What is the basic accounting equation?

• A. Assets = Liabilities + Owner's Equity
• B. Assets = Liabilities - Owner's Equity
• C. Liabilities = Assets - Owner's Equity
• D. Owner's Equity = Liabilities - Assets

Answer: (A)

The basic idea is that what a business owns (assets) has to be matched by who has claims to those assets—either creditors (liabilities) or the owners (owner's equity). So the fundamental rule is that assets equal liabilities plus owner's equity. This reflects that every resource the company controls came from someone else’s claim (a creditor) or from the owner’s investment or the profits kept in the business.

Understanding it helps with why transactions balance. If you acquire an asset by paying cash, one asset (cash) falls while another asset (equipment) rises, keeping total assets unchanged. If you buy on credit, assets increase and liabilities increase by the same amount. If the owner puts in more cash, assets rise and owner’s equity rises as well. Because every change keeps assets on one side matched by claims on the other side, the equation stays balanced.

The other listed relationships don’t fit because they imply incorrect financing links. For example, stating assets equal liabilities minus owner’s equity would misrepresent how assets are funded, and the same logic applies to the other options.