What is the balance sheet equation?

• A. Assets = Liabilities + Equity
• B. Revenue = Expenses + Net Income
• C. Assets - Liabilities = Equity
• D. Income - Taxes = Net Income

Answer: (A)

Assets, what the company owns, must be financed either by borrowing (liabilities) or by the owners’ investment (equity). The balance sheet expresses this relationship with the equation: assets = liabilities + equity. This identity means every asset has a funding source in either what the company owes or what the owners own. You can rearrange it to show equity as assets minus liabilities, but the standard form used on the balance sheet is assets equal liabilities plus equity. The other options mix up income items or rely on a rearrangement that doesn’t present the funding sources in the typical balance sheet format.