FBLA Accounting II Practice Test

The accounting equation is fundamental to the double-entry bookkeeping system and illustrates the relationship between a company’s assets, liabilities, and owners' equity. The correct formulation states that assets equal the sum of liabilities and owners' equity. This reflects that everything the company owns (assets) is financed either by borrowing money (liabilities) or by the owners’ investment (owners' equity).

This means that if a business has total assets valued at a certain amount, those assets must be balanced by what the business owes to creditors (liabilities) and what is contributed by the owners (equity). Therefore, this equation is essential for ensuring that financial statements are balanced and that all transactions are properly recorded.

Understanding this equation is crucial for any accounting practice, as it lays the foundation for preparing financial statements like the balance sheet, where this relationship will always hold true. Other options do not accurately represent this fundamental relationship in accounting. For example, stating that assets equal revenue and liabilities or rearranging the components in a way that distorts their original relationships would not reflect the true state of a company’s financial condition.