What is the accounting equation?

The accounting equation is fundamental to the double-entry bookkeeping system and expresses the relationship between a company's assets, liabilities, and equity. The correct formulation is that assets are equal to the sum of liabilities and equity. This means that everything the company owns (assets) is funded either through borrowing (liabilities) or through the owners' investments (equity).

This equation ensures that the balance sheet remains balanced, reflecting the principle that a company's resources are financed either through debts or invested funds. When liabilities increase, equity must decrease to maintain this balance (or vice versa), which is essential for financial stability and accountability.

This understanding is critical for analyzing a company's financial position, making it clear that any assets must be accounted for by either what the company owes (liabilities) or what the owners have invested (equity). Hence, the correct choice effectively illustrates this core accounting concept.