What is the basic accounting equation?

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

Answer: (A)

Think of the basic accounting equation as showing where the business’s resources come from and who has claims to them. The resources owned (assets) must be funded either by what the business owes to others (liabilities) or by the owners’ claim (equity). This balance is the foundation of double-entry accounting—every transaction affects both sides so the equation stays in balance. For example, borrowing to buy equipment increases assets and increases liabilities by the same amount, keeping the equation balanced. If the business earns revenue and retains it, assets rise (cash or receivables) and equity rises through retained earnings, again keeping the balance. Revenue and expenses influence equity through net income, not as separate terms in the equation. The other forms mix terms in ways that don’t reflect how resources and claims relate. So the enduring relationship is assets = liabilities + equity.