What does the accounting equation express?

The accounting equation is fundamental to understanding the balance sheet and reflects the relationship between a company’s assets, liabilities, and owner’s equity. The correct expression—assets equal liabilities plus owner’s equity—demonstrates that everything the company owns (its assets) is financed either by borrowing money (liabilities) or by the investment of the owner's funds (owner's equity).

This equation shows that the total resources of a business (the left side representing what it owns) must be funded through external debts and the owners' claims. It emphasizes that for a company to be financially balanced, the total amount of what it owns must equal the total amount owed to creditors and the shareholders.

Understanding this relationship is critical for financial reporting and analysis, as it lays the groundwork for maintaining accurate financial records and ensuring transparency in the company’s financial position. This equation also forms the basis for double-entry bookkeeping, where every financial transaction affects at least two accounts to keep the equation balanced, ensuring that errors can be more easily detected.

Thus, the expression correctly encapsulates how a business structures its financial resources and obligations.