What does the accounting equation represent?

The accounting equation is fundamental to the double-entry bookkeeping system and represents the relationship between a company's assets, liabilities, and equity. It states that assets, which are the resources owned by the business, are financed either through debt (liabilities) or owned funds (equity).

When you have the equation stated as assets equaling liabilities plus equity, it illustrates how everything the business owns (assets) is funded either by borrowing (liabilities) or through investments made by the owners (equity). This equation must always balance, ensuring that the financial statements are accurate and reflect the true financial position of the company.

Options discussing profit and expenses reflect relationships within income statements rather than the balance sheet that the accounting equation pertains to. The equation is foundational in understanding how financial statements connect and provides insight into the structure of a company’s finance.