Which of the following is correct?
Last updated Jun 24, 2026
Correct Answer:
Option C —
asset = liability + equity
This is known as the Accounting Equation (or the Balance Sheet Equation). it is the fundamental framework upon which the entire double-entry bookkeeping system is built.Understanding the Equation
The equation represents the relationship between what a business owns, what it owes to others, and what it owes to its owners.
Assets: Everything the company owns that has value (e.g., Cash, Inventory, Buildings, Machinery).
Liabilities: The company's legal debts or obligations to external parties (e.g., Bank Loans, Accounts Payable, Taxes).
Equity (Owner's Equity): The remaining value of the business belonging to the owners after all liabilities are paid off. It is often called "Net Worth."
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