Which equation represents the basic accounting equation that remains balanced after each transaction?

Which equation represents the basic accounting equation that remains balanced after each transaction?

• A. Liabilities = Assets + Equity
• B. Assets = Liabilities + Equity
• C. Revenues - Expenses = Net Income
• D. Cash + Receivables = Liabilities + Equity

Answer: (D)

The basic accounting idea is that what a company owns (assets) is always financed by what it owes (liabilities) plus what the owners have invested (equity). Cash and receivables are both assets, and adding them together gives the total assets being considered. If you set those assets equal to liabilities plus equity, you’re showing that every asset has a financing source, so the accounting equation stays balanced after any transaction. In practice you’d include all assets, but the fundamental relationship remains the same: assets = liabilities + equity. The other forms either misstate the balance (liabilities on the left instead of assets) or describe a different concept (revenues minus expenses equals net income, which is about profitability, not the balance sheet).

The basic accounting idea is that what a company owns (assets) is always financed by what it owes (liabilities) plus what the owners have invested (equity). Cash and receivables are both assets, and adding them together gives the total assets being considered. If you set those assets equal to liabilities plus equity, you’re showing that every asset has a financing source, so the accounting equation stays balanced after any transaction. In practice you’d include all assets, but the fundamental relationship remains the same: assets = liabilities + equity.

The other forms either misstate the balance (liabilities on the left instead of assets) or describe a different concept (revenues minus expenses equals net income, which is about profitability, not the balance sheet).