What does the accounting equation state?

The accounting equation, fundamental to the double-entry accounting system, states that assets must equal the sum of liabilities and equity. This reflects the basic principle that everything a business owns (assets) is financed either through borrowing (liabilities) or through the owner's investment (equity).

Assets represent what the company owns, such as cash, inventory, property, and equipment. Liabilities are obligations that the company owes to external parties, like loans and accounts payable, while equity represents the owners' residual interest in the company's assets after subtracting liabilities.

This relationship ensures that the balance sheet remains balanced, adhering to the principle that every financial transaction affects at least two accounts in such a way that maintains this equality. This equation not only helps in the preparation of financial statements but also emphasizes the relationship between what a company owns and how those assets are financed.

The other choices misrepresent this foundational concept of accounting by altering the relationships or terms defined in the equation, leading to misconceptions about how assets, liabilities, and equity interact.