In a balance sheet, which equation represents the relationship between assets, liabilities, and owners' equity?

In a balance sheet, which equation represents the relationship between assets, liabilities, and owners' equity?

• A. Net worth equals Assets
• B. Liabilities = Assets + Owners Equity
• C. Assets = Liabilities + Owners Equity
• D. Assets + Liabilities = Owners Equity

Answer: (C)

Assets must be funded either by what the business owes (liabilities) or by the owner's stake (owners' equity). That relationship is captured by the equation: Assets = Liabilities + Owners' Equity. This keeps the balance sheet in balance because every resource owned has a corresponding funding source on the other side. For example, when the owner contributes cash, assets rise and owners' equity rises by the same amount. When a loan is taken to buy something, assets rise and liabilities rise by the same amount. The other statements don’t reflect this balance: net worth is about owners' equity, not total assets; liabilities cannot equal assets plus owner’s equity; and equity is not the sum of assets and liabilities.

Assets must be funded either by what the business owes (liabilities) or by the owner's stake (owners' equity). That relationship is captured by the equation: Assets = Liabilities + Owners' Equity. This keeps the balance sheet in balance because every resource owned has a corresponding funding source on the other side. For example, when the owner contributes cash, assets rise and owners' equity rises by the same amount. When a loan is taken to buy something, assets rise and liabilities rise by the same amount. The other statements don’t reflect this balance: net worth is about owners' equity, not total assets; liabilities cannot equal assets plus owner’s equity; and equity is not the sum of assets and liabilities.