Which equation best describes the accounting identity?

• A. Assets = Liabilities + Equity
• B. Assets = Revenues + Expenses
• C. Assets = Liabilities - Equity
• D. Cash = Assets - Liabilities

Answer: (A)

The fundamental idea is that what a business owns (assets) is financed either by what it owes to others (liabilities) or by the owners’ claim (equity). This balance, assets equal liabilities plus equity, is the accounting identity that underpins every financial statement. It stays in balance because every transaction affects at least two accounts in a way that keeps assets on one side equal to the combination of liabilities and equity on the other.

For example, when you borrow cash, both assets and liabilities rise by the same amount, so the equation stays true. When the company earns revenue, assets increase and equity increases by the same amount through retained earnings, again preserving the balance. That’s why this formulation is the correct description.

Other proposals mix components that don’t belong in that single balance: revenues and expenses affect equity over time but don’t form a direct assets-to-funding equation; subtracting equity from liabilities misrepresents the residual ownership claim; and cash is just one asset, not the total of all assets minus liabilities.