Which equation expresses the relationship Assets = Liabilities + Owner's Equity?

• A. Journal
• B. Assets = Liabilities + Owner's Equity
• C. Accrual basis
• D. Cash basis

Answer: (B)

The fundamental idea being tested is the accounting equation: assets equal liabilities plus owner's equity. This identity shows that everything a business owns is financed either by debt (liabilities) or by the owner's investment and retained earnings (owner's equity). The balance sheet must always balance, reflecting that resources come from creditors or from the owner.

For example, if the owner contributes cash, assets go up and owner's equity goes up by the same amount, keeping the equation in balance. If the business borrows, assets increase and liabilities increase by the same amount, again preserving the balance. This is why the equation is the best answer: it encapsulates the essential relationship the balance sheet represents.

Other options describe a journal (where transactions are recorded) or accounting methods (when revenues and expenses are recognized), which do not express the fundamental balance relationship between assets, liabilities, and owner’s equity.