Liabilities + Equity.

This equation illustrates that what a company owns (assets) must be financed either by borrowing money (liabilities) or by the owners' investment (equity).

In practice, this equation ensures that the balance sheet of a company remains balanced, meaning that any increase in assets must be matched by an increase in either liabilities or equity, maintaining financial equilibrium. Understanding this equation is foundational for analyzing a company's financial health and structure, ensuring that all resources and claims are accounted for appropriately.

The other options present variations or incorrect formulations of the accounting equation, which do not correctly reflect the basic accounting principle that underpins financial reporting and analysis.