Which statement about the relationship between assets, liabilities, and equity on the balance sheet is accurate?

• A. Assets minus liabilities equals equity.
• B. Assets plus liabilities equals equity.
• C. Assets equal liabilities minus equity.
• D. Equity is not part of the balance sheet.

Answer: (A)

Think of the balance sheet as showing how assets are funded: what the company owns is financed either by debts (liabilities) or by the owners' investment (equity). The fundamental equation is Assets = Liabilities + Equity. If you rearrange that, you get Assets − Liabilities = Equity. So that statement is a valid way to express the same relationship.

For example, if assets are 500 and liabilities are 200, equity must be 300, since 500 − 200 = 300. The other ideas don’t fit the balance sheet structure: adding liabilities to assets would double-count financing and isn’t how equity is derived; subtracting equity from liabilities isn’t the correct rearrangement; and equity is indeed a part of the balance sheet.